Affordable housing woes continue to headline the news daily. Nearly every state legislature is considering a litany of housing bills. Some are good (although not sufficient to be game-changing), and some are entirely counterproductive. Although this sounds like a lot of money for various housing programs, on deeper analysis, it’s not nearly enough without much more comprehensive reforms.

A common denominator for many proposals is the promotion of home ownership through affordable housing. Opposing this is like stating you hate mom and apple pie. But I fear this is headed down a path with a lot of unintended consequences.

Let us list some of the challenges of for-sale affordable (defined here as price-restricted in some form or fashion):

• How are prices initially set? Usually, a municipality sets an income level they target, say 80% of median income, and then calculates an allowable payment, assuming the applicant should spend no more than 30% of their income on housing. The payment backs into a house price. This calculation is highly dependent on mortgage rates. Median income levels move slowly. However, mortgage rates can move fast, as has recently been demonstrated. If the income level is set and then mortgage rates go up, the price of the unit must come down.  An example of an underwriting risk that is often not fully appreciated.
• Buyers still must qualify for mortgages — credit score, down payment, etc. It can be very hard to thread the needle, especially in lower income brackets: Do not make too much, but qualify. These can be hard units to sell.
• How do you control the price post-closing? If you do not cap the resale price, we are just handing out lottery tickets, and we’ll lose our so-called affordable units.
• So how do you cap it? How much equity do we want the buyers to build? They can only have more equity if the house's price goes up. When it goes up, it becomes less affordable. What do we want here — to build wealth for a few or create forever affordable homes?
• If the buyer cannot build significant equity, one could ask why they should buy. They are taking on all the obligations of homeownership — insurance, upkeep, maintenance. Most price caps are based on inflation, or the lessor of inflation or 3% per annum, or something similar. The problem is that that formula will not keep up with rising house prices in many areas where we need this housing. So, they might be building hypothetical equity, but it is not equity that would let them trade up. 

Unintended Consequences

• If the unit is price-capped and must be re-sold to a similar income level, what happens if mortgage rates go up? Will you force them to sell at a loss? Even if rates stay constant, selling costs can wipe out any allowed increase in price.
• If they cannot find a qualified buyer at the moment they need/want to sell, what then? How long do they have to try? Do we make them stay or let them out of the restrictions? And lose an affordable unit?
• Why should someone keep their home looking great? It does not add value and costs money and time. It is like asking someone to plant flowers on the grounds of their apartment complex. How do you define good enough upkeep? As a practical matter, forcing someone to sell because the unit does not look nice enough is a serious legal challenge.
• Why keep up on maintenance in the long run? It's the same problem; it does not add value. A few municipalities are trying to deal with this by allowing the price to go up for this on top of set increases. But it is, at best, 1 for 1. There is no profit mark-up. And the expenditure is long before the recovery.
• Covenants are now being written to try to prevent WFH people from taking advantage of these programs—living in an expensive scenic spot and working remotely for a modest salary in another MSA. How can this be managed?
• If a buyer’s income goes up dramatically, should they be able to stay? Certainly, we do not want to discourage this. But then we are subsidizing someone who no longer needs our help, when many do.
• What happens when someone retires? It's hard to see kicking them out and telling them to sell, but now we are down another needed unit for their replacement employee. How long do they have to work before retiring to qualify to keep it? They probably should not be able to win the lottery for one of these, work two years, and then retire.
• What if they just want to work less?  Commonly, a minimum locally worked hours clause can prevent trust babies from beating the system. But what if it is a legitimate transition in life?
• If a buyer qualifies for a 3-bedroom unit at a large subsidy based on their family size, do the parents have to swap out for a smaller unit when the kids leave? Again, this seems harsh, but the bedrooms go unused (at least when not occupied) when clearly needed. What's more, there is often a restriction against renting out rooms, originally intended to avoid people arbitraging the units.

The list could go on, but you get the idea. Lest you think these are hypothetical examples, they have all happened.

We now see more government and nonprofit entities building units strictly for their employees. Governments for government workers, hospitals for hospital staff, schools for teachers, etc. All are well-meaning and hard to criticize. Except.  The more government does that, the more private sector workers wind up as second-class citizens.  There is only so much money to go around.  And where is the transparency once government workers get housing with subsidies?  How will we, as taxpayers, have any real idea what true compensation is?  It will make a mockery of salary comparisons to private industry.

Take-aways

One of the hallmarks of the US’s dynamism compared with most countries in the world has been a flexible workforce with less rigidity than many systems. If we head down a path where more and more of our workforce is in housing provided exclusively by an employer, are we accidentally creating indentured servants who cannot change jobs? No matter how well-intentioned, are we creating golden bronze handcuffs?

If buyers cannot create real home equity, are we turning them into renters with a maintenance obligation? Are we even doing them a favor? If they build up a little equity, but well less than the increase in prices in their area, is the equity simply a goodbye present when they leave our community for somewhere cheaper? That does not seem like the community building we had in mind.

As a society that increasingly rightly claims to value ALL people, we are making many value judgments about those who deserve our help (emergency responders, teachers, etc.) and those who do not (plumbers, janitors, factory workers, truckers, etc.). 

It is hard to shake the feeling that, in trying to solve our housing problems by selectively building for a small portion of specific classes of people, we are creating a more rigid community of haves and have-nots instead of solving the root causes of insufficient building.