Federal Home-Building Programs Guarantee Waste

Originally published in The Boston Globe

May 19, 2011
Edward Glaeser (Glimp Professor of Economics, Harvard University)

Even with superb leadership, the federal government’s home-building programs are unworkable in a country as vast and varied as the United States.

Last week, the Washington Postreported that the Department of Housing and Urban Development, or HUD, "has squandered hundreds of millions of dollars on stalled or abandoned projects and routinely failed to crack down on derelict developers or the local housing agencies that funded them." Shaun Donovan, the current HUD secretary, is impressively intelligent and inspiringly dedicated; he won widespread praise for his work as housing commissioner in complex, chaotic New York City. Yet not even Donovan can fix the current problem, because it’s impossible for federal officials to perfectly oversee any nationwide building program.
The Postseries focused on the department’s HOME investment program, which has doled out over $30 billion since 1992 to states and localities to subsidize the construction, rehabilitation, and use of affordable housing. The program is a late child of Nixon’s New Federalism, which transferred control of HUD economic development spending to states and localities.
The idea was to create more autonomy and flexibility, but inevitably decentralization creates room for abuse. The Postclaims that "nearly one in seven projects shows signs of significant delay" and that "nearly 700 projects awarded $400 million have been idling for years."The newspaper reports that "in at least 55 cases, developers drew HUD money but left behind only barren lots."
HUD has responded that "in spite of examples of incompetence and outright mismanagement by certain local governments, overall the HOME program works." The department argues that the HOME program has "produced more than a million affordable homes," which HUD calls "an outstanding accomplishment by any measure," and that "these delayed projects that the Post cites are a small fraction (approximately 2.5 percent) of 28,000 active developments."
While it’s true that the Post zeroed in on the program’s failures, the report compellingly illustrates the downsides of Nixon’s New Federalism. Washington can’t micromanage every local project, especially because "even when HUD learns of a botched deal, federal law does not give the agency the authority to demand repayment."
But HOME faces problems that go beyond occasional local mismanagement — and so does the Low Income Housing Tax Credit program, a much larger initiative that allocates tax credits for affordable housing construction to local housing authorities.
We simply don’t need to subsidize more construction across the United States. Some parts of America, like Greater Boston, do have a shortage of housing that low- and middle-income people can afford. But most of America does not, especially after the housing crash. Any nationwide policy that doles out subsidies everywhere, regardless of need, will guarantee waste even with perfect management.
Building is unfettered in areas like Atlanta, Dallas, Houston, and Phoenix, and that means with or without subsidies, prices stay close to construction costs. The median sales price of a single-family home in the Atlanta area in 2010 was $115,000. Developers in these growing places are happy to take HUD’s dollars, but that doesn’t mean that they wouldn’t have built without the subsidies.
When department officials claim that HOME "produced" 1 million new homes, they mean that HUD subsidized 1 million homes. Economists Todd Sinai and Joel Waldfogel find that public construction crowds out private building. A reasonable guess is that HOME actually produced about 500,000 new homes. That would mean that each new home cost the government $60,000, which doesn’t seem like an outstanding accomplishment to me.
In declining areas, like Detroit, public subsidies do create new housing, because private developers ordinarily wouldn’t build in such low-price areas. But why exactly do we want to increase the housing stock in declining, low income areas? The cities of the rust belt already have plenty of affordable housing. Better education and economic opportunities are what they need.
Boston does need more affordable housing: our prices are high and our supply of new housing is low. We should be grateful that HUD has pushed against our culture of NIMBYism.
But in a country where even the poorest fifth of the population occupies housing units twice the size of the average housing unit in England and France, unwieldy nationwide programs are a poor way to address such local problems. HUD should focus on its excellent voucher program, and on pushing high-cost, restrictive areas like Boston to unfetter the private construction that creates real affordability.