An Affordable Housing Roundtable: Assessing 1997’s Limited Agenda

An article in the October, 1996 New York Times Sunday Magazine reads: "There probably aren't more than a dozen people who have read this year's housing appropriation bill, but its eye straining type breaks new ground in the revision of the social contract. With one obscure sentence, the federal government has essentially conceded defeat in its decades-long drive to make housing affordable to low-income Americans... The death of affordable housing. What a strange notion in a nation as spectacularly housed as this one." Has the New York Times got it right? 

Barbara Zeidman

I am not quite so pessimistic, but there are very significant problems with use of subsidized resources as our only means of housing lower-income Americans. That is the real difficulty with this bill: It tries to further current approaches to solve problems I am not sure it is capable of doing. 

The NYTimes article continues: "But two decades of rising rents and falling wages have created record numbers of people, including working people, who can't afford to pay the rent .... "

Gary Squier 

That is true. The living wage can support less and less housing because housing costs are increasing while the working wage is going down. 

For a good analysis, however, we must ask if we are talking about the low-wage worker, as Barbara is, or homeless and near-homeless people. Each calls for a very different approach to housing. 

The funding available for the very low-income unemployed is of great concern. In the current HUD budget, because multi-year rent subsidy allocations are expiring, to continue Section 8 subsidies at last year’s levels, will require an expenditure increase of approximately $13 billion, compared to a $25 billion budget, which is just to maintain the status quo—the need is growing.

Further on, the NY Times article reads: "To put things in perspective, consider that 15 million households qualify for federal housing assistance, but only 4.5 million actually get it. Out of these, about a third live in government-run projects and two-thirds rent from private landlords with government help. Of the 10.5 million that don't get help, the 5 million that spend at least half their income on shelter are simply the most desperate." Paul, please offer your perspective on this situation. 

Paul Silvern 

Those statistics no doubt describe the national picture pretty well. But we must look at the state of affairs in the City of Los Angeles. The situation here mirrors the national picture to some degree, but has some important local differences. It's important that local policy focuses on city-specific factors... 

We can talk about the range of existing problems, many of which are getting worse. But it is particularly important that we address the question of the nearly unhoused because, with the recent changes in Federal welfare policy, we may see many of these households becoming homeless very quickly.

Ronne, is the New York Times story just too dramatic a characterization, or is there some element of truth to its assertion? 

Ronne Thielen 

There is truth to it, but this has always been true. There is no doubt, though, that with the recent changes in welfare we are going to see the situation getting worse and worse. Additionally, Congress must grapple with sustaining its existing HUD inventory and expiring subsidy contracts and still find funding sources to build additional units. 

Gary, in summary, what is the strategy for the City of L.A.'s Housing Department in 1997, given the structure of the federal budget and the apparent devolution of block granting to the states and localities? 

Gary Squier 

Our strategy will be, as usual, a product of budget-making, and that has not happened yet. 

I have spent seven months on special assignment, looking at other cities from the perspective of the Department of Housing and Urban Development (HUD) in Washington, and have seen some pretty incredible housing and neighborhood conditions. I have looked al projects in cities like Hartford, Philadelphia Miami, St. Louis, and others in which municipalities failed to make critical decisions about housing and neighborhood quality. These cities have seen substantial abandonment of housing that would otherwise be considered decent. The reason for this is that neighborhoods were allowed to decline to the point where they were too dangerous to live in. 

I am now starting to ask: How do we save what we have got now, and how do we do it in a neighborhood context so that communities do not become just relics or hulks, dangerous places to avoid as opposed to viable places to live? 

The housing policy I hope to articulate looks at the threat to the existing housing stock, and sets a strategy to address it. The threat is very complicated—it has to do with, among other things, many years of cities' not taking seriously their role in the enforcement of certain building codes. The result is landlords' being able to charge rent for substandard housing, and a marketplace where substandard is the standard. 

When renters' housing choices are limited, the value of deteriorating units becomes inflated because the value is based on what tenants can afford and not on habitability. Each unit might be worth $20,000, even if it needs substantial rehab work. Over time, that inflated value passes through refinancing and sales so that properties become over-leveraged. We are left with neighborhoods that are in bad shape, but whose values are higher than is justified by the condition of the housing. 

These over-leveraged and over­milked neighborhoods are heading towards a fall. We have seen it happen in Hartford and St. Louis, and the possibility is real for dozens of Los Angeles neighborhoods. 

Barbara, as someone formerly with the L.A. Housing Department and now affiliated with Fannie Mae, how do you perceive the situation in Los Angeles in light of Gary's last comment?

Barbara Zeidman 

Failing to enforce building codes actually plays in to the hands of lenders. Poor maintenance has led to a shortage of properties that good­quality lenders are willing to lend on. This drives poorly maintained properties into the hands of lenders who do not care what they are lending on, feeding the process that Gary just described, and weakening our overall business environment. It becomes unattractive to invest in those properties because they are in poor condition.

