Moody's Examines (And Endorses) Affordable Housing Bill
It was largely ignored with the ongoing rush of news from Washington, but late last month Senator Elizabeth Warren (D-MA) introduced a bill she says is aimed at increasing the amount of affordable housing, both for purchase and for rent. That bill, SB 3503, the American Housing and Economic Mobility Act, is now the subject of an independent analysis by Moody Analytics. Mark Zandi, Moody's Chief Economist authored the report.
Zandi notes that construction of high-end housing, both for purchase and rent, recovered first from the housing crises and that type of housing is now in oversupply in many urban areas. Construction of units that are affordable for lower- and middle-income households to rent or own however, has only recently begun to increase and they continue to significantly lag demand. The worsening shortage of affordable housing is clear in the low and still declining rate of housing vacancies. Unoccupied housing for rent or sale has fallen sharply since the housing crash and is now as low as it has been in more than 30 years.
Lack of housing is pushing up house prices and rents, making it even more difficult for low- and middle-income households to find a place to live. While builders have steadily increased production, it has risen from 600,000 units during the worst of the crash to just under 1.4 million units today, prices and rents have incentivized construction at the high end while the opposite applied to more affordable units. Prices and rents have substantially outstripped the growth in incomes for these households for over six years. This has recently started to shift as lower and middle-income households do better financially and prices and rents on the low end have increased.
The Moody analysis sees significant constraints on building affordable units. Labor is in short supply, especially in the South and West, driving up labor costs. Labor shortages in transportation, distribution, and manufacturing also feed into homebuilding costs. Lumber and gypsum prices have escalated in recent years, and the growing trade war and higher tariffs on steel, aluminum, and other commodities are making homes costlier.
Stiff zoning restrictions and higher permitting costs and other regulations significantly impact building costs, particularly in urban areas where affordable housing is in especially short supply. Permitting fees were sharply increased by many localities to make up for reduced property taxes when home values collapsed.
Zandi present a very positive outlook for the proposed act. It is designed to provide an average of $50 billion per year to encourage local governments to reduce building restrictions, provide downpayment assistance, and reduce negative equity on those households where it still exists. "Most significantly, the funds are to be used to boost the Housing Trust Fund (HTF) and Capital Magnet Funds (CMF) which were established by the 2008 Housing Economic and Recovery Act (HERA) but under which funding only started a few years ago," the analysis says.
Current combined funding for those two funds is several hundred million a year, coming from a fee on loans purchased by the GSEs Fannie Mae and Freddie Mac. The HTF provides funds to state housing authorities to develop affordable rental units under local objectives and goals. The CMF provides funds to Community Development Financial Institutions and other non-profit developers for increasing the affordable housing supply in underserved areas. "The HTF and CMF have the flexibility necessary to significantly increase the supply of affordable housing in real estate markets encumbered by a range of complex and costly problems.," according to the report.
The Act is designed to be deficit neutral over the 10-year budget horizon with $400 billion of the $500 billion paid by rolling back estate tax exemptions to 2009 levels. The remaining costs will be paid by tax revenues from the additional homebuilding and other economic activity.
In analyzing the impact of the bill Moody's conducts a simulation assuming that the law passes in 2019 and that it will take several years for HTF and CMF to bring their infrastructure up to full speed. Another assumption is an average cost of $175,000 per units to produce an affordable unit this year, increasing annually by more than 3 percent through 2021 then moderating closer to 2 percent annually through the mid-2020s. Under current law, unchanged by the proposal, 70 percent of CMF funds must be used to support affordable housing with no more than 10 percent of a project's costs coming from CMF.
Moody's model shows an increase in affordable housing units of 200,000 next year, 250,000 in 2020, and to 300,000 in later years. This is approximately equal to the current annual shortfall in supply. "If this legislation is signed into law soon, it will at the very least ensure that the current crisis in affordable housing does not get worse," the report says. However, there will still be a shortfall in affordable housing which Moody's expect will be slowly covered by market forces. By the end of the act's 10-year horizon supply should be approximately equal to demand.
Moody's expects other benefits from the bill. More supply should moderate the growth of rents from the over 4 percent expected to closer to 3 percent resulting in a rents 10 percent lower than current forecast at the end of 10 years. Home prices will moderate as well, but to a lesser degree.
In 2019 the increased housing construction should lift employment by 730,000 jobs and by as many as 1.5 million at the peak of impact in the mid-2020s. Limiting this lift is the current near-full employment and that the increased activity will result in higher interest rates.
Scaling back estate tax reductions should have little economic impact. Zandi concurs with Warren's estimate fewer than 10,000 families will be affected, and these are wealthy households with substantial financing resources.
Moody's says its model likely understates the economic benefits of the legislation as it does not measure the impact of low and middle income families being able to move closer to their employment or potential jobs, something currently constrained by the lack of housing. It may also lessen the commutes of workers for the same reasons.
Warren said, when introducing her legislation, "Housing is the biggest expense for most working families - and costs for everyone, everywhere are skyrocketing. Rural housing is falling apart, and decades of discrimination has excluded generations of Black families from homeownership. My bill would cut rents by 10% and give families in urban, rural, and suburban communities more economic security. This proposal will attack the rising cost of housing by helping to roll back needlessly restrictive local zoning rules and taking down other barriers that keep American families from living in neighborhoods with good jobs and good schools. After bungling housing policy for decades, it's time for Congress to make things right and pass my bill."