Housing policy is too focused on rental homes. That must change

At a recent Michigan Bankers Association conference, the vice president in charge of business development for the Michigan Economic Development Corporation and the executive director of the Michigan State Housing Development Authority both indicated to the bankers assembled that the No. 1 economic development problem the state faces is a shortage of homes for sale. Other states have similar problems.

As American Banker reported last month, there a number of reasons why construction of new, entry-level homes has been declining for years, including rising lumber costs, a lack of labor, burdensome local zoning restrictions and the homebuilding industry’s slow recovery from the 2008 financial crisis.

To that list we can also add government policies, which tend to encourage construction of rental properties and not the types of starter homes that could help low- and middle-income households build wealth.

The latest proposal from Congress involves expanding the Low-Income Housing Tax Credit, a program designed to boost the supply of affordable rental housing.

But building more rental housing using federal tax credits or subsidies is not the answer, as it prevents the people that live in that housing from ever joining the middle class. Our bank’s home city of Ann Arbor, Mich., used tax credits over the decades to create 360 units of rental housing that were never properly maintained and now all need to be torn down and replaced. This approach perpetuated the cycle of oppression while turning the city into the worst kind of slum lord.

We need to rethink housing policy to encourage the development of modestly priced, quality entry-level homes that are sold to households of modest means. Over time, the people who buy those homes will be able to join the middle class.

The Department of Housing and Urban Development, for example, will back any rental program for new construction projects with loan guarantees, but will not back any new construction projects for homes for sale. This limits new construction to rental housing when the market demands more home ownership alternatives. All of the many tall buildings recently built in downtown Ann Arbor and all the major new home projects built outside of the downtown over the past two decades are apartments funded by this HUD loan program.

Through research, I discovered that HUD actually has a loan guarantee program for multi-family housing for sale, under Section 234(d), but Congress has not funded this program in many decades.

If HUD’s multi-family loan program for “for-sale” multi-family housing projects was funded by Congress, large quantities of new construction of condominium, cooperative or planned-unit development style owner-occupied housing could be built. While such projects carries risks for the government, the solution lies with risk-sharing, where banks or other private-sector lenders have to take on a portion of the risk of each construction supporting home ownership. The Veterans Administration housing loan guarantee program would be a good model of a successful program incorporating risk-sharing.

I would urge bankers to contact their Congressional representatives and request that they enable HUD to offer loan guarantees with risk-sharing under Section 234(d) similar to the VA loan guarantee program.

Our bank would gladly participate in a pilot in Michigan for this type of solution.

Ann Arbor’s Washtenaw County has a severe shortage of housing, resulting in 80,000 commuters driving into Ann Arbor each day for their job. Because the homebuilding firms in Michigan were largely decimated in the 10-year Michigan recession, most homebuilding going on today is rental apartments, spot single family development of single developed lots and luxury single family homes being built by large publicly traded home building firms, using their own cash. A loan program variant under HUD’s existing multi-family lending programs with an 80% or 90% loan guarantee from HUD would be very useful to address this severe unmet need for new owner-occupied housing.

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