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       From all appearances, federal policy on affordable housing is facing its most searching reassessment in decades. As housing policy comes up for reauthorization in Congress, the decades-old approach of housing low-income tenants in massive housing projects has few defenders in Washington. The Clinton administration seems to favor the demolition of some of the notorious projects, relocating some of their former tenants in newer, largely mixed-income units, and assisting others with vouchers to subsidize their rental of housing in the private market. On the Republican side, Rick Lazio, the chairman of the housing and community opportunity subcommittee, has gone so far as to suggest repealing the National Housing Act of 1937, the basis for all current federal housing programs. In addition, he has advocated potential time limits for public-housing tenants and tougher oversight of corrupt housing authorities.

       None of these proposals, however, have challenged the intellectual basis of current housing policy. Both sides have essentially proposed marginal changes intended mainly to ameliorate the worst aspects of public and subsidized housing. Unfortunately, the changes rest on dubious assumptions--chief among them that the problems with our housing policy have stemmed from its implementation rather than its very conception. We are told that public housing might work if only it did not take the form of high-rises and serve mainly the very poor, that low-income housing subsidies should certainly work if only they were provided in the form of vouchers that will open up the private housing market to those in need. But since these proposed reforms ignore the powerful social dynamics that shape neighborhoods, we are in danger of lurching toward a new generation of policy mistakes.

       There is another way out of our housing policy problems. Throughout the country, we see innovative models of housing that work and, in most instances, are neither politically divisive nor dependent on government subsidies. This network of privately built and maintained neighborhoods suggests that massive government spending is not needed to help those of low and moderate income find good housing.

       The key to understanding what works is a concept called the housing ladder: the idea that neighborhoods and the types of homes in them shape the way we organize our society and its social structure. Public officials who understand the housing ladder can help citizens of any income secure good homes and neighborhoods. If we understand its rules, its social dynamics, government can help extend housing opportunities through use of the market and, at most, limited subsidies.

       In 1979, geographer Phillip Rees found that socioeconomic status is a universal sorting principle in American cities. People of similar incomes and educational backgrounds overwhelmingly choose to live together. The result: Most neighborhoods comprise relatively similar lots and types of housing. Each type of neighborhood is linked roughly to an income group. Each type of neighborhood represents a rung on the housing ladder.

       But the housing ladder is not just a system of physical structures; it's also a social system. Families strive to improve their economic position--to climb to a higher rung. A bigger and better house in a more affluent neighborhood is one of the rewards that market economies bestow upon individuals. Unlike other consumer goods, the value of one's house is, in part, determined by the condition of one's neighborhood. Keeping a neighborhood safe and property values high is a common enterprise that helps hold communities together. Residents may, for example, work hard to forestall neighborhood deterioration and so avoid falling to a lower rung.

       Residents fashion the civil society of their neighborhoods through myriad activities--organizing crime patrols, volunteering at a local school, or simply doing favors for neighbors--that make an area a better place to live. Every day, citizens join in this confidence-building enterprise to reassure each other that their neighborhood will remain attractive to new buyers, will remain a good place to live and increase in value, and may provide the wherewithal to move up to a more expensive neighborhood.

       In general, housing policy is a local matter. Every municipality, every residential neighborhood, plays a role. How a community designs its zoning and building codes both reflects and shapes its sense of where it fits within the housing ladder. Properly maintained, the housing ladder provides a full range of privately owned housing options, from cheap single rooms with shared baths to mansions on large plots. Such an array of choices motivates residents of al incomes to maintain their homes and communities and strive to ascend the ladder to better accommodations. This dynamic is key to preserving the social fabric that holds all healthy communities together. It can be awkward to acknowledge that Americans group themselves on the basis of income and education (which are, of course, related). But such are the unwritten rules of the housing ladder, and we ignore them at our peril.
 

$384 BILLION DOWN THE DRAIN
       The housing ladder poses a vexing problem. At the lowest rungs, private builders and property owners may erect structures that society believes are not for fit for habitation. Shacks, urban shanties, windowless tenements, and converted garages and cellars scandalize reformers and legislators. Historically, government's pursuit of decent housing for all has been based on the belief that substandard housing is not simply smaller and less ornate than middle-class housing, but can deprive its inhabitants of life opportunities and threaten their health and safety.

