“America is experiencing an affordable housing crisis!” We’ve seen the headlines. House prices are rising faster than inflation, as 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 low-income housing, often referred to as affordable housing or workforce housing.
Low-income housing comes in two types: rental housing and owner-occupied housing. Properties have deed restrictions that specify maximum income limits for renters or buyers. Tenants lose their lease if they earn too much. Buyers don’t lose their homes, but the government sets a maximum resale price based on increases in the Consumer Price Index (CPI) and a few other adjustments.
The goal is to help low-income workers. But let’s dig deeper and understand the seriousness of this crisis, who benefits, who gets hurt, how it makes economic sense to voluntarily restrict properties, and what could happen if we didn’t have these programs.
How serious is the problem?
Currently, the Denver metro area and surrounding areas are seeing housing prices increase by 15-30% per year. Meanwhile, payscale.com reports that the median salary in the Denver metro area has only increased 3.5% year over year. Yes, house price increases exceed wage increases. But how important is it?
People are considered to have rent costs if they have to spend more than 30% of their income on housing. For a city, if the median cost of housing is above 30% of the median income, the city is in an affordable housing crisis. Is this 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 taxes, Social Security and Medicare taxes, leaving $79,409. It should be obvious that the taxes are too high. The easiest way to solve any accessibility crisis is to cut public spending.
The median monthly mortgage was $2,226. Add 25% for property taxes, insurance, HOA, and utilities, and you have $33,390 per year. That leaves $46,019 for everything else, or nearly $4,000 per month. It might not give you the best Cabernet Sauvignon to pair with your filet mignon, but it’s not a disaster. There are currently people whose income exceeds the Medicaid limit (about $38,000 for a family of 4) who make it work. Consider a family with an annual income of $1 million. Can they pay just $300,000 in housing costs? They could easily pay $800,000 in housing costs and 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 their place of work? There are several options. They may travel further to get to work, or move to a place and job they can afford, or find better jobs.
Is it advantageous for a low-skilled worker to live in an apartment where she would lose her lease if she earned more than the income limits? If she earns $1 over the limit, she loses her apartment and may have to pay thousands of dollars more in rent. It’s called a poverty trap, and it’s not an advantage.
And the buyer? In this era of 20% annual gains in house prices, the buyer is limited to CPI gains, averaging about 4% over the past five years. Is it an advantage to take on the risks and responsibilities of home ownership, just so that your most prized asset appreciates by an underestimated measure of inflation? It’s not.
Who supports these programs? Low-wage employers benefit from means-tested housing programs. If workers cannot afford to work in restaurants, factories, hotels, hospitals or schools, wages must rise to attract and retain workers. But if a government program steps in to make housing affordable, wages may stay low.
As is often the case with government programs, the intended beneficiary is harmed.
How does this make economic sense?
Why would a developer place income restrictions on a property? Limiting income from a property reduces the value of that property. What is happening here?
The federal government offers the Low Income Housing Tax Credit for low income housing developments. The promoter is reimbursed 70% of the development costs over ten years. Needless to say, the developer has less incentive to build efficiently. Studies have shown that these projects generally cost more to build than unsubsidized projects and are of lower quality.
Without tax subsidies, these projects do not make economic sense.
Rent control and House Bill 1117
Fascinating thing – you would think that a 70% subsidy would be enough incentive for developers to voluntarily add act restrictions to their developments. But it’s not moving fast enough for some politicians.
Colorado has long banned rent control. There was a time when the Colorado legislature understood that rent control caused shortages. However, in 2000 the City of Telluride passed an ordinance that required new developments to provide a certain amount of affordable rent-controlled housing. Apparently the federal grant wasn’t enough to get the developers to do what the Telluride planners wanted. The Colorado Supreme Court found that the order violated the rent control ban.
Eleven years later, the Democratic-controlled Legislature passed Bill 21-1117, allowing local governments to demand what they want from developers and landowners. Governor Polis, always keen to demonstrate his libertarian side, vetoed the bill. I laugh! Polis is always ready to abandon the free market in favor of central planning! He signed the bill. You can expect to see more local governments trapping low-income workers.
What would happen if the government did nothing?
Who knows for sure? But Vail and other hill stations have shown a way.
The cost of housing in mountain resorts is often astronomical and lift attendants could not afford to live there. Since ski resorts cannot operate without workers, what can they do? Many ski resorts, at their own expense, build housing for their workforce.
In cities like Denver, the easiest solution is for low-income employers to raise wages. It could close a few businesses or raise prices in some restaurants. But do you want to argue that the government should use our taxes to ease the burden on the well-to-do when they dine out?
Inflation is one of the main causes of the “affordable housing crisis”. What causes inflation? When the Federal Reserve prints money, IT IS inflation. Why do they print money? To finance federal government debt. What increases public debt? Subsidize everything, including income-tested housing.
Politicians foment crises to increase political power. One crisis leads to the next. Every crisis results in government intervention that may have good intentions, but inevitably has bad results.
Local governments have the power to plan. They don’t have to participate in the scam.
Brian Vande Krol is a residential real estate appraiser who ran for Colorado House in 2010 and 2012.
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