A lender given the choice between a property in good condition and a property in horrible condition will choose the former, and there is ample opportunity for lenders to do good business. We thus deprive ourselves of lending capital because we do not maintain the housing stock well. The message we send is that we do not care; we do not care that our building codes are under-enforced. We end up in an awful system that feeds on itself. Every year it sinks to a new, lower level. 

Gary Squier 

The few dollars we have to invest in housing subsidies become wasted in a market where the housing quality has been allowed to decline and where properties have been over-leveraged. You have a double whammy of a housing stock that is expensive and needs major rehabilitation investment. 

Paul, drawing upon your study of the rent-stabilized housing stock in Los Angeles in 1994, what does the declining number of permits issued mean for L.A.? 

Paul Silvern 

The decline in number of permits issued is a region-wide phenomenon. But L.A.’s pattern reflects the overall downward trend since the peak of 1986. This is a result of a number of complex economic forces, some relating to population change, some relating to the state recession and so forth. 

This comes at a time when demand for new housing, although slowing, is certainly not abating and when, as we were saying before, new pressing needs for all kinds of housing are likely to come about as the Welfare Reform legislation in the County works its way through the system. 

A rather imbalanced supply-demand relationship is about to get worse in a number of ways. Our study found significant mismatches between household sizes and unit sizes, among other things. Although the economy is definitely on an uptick according to recent forecasts, L.A. City and L.A. County are clearly lagging behind the rest of the State in most indicators, including multi-family construction permits. 

Barbara Zeidman

Paul, a striking piece of data that emerged in your study was the tremendous loss of income of residents in our lower-end housing stock, meaning in those years, there is no way to use the rent they paid for upgrading the housing stock. We are really in a catch-22, because there has been a tremendous loss of income.

Paul Silvern

What we have found is that with low inflation during the period between 1990 and 1994, rents in the stabilized stock remained fairly flat. But the incomes of the residents in the stabilized stock declined markedly since 1990. We were surprised at how large a drop occurred. 

Ronne, as representative of Tax Credit Investors, are there any pending deals in the metro area that attract you? 

Ronne Thielen 

We have a deal in Anaheim, where the City Redevelopment Agency has, through condemnation and purchase of 48 buildings pulled together an entire troubled neighborhood and, with tax credits and a great deal of city money, we have a project that will not only stabilize the neighborhood, but also allow many of the existing residents to move back in. But that is a tremendous undertaking, and a tremendous use of resources — about $23 million, for 176 units. 

Paul Silvern 

In fact, that sounds like a parallel to the strategy that was pioneered in its Housing Department for the Earthquake Recovery Program.

Ronne, the California Tax Credit Allocation Committee has gone through changes in its policies and procedures. As someone working in that environment, is TCAC's policies encouraging investment in the areas we are talking about?

Ronne Thielen 

The (TCAC) policies and procedures have been in a mode of constant change in recent years, so it has been extremely difficult to know what kinds of properties will be available for investment. A reliable pipeline of properties cannot be sustained where the rules regarding allowable costs, income targeting and determination of feasibility are continually shifting.

The unpredictability of the program has caused concerns throughout the state. In the urban areas with the program allowing income targeting at extremely low levels, we have concerns about the social impact of providing units within a property only to a small band of very, very low income families. A better policy would be to allow a mix of income levels up to 60% of median. The proposal for 1997 is for allowing targeting at 40% on average. This is still too low for social and economic reasons.

More specifically, management of these housing properties will be crucial to their success… or failure. We're continuing to invest in the urban areas of Metropolitan Los Angeles but we're doing it very cautiously and, quite frankly, hoping that there will be some income assistance from the section 8 program to bolster the operating budgets and save for a rainy day.

Gary Squier

And the rents are so low that they do not support the cost of intensive management, so it is likely that it will require local government subsidies to support them. It will be the housing crisis of the year 2000. 

Barbara Zeidman 

There simply is not enough money in the system to operate it in a manner that produces decent, safe and sanitary housing. It produces slums. 

Paul, candidly, are there legitimate structural problems with the way we have been handling affordable housing that require major over-hauling of the programs? How do you explain the loss of public support for increased funding? 

Paul Silvern 

There is certainly a loss of political support in a number of quarters. We have for years seen a gradual decline in federal support for affordable housing, particularly as funding makes its way to cities. Funding for State programs in the form of allocations that come from TCAC have almost completely evaporated.

The State of California has virtually no money for affordable housing. And, so, responsibility has fallen to local government and non-profits, in particular, to try to stitch together the resources necessary to meet overwhelming demand. It is an extremely time-consuming, expensive and inefficient process that is simply not up to the challenge.

Ronne, looking back on the last ten years, is there justification for pulling public financial support for affordable housing? How efficiently and cost-effectively have we approached it?

Ronne Thielen 

I think we've seen that providing affordable housing efficiently and cost effectively is very difficult given the number of funding sources that must be accessed to achieve the multiple goal of subsidy providers. The predevelopment process is more time consuming and risky for all the development team members and that results in higher costs. Subsidy sources have been unpredictable in the past several years—minimal redevelopment money in Los Angeles, the depletion of the state taxable bond funds, evolving rules for the home and tax credit subsidies, all this adds to the cost of those projects that are successful in the competitions. 