       But when policies to improve housing conditions for the poor ignore the rules of the housing ladder, they inevitably fail. Regulations that raise living conditions also raise construction and maintenance costs, thereby reducing the supply of cheap housing. Costly subsidies for housing based on financial need destroys the incentives of the recipients to save money and to maintain the condition of their environment.

       The failure of public housing is commonly attributed to the poor management and high-rise architecture of housing projects and their subsidized successors. But its main flaw is that it deprives poor families of the kind of social fabric that wards off lawlessness and decay. Such accommodations are often physically equal to those for which persons of greater means might pay. But they undermine the incentives to maintain the housing stock that undergird communities.

       Since 1962, we have spent $384 billion through the Department of Housing and Urban Development (HUD) and its federal predecessors. Yet physical maintenance of housing projects is abysmal: A 1988 study estimated that fixing up the nation's public-housing stock, which houses one-third of the 4 million families receiving housing assistance, would cost at least $30 billion. Social maladies--crime, drug abuse, pregnancy among unwed teenagers--are concentrated in, and sometimes exacerbated by, public housing. A 1989 HUD study found that fewer than 10 percent of housing-project families with children are headed by a married couple. Once in the projects, many single-parent families remain, and remain on public assistance.

       In contrast, poor owners and so-called tenement landlords (owners of small, multifamily buildings) seeking home improvements once contributed their own time and hired neighborhood tradesmen. Public housing did away with this type of informal system. Suddenly a public bureaucracy, with its bidding rules and standardized procedures, arranges all repairs. The result has been the decline both of physical structures and the civil society of poorer neighborhoods.

       Not only does public housing weaken the social structure within, but the lure of larger, less expensive accommodations than families could otherwise afford draws families out of surrounding neighborhoods and thereby undermines them. Denied their supply of low-income tenants, the fragile private housing market in poor neighborhoods may suffer foreclosures and abandonment.

       Public housing also rewards those who have not worked and sacrificed to gain their accommodations; their need alone is considered qualification enough. Absent subsidies, the price of housing serves as a way to separate those among the poor with good work habits and strong family bonds from those who lack them. Public housing deprives low-income citizens who are ambitious and self-sacrificing of an incentive to distance themselves from those who are not. In so doing, it inhibits the formation of strong communities on the lower rungs of upward mobility.

       It can be argued, of course, that we have learned from our mistakes in public housing. But we have ignored the true lessons from this failure. As a result, we've developed alternative policies that offer no significant improvement.

       Housing vouchers. Housing vouchers, which now account for a third of the nearly $8 billion spent annually in federal housing subsidies, offer a dangerous, perverse incentive. In effect, they offer tenants a chance to move to higher-income, or slightly less poor, neighborhoods without having raised their own incomes. By rewarding need, not achievement, vouchers send the wrong message to those they subsidize and threaten to introduce social problems to the neighborhoods into which voucher-holders move.

       Subsidized construction. Even as our cities bristle with the remains of previous utopian housing visions, we have embarked on a vast new round of subsidized housing construction--one in which government's role is indirect but crucial. This new approach still produces subsidized rental complexes, but relies on nonprofit community management groups to oversee them. Its premise is that the flaw of public housing has been poor management by housing authorities. Nonprofit groups, it is thought, will do better.

       The National Congress for Community Economic Development has estimated that there are more than 2,000 nonprofit, community-based development organizations (CBDOs) in the United States. Most of them--about 88 percent--help create so-called affordable housing: subsidized units for those of lower income. Between 1987 and 1991, these organizations alone produced at least 87,000 housing units, many of them renovations of older apartment buildings in poor neighborhoods. In doing so, they have relied mainly on federal support. Community-based development organizations depend largely on federal tax credits and housing subsidies. But some of the same problems that have dogged public housing, including maintenance problems, are already developing in these new projects.

       A common belief among public-housing advocates is that private ownership and production of housing will inevitably ill serve those of modest means. There is good reason to question this core belief. For much of this century, housing reformers have tried to eliminate overcrowded, unsafe, and unhealthy conditions deemed intolerable in a wealthy and compassionate society. In so doing, they have also removed many of the lowest rungs of the housing ladder. The utterly predictable reduction in the supply of affordable housing has in turn been used to justify massive government subsidies.
 

