A recent article in the Washington Post discussed the current cost of rental housing. The article, citing a Harvard study on the topic, claimed that 26% of all tenants spend more than half of their income on rent and utilities. That’s the highest percentage in the last 50 years!
The article attributes the shortage of low-cost rentals to two principal factors: The cutback in residential development due to the deterioration of the economy in 2009, and the claim – at least according to a report produced for Congress by the Obama Administration – that financing is more readily available for high-end rental properties.
The Harvard study, the Obama report, and the Washington Post all display an appalling ignorance of the real estate market – or worse, participation in a cover-up intended to (again) protect their the political allies responsible for this mess.
Here are some of the real reasons for the rental housing shortage:
1. Government at all levels meddles in the market, forcing anyone who wants to build rental housing to jump through endless hoops, thereby causing interminable delays.
2. All this meddling causes significant cost increases, only to drive up the construction cost of each unit and the resulting monthly rent for the tenant.
3. Governments charge excessive fees under the misguided notion that the “deep-pocket developer” is bearing the cost when it is actually the tenant who pays a higher monthly rent.
4. Governments demand that developers pay for unrelated city enhancements such as street lights or parks. These are nothing more than bribes paid to public officials to complete their pet projects; again causing the development cost – and the resulting monthly rent – to increase substantially.
5. In many areas, politicians appease their union friends by requiring work to be done at what is referred to as the prevailing wage (union wage levels), thus further exacerbating construction costs.
6. Governments impose price restrictions (rent control) on apartments, limiting the ability of a developer to generate sufficient revenue to justify a project.
The fact that the Obama Administration wasted money on a study to tell Congress that financing is only available for higher-end apartments just boggles the mind. Even novices in the housing market can identify the real culprit: Government has made affordable housing impossible to achieve – and therefore no responsible lender will finance these projects.
That is why the Low Income Housing Tax Credit (LITHC) Program was established in 1986. This program utilizes private equity for the development of housing for low-income Americans, and today accounts for the vast majority of affordable housing developed in the U.S.
I recently spoke with Roger Davila, a developer I have known since my involvement with the LITHC program in 1992. Roger continues to this day to construct residential real estate for low-income Americans, but he has regrettably concluded that government wonks and politicians have twisted this program to once again make it difficult to develop any housing in a cost-effective manner.
The LITHC program was established by the federal government, is run by state governments, and requires that local government approve each project. Davila stated over the years, California State Treasurers (like other state treasurers) lowered the acceptable income level for potential renters, which (because of increased risk) resulted in a demand for additional financing by local redevelopment agencies. That just means more delays, more governmental oversight, and less ability to profitably produce quality affordable housing.
Davila also told me that construction and financing requirements have further impeded the prospect of getting a project off the drawing board and into the building stage. Requiring nicer projects with greater facilities may be admirable, but it costs money and limits the ability of a developer to make the project work economically. When local government forces you to include new social engineering programs – like after-school programs, ESL classes and computer training for seniors – you begin to wonder if “affordable” is actually in the terminology of the bureaucrats involved.
We have a significant housing problem in the United States. Most of it is caused by do-gooder politicians sticking their noses into an area where they have little or no knowledge, and imposing rules that undermine their actual objectives. If history repeats itself, future “solutions” will only involve more meddling and result in less affordable housing. That will only change when the American people get rid of professional politicians and bureaucrats, and assign the task to responsible adults who actually want to fix the problem.
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