No, we have not been as efficient or cost effective as we could be and we have to try harder. But remember, the housing we produce will remain affordable in perpetuity. Somewhat higher costs up front to achieve that isn't such a bad trade-off. 

Barbara, as we require management for these projects while the declining revenues built into these projects' budgets seem to preclude that management, have we built in a time bomb? 

Barbara Zeidman

Most definitely. Unfortunately, having targeted so very low and building-in dependence on continuing public subsidies and various bail-out strategies that we have absolutely no assurances will ever happen (we almost have assurances they will not), we will likely see a housing crisis in the year 2000. When projects begin to mature, when they hit the five-or eight-year operational level and need replacement, or there are changes in tenancy or operation, their management requirement intensify, the costs will exceed the available resources. 

The poor are not going to get any less poor in this scenario. Even now, while the overall economy may be doing better, the folks at the bottom of the food chain are not. Gary spelled out a national problem of knowing that something bad could happen and a hope that maybe we can wish it away. We are going to have another version of that and nobody seems to be listening. We are headed for a crisis in our subsidized housing. We have every right to be very proud of its quality, its aesthetic contribution to neighborhoods, and its impact on families; but it is going to get trashed.

Gary, What do you argue to the Council and to the Mayor that will help get us beyond the Cassandra problem and begin to take on the challenge constructively? 

Gary Squier

First, there will be a need for capital-intensive investment in specific neighborhoods—an effort to create islands of safety where you can start pushing out bad guys, reducing gang violence and making it a decent place to raise kids. Anaheim is a good example of this, and you can do it for less money in other environments. The $40 million in capital we will be budgeting this year (more or less) seems like a lot of money. But it is not when you look at the hundreds of thousands of units and the dozens of neighborhoods that are troubled. 

I would recommend the Council take a "tough love" approach to neighborhoods and housing. They should say to property owners that they will not allow deteriorated housing units to exist in their current condition. If an owner has a mortgage of, say, $20,000 per unit but needs $7,000 to $10,000 per unit to rehabilitate them into decent, livable places, we are going to force that owner to make those improvements and, if he or she cannot do so, the property will likely default to the bank.

The bank will look at a shortfall of more than $20,000 and say: "It is worth $20,000, but since the City is forcing $7,000 worth of improvements, we are going to have to take a mark-down on any outstanding principle of $7,000 to $10,000 and bring it down to its true value"—a value that is supported by what tenants can afford to pay.

If L.A. gets tough and starts to behave like Glendale or Burbank and not let housing get out of control like it is, we will be able, over a period of seven to ten years, to reclaim a large percentage of the now-substandard housing. You are not going to be able to do it solely with capital investment. 

We are leaving out of this analysis the need for new units, units that Paul's study suggests we must have to meet demand. How do we attack the new unit shortage? 

Gary Squier 

I am afraid that there is a huge change at the federal, state, local levels in commitment to money for new housing—the capital is just not going to be there. We can wring our hands about it or we can stop the bleeding and the loss of units that we do have.

Yes, there is a need for more units and for more affordability. But there comes a point when you must attack the most critical problem, the one that will make the biggest difference. I do not think it is production; I think it is conserving what we have.

Barbara, what is your attitude about the future of the non-profits and their potential to develop new units in the L.A. Basin?

Barbara Zeidman 

I agree with Gary, the probable direction of public policy is that the non-profit world needs to do speedier rehabilitations and manage projects more effectively. This must be their wellspring of financial resources rather than developing new construction property. We just are not going to see a lot of new construction property being developed. The resources are so limited and go such a short way when you spend it on new construction, it makes much more sense to refurbish what we already have. 

I am afraid if we do not focus on reclaiming and rehabilitation, as Gary has suggested, we could build a new unit every day and still not stay ahead. We have to look at units disappearing and say "we are not doing any new construction. Period." 

It is expensive, and the non-profits that cannot adapt are going to slowly go out of business. The real business will be in rehabilitation and management. Rehabilitate units as quickly and cheaply as they can. The non-profits should eliminate their overhead by learning how to manage the units. 

Ronne & Paul: Any final thoughts on our discussion?

Ronne Thielen 

I've been in the business a long time and I'm optimistic that this very specialized industry will continue to find ways to produce new units and help maintain existing units. Tax exempt bond financing works best with rehabilitation projects. We're seeing more and more of these proposals… 

Paul Silvern 

One thing we have not yet addressed is the role of the private sector in producing additional housing… While I am generally not a big believer in the trickle-down formula, unaided by other public policies, there is certainly value in making it easier to produce new housing in order to expand the overall supply. 

Gary has commented primarily on the need to conserve what we have got. That is certainly appropriate, but clearly we need a two-part strategy that focuses both on preservation and production, as the Housing Department has traditionally done. We need to continue to find ways to assist the private sector which produces the largest of share of new housing in Los Angeles… That can be done in a number of different ways, some of which are within the power of the City to assist, some of which are not.