Where would affordable housing be without gov't support?

As the battle over reforming health care has put government competence and personal freedom under the spotlight, I can’t help but think of critical infrastructure needs that would simply go unmet without the backing of the public sector. Besides local services such as police and fire protection as well as building and maintaining roads and freeways, it’s also difficult to imagine the private sector preventing homelessness on its own by meeting the country’s ongoing need for affordable housing.

When public entities try to force the private market to do its bidding – such as through inclusionary zoning – the result introduces an inherent unfairness whose cost is ultimately passed onto renters and buyers paying inflated rates while not enjoying a higher level of services versus their neighbors. Moreover, many community groups aren’t big fans either, as they must also pay the price locally for a problem that is national in scope.

So if private enterprise isn’t the answer, then what is? It has to be government – both in terms of direct subsidies, as well as incentives such as tax credits and rewarding non-profits operating both internationally – such as Habitat for Humanity – and at the local level. And yet for a variety of reasons, even these incentives are now under pressure.

The national tax credit program, which for the past 20 years has provided a critical way to finance low-income rental housing, is now under duress because investors such as Fannie Mae and Freddie Mac exited the market last year, thereby taking 40% of the funding off the market. Much of the balance was previously funded by the banking industry, most of which no longer has profits against which to offset taxes.

The result is hundreds of stalled projects waiting for funding to make up for 3 million affordable housing units destroyed, converted to condominiums or upgraded to market-rate rentals since 2003. In some places, the waiting lists for assistance are so long that new applications are being denied.

To address this deteriorating situation, the Treasury Department said in May that it would funnel $5 billion in federal stimulus dollars to buy unsold tax credits for affordable housing projects approved since 2008; developers who wish to redeem unsold credits can also exchange them for government grants, but only at a ratio of 85 cents to the dollar.

In the longer term, the Affordable Housing Tax Coalition is hoping that Congress will expand the Treasury’s credit exchange program to cover projects approved through 2010 as well as carrying back the credit back five years on past taxable income instead of income earned in the future. The aim is to entice companies outside of finance – such as those involved in insurance, technology and manufacturing – to take advantage of the program while also filling in the crucial role abandoned by, in essence, the private sector.

For existing rental housing, the Housing Choice Voucher Program – commonly known as Section 8 – provides federal vouchers to cover up to any Fair Market Rent (FMR) that is over 30% of a family’s income. However, since landlords only have to meet fair housing laws, many will not participate in the Section 8 program due to a fear that voucher tenants will not maintain the premises, not wanting the government involved in their business, a need to raise rents above the HUD-determined FMR and avoiding the requirement that all evictions be done through judicial action.

Yet with greater education, landlords wishing to fill vacancies could benefit from a large pool of renters, prompt payment from the government for its share of the rent, and the knowledge that tenants can be removed from the Section 8 program permanently if they damage the unit or don’t pay their share of the rent.

Other federal programs, such as HOME grants to participating jurisdictions, SHOP funds to non-profit groups such as Habitat for Humanity and the Homeownership Zone (HOZ) program to reclaim and redevelop blighted areas, are now all under pressure due to fewer donations to non-profit organizations and tax dollars being allocated to higher priorities.

As the country’s population continues to expand and unemployment remains high, the need for affordable housing remains a critical issue for most municipalities. And, like health care reform, the private sector can play an important role, but will only solve the issue with appropriate government oversight, support and incentives.