“America is experiencing an affordable housing crisis!” We’ve seen the headlines. Housing prices are going up faster than inflation, measured by the Consumer Price Index (CPI). As is the norm, any perceived crisis is a call for government to intervene. One intervention is the advent of income-restricted housing, often called affordable housing or workforce housing.
Income-restricted housing comes in two varieties: rentals and owner-occupied homes. The properties have deed-restrictions that specify maximum income limits for the renters or purchasers. Tenants lose their leases if they earn too much. Purchasers don’t lose their homes, but government establishes a maximum resale price based on Consumer Price Index (CPI) increases and a few other adjustments.
The intent is to help low-income workers. But let’s take a deeper dive, and understand the severity of this crisis, who benefits, who gets hurt, how it makes economic sense to voluntarily restrict properties, and what might happen if we didn’t have these programs.
How bad is the problem?
Currently, Metropolitan Denver and surrounding areas are seeing housing prices increase 15 – 30% per year. Meanwhile, payscale.com says that the median wage in the Denver Metro Area increased only 3.5% year over year. Yes, housing price increases are outpacing wage increases. But how important is that?
People are considered cost-burdened by rent if they have to spend more than 30% of their income on housing. For a city, if the median cost of housing is more than 30% of median income, the city is in an affordable housing crisis. Is that a reasonable measure?
In Parker, CO the median household income was $114,802 in 2019. You would pay $35,393 in federal and state income tax, Social Security and Medicare taxes, leaving $79,409. It should be obvious that taxes are too damned high. The easiest way to solve any affordability crisis is to reduce government spending.
The median monthly mortgage was $2,226. Add 25% for property taxes, insurance, HOA and utilities, and you get $33,390 per year. That leaves $46,019 for everything else, almost $4000 per month. That may not get you the best Cabernet Sauvignon to go with your filet mignon, but it’s hardly catastrophic. There are people right now with incomes above the Medicaid limit (roughly $38,000 for a family of 4) that make it work. Consider a family with an annual income of $1 million. Can they only afford $300,000 in housing costs? They could easily afford $800,000 in housing costs and still buy a new Tesla every year.
So how bad is it? Hard to say. But history tells us that, politicians will exploit and exaggerate any “crisis” for political gain.
These programs are designed so that low-skilled workers can afford housing. What if they can’t afford to live near work? There are several options. They can travel further to work, or move to a place and job they can afford, or find better jobs.
Does it benefit a low-skilled worker to live in an apartment where she would lose her lease if she makes more money than the income limits? If she makes $1 more than the limit, she loses her apartment and might have to pay thousands more for rent. That’s called a poverty trap, and it’s not a benefit.
How about the purchaser? In this age of 20% annual gains in housing prices, the purchaser is limited to CPI gains, averaging around 4% for the last five years. Is it a benefit to take on the risks and responsibilities of home ownership, just to have your most valuable asset appreciate in line with an understated measure of inflation? It’s not.
Who supports these programs? Low wage employers benefit from income-restricted housing programs. If workers can’t afford to work at restaurants, factories, hotels, hospitals or schools, wages must increase to attract and retain workers. But if a government program steps in to make housing affordable, wages can remain low.
As is often the case with government programs, the intended beneficiary is harmed.
How does it make economic sense?
Why would a developer put income restrictions on a property? Limiting the revenue from a property reduces the value of that property. What is going on here?
The federal government offers the Low-Income Housing Tax Credit for income-restricted housing developments. The developer gets 70% of the development costs repaid over ten years. Needless to say, the developer has less motivation to build efficiently. Studies have shown that these projects typically cost more to build than unsubsidized projects, and are lower in quality.
Without tax dollar subsidies, these projects don’t make economic sense.
Rent control and House Bill 1117
A fascinating thing – you would think that a 70% subsidy would be enough incentive for developers to voluntarily add deed restrictions to their developments. But it’s not happening fast enough for some politicians.
Colorado has a long-standing prohibition on rent control. There was once a time when the Colorado legislature understood that rent control causes shortages. However, in 2000 the town of Telluride passed an ordinance that required new developments to provide a certain amount of rent-controlled affordable housing. Apparently, the federal subsidy was not enough to get developers to do what the planners in Telluride wanted. The Colorado Supreme Court found that the ordinance violated the prohibition on rent control.
Eleven years later, the democrat-controlled legislature passed House Bill 21-1117, allowing local governments to require what they wish of developers and land-owners. Governor Polis, always anxious to demonstrate his libertarian streak, vetoed the bill. Just kidding! Polis is always ready to abandon the free market in favor of central planning! He signed the bill into law. You can expect to see more local governments trapping low-income workers.
What would happen if government did nothing?
Who knows for sure? But Vail and other mountain resorts have shown one way.
The cost of housing in mountain resorts is often astronomically high, and lift-line attendants couldn’t afford to live there. Since ski resorts can’t operate without workers, what can they do? Many ski resorts, at their own expense, build housing for their workforce.
In cities like Denver, the simplest solution is for low-income employers to raise wages. That might close a few businesses or increase prices at some restaurants. But do you want to argue that government should use our tax dollars to ease the burden of the well-heeled when they dine?
Among the top causes of the “affordable housing crisis” is inflation. What causes inflation? When the Federal Reserve prints money, THAT is inflation. Why do they print money? To fund federal government debt. What increases government debt? Subsidizing anything, including income-restricted housing.
Politicians foment crises to increase political power. One crisis leads to the next. Each crisis results in a government intervention that may have good intentions, but inevitably has bad results.
Local governments have planning authority. They don’t have to participate in the scam.
Brian Vande Krol is a residential real estate appraiser who ran for the Colorado House in 2010 and 2012.
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