Just the Ticket for Affordable Housing

With rental costs climbing in major cities, politicos scouting for new ways to ease the crunch should try vouchers

By Christopher Farrell

With chief executives being indicted, corporate earnings restated, and the stock market stuck in a painful rut after the bubble bust, it's popular to denigrate the economic achievements of the 1990s. Yet the longest economic expansion in U.S. history spurred an investment boom in innovation and technology that substantially hiked productivity growth. Worker incomes and household net worth rose as the unemployment rate dropped to its lowest level in decades. And home ownership rates climbed to historic highs. Thanks largely to the combination of high-tech investment and robust consumer incomes, the recent recession looks to be the mildest in downturn in memory.

Still, even when the prospect of permanent prosperity seemed tantalizingly close during the headiest years of the '90s, many social commentators and community activists worried about an "affordable-housing crisis." A shortage of reasonably priced rental housing in the nation's major metropolitan areas forced more and more families to devote a substantial portion of their income to shelter.

Rental costs consumed 30% or more of household income among 44% of the nation's renters in 1999. (The traditional standard has a rental unit defined as unaffordable if a household has to spend more than 30% of its income on it.) Addressing a shortage of inexpensive rental apartments dominates the political agenda of mayors across the country, from New York to Minneapolis to San Francisco. The most popular idea: Build subsidized housing.


  The solution sounds good. But it's extremely expensive for government to do this. The publicly funded apartment complexes also can drive local landlords out of business and discourage privately constructed rental units. And subsidized housing projects siphon taxpayer money to politically connected developers.

Vouchers are a better public-policy response. A voucher is essentially a government chit worth a certain sum of money. Housing vouchers are tailor-made to bolster incomes and reduce the out-of-pocket drain of paying rent. Vouchers allow individuals to decide where they want to live, rather than political powerbrokers and their developer allies.

And vouchers are a more cost-effective public policy. The federal Government Accounting Office, the watchdog agency for government programs, found last year that "total per unit costs for housing production programs are from 32% to 59% greater than for housing vouchers in the first year, and from 12% to 17% greater over 30 years."


  What's more, the real problem may not be a lack of housing but a lack of income. The reason to worry that poor families are spending more than 30% of their income on housing is that the rental bill cuts into expenditure on other necessary goods and services, such as food, medical care, and education. That's the conclusion of a recent paper by Ron Feldman, assistant vice-president at the Federal Reserve Bank of Minneapolis, The Affordable Housing Shortage: Considering the Problem, Causes, and Solutions.

Of course, regulatory relief would encourage a greater supply of rental units. Government regulations over land use, the quality of construction materials, the features of apartments, and other strictures can hike the cost of building an apartment considerably.

Feldman calculates that rents would fall 15% nationwide if metropolitan areas shifted from a high regulatory environment to a low regulatory regime. The percentage of renters living in unaffordable units would drop from 44% nationally to 35%. The share of extremely low-income households living in unaffordable units would fall from 85% to 78%.


  These are far from trivial figures. Still, while many communities support a streamlining of the regulatory process, it's unrealistic to expect a wholesale lifting of rules that many voters perceive as adding to the quality of everyday life.

One key disadvantage of vouchers is that the government would decide what families spend for housing. Still, vouchers are a sensible policy for easing the financial strain of renting on the nation's poorest families. The program should be embraced by any local government with a housing problem.

Farrell is contributing economics editor for BusinessWeek. His Sound Money radio commentaries are broadcast over Minnesota Public Radio on Saturdays in nearly 200 markets nationwide. Follow his weekly Sound Money column, only on BusinessWeek Online

Edited by Beth Belton

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