An Easy Solution to D.C.’s Rapid Rehousing Program

A story in the Washington City Paper caught my eye yesterday not, because of the complexities involved in it, but because of the obvious solution. As part of the 2009 stimulus, D.C. implemented a new program called rapid rehousing that puts people up in apartments for very short periods of time (around fourth months) so that they feel a sense of urgency to find work and become self-sufficient. If you tell someone they can have housing indefinitely, that incentivizes people to delay looking for a job or cheap housing. The rapid rehousing program tries to fix that problem. If a person cannot afford the apartment in those four months, the program generally extends the program up to a year. But the people in the program often don’t about that so the pressure is still on to find work.

In 2011, when the stimulus funds ran out, D.C. continued running the program itself, but it has run into a new problem: apartments in D.C. are too expensive. From the story:

But the problem, as Wright notes, is that housing has gotten very expensive in D.C. That’s meant a double whammy for the city: more homeless people who can’t afford to pay the skyrocketing rents, but also fewer affordable units for the city to place them in through rapid rehousing.

“We don’t have apartments,” Berns says, agreeing with the residents who have struggled to find housing. “They’re right. This has been my biggest frustration, that we can’t put them in an apartment that costs thousands of dollars per month, with the thought that at the end of four months or a year or even two years, after rapid rehousing ends, that they’d put up that rent.”

Placing the participants in more expensive apartments, says Berns, would be “setting them up for failure,” since they’d have trouble paying the rent once they’re on their own and could end up back in the shelters or hotels.

“D.C. has failed to adapt its rapid rehousing program to the realities of an expensive housing market and a highly competitive population of renters,” saysAmber Harding, an attorney with the Washington Legal Clinic for the Homeless. “Homeless families, many with poor credit and low incomes, are competing with renters with good rental and credit histories and much higher income.”

As a result, there’s a tremendous backlog. Berns says his agency has plenty of funds to place more families into rapid rehousing but simply can’t find enough affordable units.

The problem here isn’t D.C.’s rapid rehousing program, as Harding suggests. It’s that D.C. is too expensive!  You know what would be a great way to make D.C. less expensive? Reducing the height restrictions on buildings here. Right now, supply is constrained by the 1910 Height Act as buildings are capped at 90 feet on residential streets and 130 feet on commercial ones. It’s a draconian law that artificially limits the number of housing units available in the city and keeps prices high. The city is finally ready to revise the law, although it is in the hands of Congress in the end.

Last week, D.C. Mayor Vincent Gray submitted his recommendations to Representative Darrell Issa (R-CA) calling for new height regulations that would allow buildings to be 1.25 times the width of streets inside “L’Enfant City”. This would allow buildings to reach 200 feet in the air on streets 160 feet wide. It would be a big increase, but it still doesn’t go far enough. Abolishing the height act entirely and allowing skyscrapers into downtown D.C. would allow residents to take full advantage of D.C.’s infrastructure while providing a larger customer base for nearby stores and increasing economic activity (meaning more tax revenue as well). In addition, it would help programs like rapid rehousing by decreasing rents and allowing a sector of affordable housing to flourish. Sounds like a no brainer to me.

The Housing Recovery Has Stalled

Over the past year, everyone has come to agree that a housing recovery is happening. It wasn’t happening everywhere, but overall , the country was seeing a housing revival. But over the past couple of months, this recovery has started to stall and most people haven’t noticed yet.

Look at housing starts:

Housing Starts.
Housing starts increased from the end of 2011 through most of 2012, but have since fluctuated between around 850,000/month and 1,000,000/month. In fact, starts are in a downward trajectory the last couple of months. In July, single-family housing starts fell 2.2%, against expectations of growth, to reach their lowest levels since November of last year. The data may be noisy, but the overall trend in 2013 is clear: housing starts have stalled.

So far, it’s not clear that people have noticed. Take Wonkblog’s Neil Irwin, who wrote about housing starts last week. He noted the dual forces of increased housing starts and rising mortgage rates, concluding:

But the July data is the first real evidence we’ve seen of whether higher mortgage rates will affect the housing industry more broadly. And the early signs, at least, are that builders are not being scared off by higher mortgage rates that make the houses they sell less affordable.

The data seems to tell the exact opposite story.

As Irwin notes, interest rates have risen dramatically since May:MortgageSince then, housing starts have fluctuated. The increase in July was just the result of a poor result in June. Housing starts are still below there May level. So, as mortgage rates have risen, are builders “not being scared off”? The answer is unclear. It’s certainly, not a “yes,” as Irwin writes. It’s also only a couple of months of data. But it’s worrisome data at that. The economy is already recovering at a tepid place and a slowdown in housing would further reduce it.

This is yet another fundamental reason that President Obama should nominate Janet Yellen to head the Federal Reserve. Yellen is more dovish than Larry Summers and at least one economist believes the recent rise in rates is because Wall Street fears a Summers-led Fed would reduce asset purchases faster than a Yellen-led one would. If Obama does select Summers and interest rates rise, it could lead to even further contraction in the housing market and hamper the recovery even more. Given the recent data, that’s not a risk the President should take.

Misaligned Incentives in the Housing Market

For one of my classes this semester, I have to write a blog post by 5pm each Sunday on the readings for class. Unfortunately, the blog is private so I can’t just link over to it, but I think my last post is worth re-posting here (my first two posts weren’t as insightful). As I wrote the post, I discovered how truly messed up our system is. In a way, everyone has an incentive to create a bubble in the housing market – until it pops of course. It’s a massive tragedy of the commons. Everyone does what is best for themselves and everyone is hurt in the end. It’s a big reason why we need regulators who’s livelihoods are unrelated to housing market and thus can provide neutral, effective oversight to prevent such a bubble. It’s certainly a very difficult problem and one that we haven’t solved yet.

Here’s the full post:

This week’s articles focused on the sub-prime mortgage crisis and the rampant fraud throughout the mortgage lending industry. For me, this is the most infuriating aspect of the entire crisis – everyone is to blame from lenders to borrowers to the government.

As Binyamin Appelbaum, Lisa Hammersly Munn and Ted Mellnik document in their series “Sold a Nightmare,” and Michael Hudson reveals in his piece on Countrywide Financial Corp., mortgage lenders participated in a number of fraudulent and unethical activities that eventually lead to a huge rise in foreclosures. Borrowers themselves were not blameless either. Many took on loans they knew they could not afford.

However, one aspect of the sub-prime mortgage crisis that has been overlooked is the government’s involvement in it. Here is where we find an incredible number of poorly aligned incentives that significantly contributed to the crisis.

Let’s look at incentives from a general level: Politicians want to be reelected and to attain higher office, and they do so by pleasing their constituencies. What’s one way for them to please their constituencies? Make houses more affordable and available. In fact, this may be the single best way for politicians to make their constituents happy. After all, one of the most crucial aspects of the American Dream is homeownership. Politicians have a huge incentive to promote homeownership.

And across the country, we saw lower less government oversight and a rise in government-insured loans. This, in itself, is not necessarily a bad thing. The problem is once again with incentives. Government-insured loans incentivize lenders to create loans as quick as they can, ignoring borrowers’ income, credit and ability to repay their loans. When the government insures loans, lenders have no default risk on those loans.

Now, certainly, the government was not promoting fraud here. If the program had been successful, more low-income individuals would have received loans, some of whom would have defaulted. The government would have eaten the cost of those defaults but this was the acceptable tradeoff of increased homeownership amongst low-income individuals. Continue reading “Misaligned Incentives in the Housing Market”