Testimony of Ed Lazere at The Public Roundtable on District Funded Affordable homeownership Programs: Long-term Housing Affordability Restrictions Before the Committee on Housing and Workforce Developmentby Ed Lazere | June 9th, 2010 | PDF of this report
Testimony of Ed Lazere, Executive Director
At The Public Roundtable On
District Funded Affordable Homeownership Programs: Long-term Housing Affordability Restrictions
Before the Committee on Housing and Workforce Development
Wednesday, June 9, 2010
Chairman Brown and other members of the Committee, thank you for the opportunity to testify today. My name is Ed Lazere, and I am the executive director of the DC Fiscal Policy Institute. DCFPI engages in research and public education on the fiscal and economic health of the District of Columbia, with a particular emphasis on policies that affect low- and moderate-income residents. I appreciate the opportunity to testify on this important issue.
When government programs help low-income families become homeowners, a key issue is how long the housing must remain affordable — that is, how long should the re-sale price be restricted to keep it affordable to other low-income families?
On one hand, resale price restrictions are critical to maintaining a stock of affordable housing over the long-term. On the other hand, some argue that long-term price restrictions deny low-income homebuyers meaningful equity gains that typically come with homeownership.
The DC Fiscal Policy Institute believes that long-term affordability provisions in subsidized homeownership programs are important to preserving affordable housing and public investments, and that affordability restrictions can be designed in a way that allow owners to use their home for the important goal of building assets.
There are two key reasons to support long-term affordability provisions, including permanent affordability requirements. The first is that the supply of affordable housing in the District of Columbia has dwindled over the past decade, which means that efforts to preserve investments in affordable housing are important. In 2000, there were 58,000 owner-occupied homes in DC valued at $250,000 or less. That was half of all DC homes. By 2007, only 19,000 DC homes were valued below $250,000, a reduction of two-thirds.
Any program that sets affordability restrictions for less than the life of the home means that that any gains against the private market decline in affordable housing ultimately will be lost. Montgomery County’s MPDU (inclusionary zoning) provides the most vivid local example, where 20-year restrictions on affordability have resulted in losses of affordable units.
The second reason is that subsidies that help families or individuals become homeowners provide a substantial benefit, even if there are sales price restrictions. By definition, recipients would remain as renters and not enjoy any benefits of homeownership without the subsidy. Thus, even if someone remains in their home for a long time, it seems reasonable to ask more of them than repaying the initial subsidy they received, including requirements to sell the home to another low- or moderate-income family.
This by definition will mean that families will gain less equity from owning a home than if the sales price restriction ended after some period of time. While I understand the desire to help low-income families fully enjoy the “American Dream,” it is not clear from a policy perspective why a household fortunate enough to become a homeowner with a public subsidy should then also get the full benefit of the growth in equity that comes with homeownership. That is providing essentially two sets of benefits to one household while limiting the ability to help others.
Finally, it is critical to understand that families can gain equity from owning a home even if the sales price is restricted. The DC Fiscal Policy Institute simulated the impact of a 3 percent cap on annual increases in allowable sales prices. We took into account equity gains that come from the 3 percent annual increase and from payments of mortgage principal. We took into account tax savings likely to occur because a family would be able to itemize mortgage interest and property tax payments. We also factored savings based on the assumption that a family’s rent would continue to grow from year to year, while mortgage payments likely would be fixed. Finally, we factored assumptions of maintenance expenses and property taxes.
Our results show that a family buying a $225,000 home would gain $45,000 after five years, $114,000 after 10 years, and $213,000 after 15 years. While there be other sets of assumptions that may be equally valid, these examples demonstrate that sales price restrictions can still allow equity gains.
It is worth thinking of a subsidized home purchase as helping someone get their first or starter home. If a family wants the full benefits of their home’s equity appreciation, they can build up savings through their subsidized home and use that as the basis for purchasing an unsubsidized home.
Finally, it is worth considering a set of principles to guide long-term affordability restrictions. For example, an increase in mortgage interest rates could mean that an owner would have to sell the house below the purchase price if they are required to sell at a price that is affordable to a low-income buyer. It is worth considering provisions that would protect homebuyers from having to sell at a loss for reasons such as these.
Thanks again for the opportunity to testify. I am happy to answer your questions.