Thursday, January 27, 2005

Eliminate HUD and lower the cost of housing

The New York City Housing Authority complains that the federal government is providing "$50 million less than what the agency needs." NY Times.

(1) Housing should be a local issue and not a federal issue. Eliminating the entire federal Department of Housing and Urban Development would help reduce the budget deficit by $31.3 billion.

(2) Housing can only be made more affordable by increasing supply or by reducing demand. Basic economics.

(3) Housing vouchers make housing less affordable because they increase demand by increasing the amount of rent that voucher recipients can afford to pay. Voucher recipients wind up bidding against each other for a fixed supply of housing resulting in higher prices.

(4) The economically sensible way to help poor people is to increase supply, which can easily be done by changing zoning laws and reducing other regulatory impediments to residential construction. And the best part of this solution is that it doesn't cost the taxpayer any money at all.

5 comments:

Raja said...

wow, wonderful post!

mikeca said...

HUD and housing vouchers are a minor influence on the low-end rental market. The idea that without these vouchers the free market would solve this problem is debatable. The cost of building new housing sets a minimum rental price, and if that is too high for poor people, then the free market can do little to help them. In this case the “free market” solution is illegal shantytowns, like you find in much of the 3rd world. Is this the solution you are proposing for the US?

If you want to reduce the cost of housing in the US, you need to eliminate the real government subsidies, like the tax deductibility of home mortgage interest, Fannie Mae and Freddie Mac. The problem is that home ownership is very high in the US, so this would hit most Americans hard and is therefore unlikely to be politically acceptable to either party.

The other thing to keep in mind is that the vast majority of private savings in the US is in home equity. Many Americans will be relying on this for part of their retirement income.

Scott said...

Several correct points were made above.

"(3) Housing vouchers make housing less affordable because they increase demand by increasing the amount of rent that voucher recipients can afford to pay. Voucher recipients wind up bidding against each other for a fixed supply of housing resulting in higher prices."

Increasing the amount of rent that recipients can pay also provides an incentive for the construction of more and better housing. I doubt it's the right incentive, but it is worth noting.

I may be wrong, but I think Libertarian Girl is equating "price" and "affordability" in her economic analysis, when the two terms are not necessarily synonymous.

Engineer-Poet said...

One correction to what mikeca said:  Housing can easily rent for less than the cost of construction if it is in an area people are fleeing, like much of Detroit.

mikeca said...

Engineer-Poet said “One correction to what mikeca said: Housing can easily rent for less than the cost of construction if it is in an area people are fleeing, like much of Detroit.”

This is true, but it is not a sustainable situation. Housing being rented very cheaply because no one wants to live in that area will not be properly maintained, as the example of Detroit illustrates. There also are areas of the country that simply do not have undesirable locations where housing rents can fall so low, or when they do, the local governments declare them slums and tear them down.