‘Affordable’ Housing Won’t Come From D.C.
In the 26th chapter of Ludwig von Mises’s magnum opus, “Human Action,” one finds a discussion of a builder vexed by the absence of prices and therefore unable to objectively determine the optimal mix of methods and materials to construct a house. Mises writes: “The paradox of ‘planning’ is that it cannot plan because of the absence of economic calculation. What is called a planned economy is no economy at all. It is just a system of groping about in the dark.”
Today we find ourselves lurching toward that world where the government sector operates without regard to price, scarcity or calculation simply because it has been given the power.
A case in point: The Fort Wayne City Council is considering participating in the financing of a low-income housing project at the site where a previously approved housing project failed. The new project’s Tax Increment Financing (TIF) was approved 3-2 by the Redevelopment Commission at its last meeting. This $3.3-million TIF bond is part of a capital stack of $42.8 million that includes $19 million in Tax Credit Equity, a $0.5 Million Federal HOME loan, a $5 million READI grant and a bond of $19 million dollars to go with the developer’s equity, which is made up of a $1.95 million deferral of half of the $3.9-million development fee.
This menagerie of financing tools buys the developer $3.8 million of site work, $0.8 million of architectural and engineering work, $28 million of construction costs, $5.25 million of “soft costs,” nearly a million dollars in appliances and finally the $3.9-million fee, half of which was pledged as “equity.”
When the dust settles there should be a set of apartment buildings with roughly 215 low-income units available for rent. If one were interested (which apparently no one is) the cost is roughly $200,000 per unit — a princely sum for a 1,000-square-foot apartment unit in Fort Wayne.
Unlike the builder in Mises’s analogy, we still have some comparative prices with which to perform basic calculation. Consider the newly constructed “Ventry” in the southern portion of incorporated Aboite Township. This complex is roughly the same size (180 units) and type of units. The apartments are between 1,000 to 1,250 square feet each renting for over $1,000 a month, many of which include a private garage. The complex includes a community swimming pool and club house. According to data from the county assessor’s office and information from the auditor’s office, the Ventry appraises at about $17 million and cost about $16 million to build. That is less than $90,000 per unit.
Bluffton Park, an 87-unit apartment complex in south Fort Wayne, recently sold to a New Jersey investor for $8.5 million. That comes to $97,700 per unit. Both of those projects sell their units for a far sight below the project that council is considering.
So it begs the question of why piles of federal, state and local money are pouring into a low-income housing project where the price per unit is more than twice market-rate comparables. Part of the answer is that the people making the decisions never looked at actual comparable property prices. They didn’t care; they’re not making market-based economic calculations.
You also need to understand that the decision-making is not being made in Fort Wayne. This all began in Washington D.C. These types of housing projects are the result of the 1986 Tax Reform Act and the creation of the Low-Income Housing Tax Credit (LIHTC). This program spans multiple federal agencies, state and local government departments as well as non-governmental not-for-profits.
The U.S. Treasury Department and the U.S. Department of Housing and Urban Development each have a hand in administrating the program. The Internal Revenue Service is tasked with carrying out Internal Revenue Code Section 42 while the Treasury’s Office of the Comptroller of the Currency (OCC) is involved regulating the investment in the tax credits by financial institutions. Banks are strongly encouraged to participate in the LIHTC by the relaxation of capital ratios, depending upon the level of investment of CRA (Community Reinvestment Act) eligible assets. Larger banks have entire divisions devoted to community-development banking where LIHTC plays a big role. CRA, of course has its own regulators, the Federal Reserve Board of Governors, Federal Deposit Insurance Corporation and the previously mentioned OCC.
The Treasury uses a formula to distribute the credits to states each year. The state then has its own process for meting out the credits to developers, who sell them to the banks or other financial institutions that might have a need for tax credits. In Indiana, the state’s LIHTC program is handled by Indiana Housing and Community Development Authority or IHCDA. Indiana’s program is called Rental Housing Tax Credit (RHTC), because it never hurts to throw in another acronym.
And yes, all this complexity comes at a cost. There are a number of law firms and financial advisory firms that specialize in helping developers, investors and municipalities navigate a complex regulatory environment. The second largest item on the expense ledger (a full 12 percent of the total) are those “soft costs.”
This is the amount said to be needed to “land” the project and pay for the insurance, compliance, regulatory and application fees. This is where the courtiers and bureaucrats take their cut. Nearly a million of this goes to IHCDA, Civil Rights Enforcement Agency (CREA), and green building compliance. Another $3 million goes to bank fees and interim financing and the last million of the $5 million goes to other legal fees and project administrative costs.
This still doesn’t explain why the actual construction prices (even excluding the developer fee and soft costs) are nearly 80 percent higher per unit than those incurred in a nearly identical project completed a year ago. The developer predictably blamed inflation, which may be responsible for 20 to 40 percent of the increase according to the Census Bureau’s Construction Price Index and depending on when purchasing arrangements were made. That still leaves, after excluding the impacts of inflation and the exorbitant soft costs, a 40 percent price differential.
This is where local participation matters. With this being a Redevelopment Commission project (TIF), the city Community Development apparatus is involved in selecting vendors. This process can be rather opaque when not subject to competitive bidding but there is no incentive to hold costs down. Favored vendors end up winning big contracts. Often, members of the city’s Economic Development Corporation have connections with the firms that win these types of contracts.
Ultimately, we end up with less housing than there would have been without all the red tape. The market will meet demand where it is and do so in a sustainable fashion, where the products are constructed using materials and methods that fit the budgets of the consumers without imposing undue costs on society. But since the CRA was launched in 1977 we’ve seen a continuous uptick in the need for subsidized “affordable” housing, which never seems to meet the demand.
Conversely, we see multiple examples here in Fort Wayne where attempts to construct anything privately is held up by a variety of barriers erected by local, state and federal government.
Building codes in Indiana vary by county, and some counties more or less exclude outside contractors, though they may be licensed in neighboring counties or even do projects in the largest counties. The building commission board consists of the same entities that play such a dominant role in the economic development corporation board.
Rent subsidized by the federal government has diminished over the years because of the difficulty of complying with the inspections and audits by the local Housing Authority or with the parameters of the particular programs that impose rent regulations. At the same time, landlords are left to apply for rate increases and can only hope they get them. Their own costs increase in the mean time and their incentives to stay in the market decrease.
Rather than asking for more help from Washington, Fort Wayne would be wise to minimize government interference in housing markets, allowing charitable institutions to fill gaps and provide assistance for those who are truly unable to make market rents. Von Mises and history tell us that supply and demand at all price points will meet in equilibrium.
A version of this piece first ran in the Journal Gazette