MODELS OF PRIVATE HOUSING
       It is time to rediscover the virtues of privately owned low- and moderate-income housing. What follows are descriptions of initiatives in cities across the United States that help create those rungs on the housing ladder needed to generate good, safe neighborhoods and offer social and economic upward mobility. Each initiative represents its own rung on the ladder. They have been chosen not as programs to be slavishly imitated, but as examples of how a housing policy might take shape when it is based on less regulation, less subsidy, and more attention to the social forces at work in neighborhoods.

       San Diego's SRO housing. After World War II, urban renewal programs to raise housing standards decimated the supply of single-room-occupancy (SRO) units. Between 1974 and 1983, 896,000 housing units in the United States renting for less than $200 a month, many of them single-room units, were demolished.

       San Diego, California, was no exception. Downtown redevelopment led to significant demolition or conversion of the city's SRO stock, which declined 25 percent from 1976 to 1985. In recent years, however, more than 2,700 new or renovated, privately owned, single-room units have come into the market, most built and run without public subsidy. For this we can thank subtle but crucial regulatory changes that reduced construction costs enough to allow SRO developers to keep rents in line with their low-income market.

       To lower costs for private developers of SRO housing, city agencies permitted new SRO hotels in inexpensive commercial zones on the fringe of downtown; exempted SROs from complex zoning and planning reviews; secured state permission to reduce the minimum room size for single-room units and allow rooms to have partial baths and shared showers; allowed builders to satisfy building codes in the cheapest way consistent with safety; and waived regulations for minimum parking, sewer capacity, and other requirements on a case-by-case basis.

       Baltimore's minimal rehab model. The decline of inner-city neighborhoods after World War II prompted the federal government to subsidize the interior renovation of buildings in older neighborhoods through so-called gut rehabs. The costs of renovation were higher than the rent rolls in poor neighborhoods could ever support. To draw private owners and managers into the low-income housing business, therefore, the government provided subsidized mortgages for owners and rental subsidies for tenants.

       Because much of their rent is paid for by the government, tenants lack leverage to demand proper upkeep and maintenance. Owners, in turn, have neither opportunity nor incentive to screen tenants for ability to pay rent and stay out of trouble. Such renovations are extremely expensive and disrupt the housing ladder. They minimize the incentive to move up, because residents are unlikely to acquire with their own income accommodations equal to what they've gained through subsidy.

       A small project called City Homes, Inc., in Baltimore, has a different approach: reduce rents and satisfy societal norms for decent housing by lowering the costs of renovation. To keep costs and rents low, City Homes emphasizes repair over replacement. It retains as much of the existing interior as possible and avoids unnecessary amenities.

       The City Homes minimal-rehab approach does not require waivers from housing codes. It does require a willingness on the part of local and state officials to commit low-interest mortgage money to a project that is not a gut rehab. City Homes has renovated 243 row homes for an average of $12,000 each, and charges rent of $268 a month.

       Because its costs are low, it can choose only tenants with a demonstrated ability to pay and willingness to maintain their households. The combined effect of reduced costs and good screening policies is the creation of a new, low-end rung on the housing ladder: nonrent-subsidized, low-income tenants who seek the chance to begin the process of upward mobility.

       Creating homeownership opportunities. Homeownership is critical to the housing ladder system. Ownership gives lower-income families a stake in maintaining their property, increasing their investment, and moving up the ladder. Unfortunately, older, distressed urban neighborhoods sometimes offer little assurance that one's investment will be worthwhile.

       Many builders recognize that another approach is possible: housing that is affordable not because it is subsidized but because it is cheap to build. The key to these opportunities for low-cost homeownership is open land, in the form of urban lots that are vacant or occupied by abandoned buildings. Two of the largest organizations engaged in such construction are nonprofits: the Nehemiah Plan Homes, in New York City, and Habitat for Humanity, the national organization headquartered in Americus, Georgia.

       Nehemiah develops attached, single-family homes, owned by their residents, in once derelict areas. Nehemiah has, since 1984, built some 2,500 homes--mostly small row houses selling for between $51,000 to $73,000 on cleared land in Brooklyn and the Bronx. It is financed by two consortia of African-American churches, which provide no-interest financing by raising enough capital to get construction underway. Home sales replenish the capital and pay for the start of the next round of construction. In addition, Nehemiah homebuyers have received low-interest loans from a state agency.

       Habitat for Humanity, which uses donated materials and volunteer labor, has become the 14th-largest homebuilder in the United States. Between 1984 and 1995, Habitat's 1,100 local chapters built some 40,000 modest single-family homes. The homes sell for as little as $30,000. Like Nehemiah, Habitat is self-financed, relying on donations for its capital. Unlike Nehemiah, it provides its own mortgage financing at no interest and redirects mortgage payments toward new construction. The homes it sells for $30,000 are typically valued at $50,000 or more. Often they are built on land given by government and improved through community-development grants.

       Both Habitat and Nehemiah sell homes at below-market cost. They are, in other words, responding to that central complication of the housing ladder: the social consensus that we should not let the for-profit market alone provide housing at the bottom rungs. By deciding not to use price alone as a way to discriminate among buyers, Habitat and Nehemiah use other means that assure them of the reliability of their owner-occupants. Nehemiah looks for proof of ability to make payments, while Habitat uses both economic criteria and a questionnaire about personal character. Both groups limit the right to resell to discourage quick speculation.

       Accessory apartments in Long Island. I have not advocated bringing subsidized rental programs to suburban locations. Such projects are likely to create a political backlash and to send the wrong message to less affluent families. Nevertheless, suburban municipalities need to recognize that neighborhoods change as the demand for housing types changes. Municipalities that adjust can continue to attract new residents and ensure stable or rising home values.

       One model is laws that allow the creation of an accessory apartment in single-family homes, in effect converting them to two-family structures. Accessory units create a slightly lower, more accessible rung on the housing ladder for young, upwardly mobile residents. In the 1970s and 1980s, for example, many older, middle-class homeowners in the Long Island suburbs of New York found themselves paying high property taxes for homes with more space than they needed. So they began to rent out illegal accessory apartments, often converting basements or garages into separate living quarters. By changing their zoning laws, seven towns on Long Island, New York, helped to create thousands of new, legal housing units in the past 15 years.
       It can be argued, of course, that the advent of accessory apartments is nothing less than a sign of deterioration. The fact is, however, that neighborhoods don't have as much choice as they think as to which rung they will occupy on the housing ladder. Acknowledging and adapting to incipient changes seems like a far better strategy than prohibition.

       Some sort of subsidies are involved in some of the example cited here. Such subsidies are limited and not necessary for the long-term financial management of the projects. Moreover, they are offset by the value of these examples' other attributes: low-cost construction, homeownership, and zoning and building code changes that enlarge our housing supply.

       The transition to a housing policy that recognizes and rebuilds the housing ladder will be neither easy nor instant. The existing system of public and subsidized housing has powerful backing from various interest groups and bureaucracies. Finding humane ways to phase out these programs and incorporate public housing into the housing ladder will be difficult.

       In addition to the practical and political obstacles to restoring the housing ladder, our society must also make a psychological transition. Somehow we must learn to accept the existence of poor, at times shabby, neighborhoods. Housing reformers discount the possibility that such neighborhoods can still serve their residents well, and that those residents might accept the challenge to improve their neighborhood or to improve their own prospects for moving elsewhere. Again and again, in American cities, the impulse to bulldoze poorer neighborhoods--lower rungs on the ladder--asserts itself. But there is no way that all neighborhoods can be middle class or better. And there is no sustainable way to replace inexpensive housing with a publicly subsidized alternative.

       I do not propose specific new programs. The housing market is intensely local; officials must respect the market and make sure that regulations do not unnecessarily impede it. Rather, I offer a vision of incremental improvement, through individual initiative, altruism, and deregulation. The time has come for an approach that respects the way in which the private market improves the social character of neighborhoods. The restoration of the housing ladder will help not only the poor, but all of civil society.

       Added material
       Howard Husock is the director of the Case Study Program at Harvard University's John F. Kennedy School of Government. This article is adapted from "Repairing the Ladder: Toward a New Policy Paradigm," published by the Reason Foundation in 1996.

 

WBN: 9706001170010