Author Archives: David Reiss

Historic Preservation and Affordable Housing

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photo by Ebyabe

Lior Strahilevitz has posted Historic Preservation and Its Even Less Authentic Alternative to SSRN. The abstract reads,

Historic preservation regulations are costly, contentious, and – as best we can tell – tend to promote residential segregation. Preservation as practiced in the United States also tells historical tales in a way that is inevitably selective, often more attuned to contemporary needs than historical objectivity, and likely to signal current residents and visitors about whose stories aren’t worth commemorating. Yet historical preservation, even to its critics, can further desirable goals. This essay examines traditional historic preservation strategies while also considering two potential alternatives, neither of which has received much attention.

The first alternative to traditional historic preservation – fake history – is employed on a large scale in the fastest growing residential community in the United States. The essay provides a case study of the use of fake history and theming in The Villages, Florida, revealing both the strategy’s potential for generating low-cost cultural resonance and its pitfalls. The possible connections between The Villages’ omnipresent theming and its disturbingly homogenous demographics are explored. The essay suggests that The Villages’ alternative to historic preservation might be replicated elsewhere and speculates about the demographic results of efforts to create more inclusive fake historical narratives.

A second, and novel, alternative to traditional historic preservation would select sites for historic preservation restrictions at random within a given community. Many of the problems associated with the way historic preservation regulations are implemented in the United States stem from the arbitrary and occasionally ugly battles over what to preserve and what to erase. Historic preservation becomes a battlefield for cultural warfare. Compared with this alternative, the case for randomly preserving in each city a few blocks that date from each particular era, while letting market forces dictate what gets preserved or destroyed elsewhere, may be surprisingly strong.

While I do not like either of these novel alternatives, we would certainly benefit from fresh thinking about what we are trying to achieve with historic preservation. Historic preservation remains too much of a niche area of regulation dominated by the few who feel most strongly about it. It has slowly but surely increased its reach in cities like New York. But it has not been accompanied by much serious thinking by broader constituencies about the costs and benefits of each incremental step.

There are obvious trade-offs with landmarking that don’t just affect landowners and developers. By restricting new construction, landmarking tends to restrict the supply of new housing units. This might be okay, but we should certainly think through those costs before just letting preservation districts cover more and more of a city. I am not particularly interested in communities based on fake history, but others are welcome to them. For me though, I am concerned that our most important cities might end up like Paris — stunning historic playgrounds for the wealthy, encircled by high-rise ghettos for the poor.

Airbnb’s Tourist Tenements

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The New York State Independent Conference issued a report, Tourist Tenements in the Making. The report concludes,

New York City has long been at the forefront of ensuring that its housing stock is safe for residents. We have instituted laws such as the Multiple Dwelling Law, the Housing Maintenance Code, and the Fire Code to ensure that buildings are constructed to the right standards for their intended uses, and have passed laws to prohibit activities that endanger people’s lives. One such action is turning residential properties into illegal hotels hosting over a dozen guests.

Residential properties are not meant to host dozens of transient guests. The IDC’s investigation found over 100 ads featuring residential spaces for groups of more than a dozen people, some claiming to house over 30 people. This kind of behavior not only creates an inconvenience for neighbors, but creates real dangers to both residents of this city and those guests that may choose housing not knowing that it is an illegal posting, since they saw the ad on Airbnb. We should not wait for a tragedy to strike before taking actions to curb illegal rentals that create dangerous conditions.

It is important that the State government take steps to protect our residents and tourists visiting New York from this kind of irresponsible behavior. As such, the Executive should act and sign into law the recent bill passed by the Legislature that will impose fines on individuals advertising illegal short term rentals and the Legislature should examine additional steps necessary to make sure that illegal short term rentals are handled not only in multi-family buildings but in private homes as well and that hosting websites be made responsible for the content they profit from. (11)

While the sharing economy is here to stay, it is hard to imagine that it will not face some form of increased regulation after reports like these come out. One Airbnb rental highlighted in the report advertises space for 16 people in a two-family house and another claims that it can house 32 people. The pictures in the report tell a thousand words each — bunk beds, beds in the kitchen, air mattresses lined up one next to the other.

This report shows some extreme examples of what can happen when the free market for residential space goes unfettered in a high-cost city. But, as the report notes, the government has a legitimate interest in protecting the health and safety of its residents and visitors. New York first regulated tenements over a hundred years ago. No doubt, they will soon act on this 21st century version of them, hopefully before a Triangle Factory Fire-type event strikes.

Jacob_Riis,_Lodgers_in_a_Crowded_Bayard_Street_Tenement

Banned from Their Land

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photo by MIKI Yoshihito

Realtor.com quoted me in Family Told They Can’t Live on Their Own Land (and You Won’t Believe Why). It opens,

One of the best perks of owning property—in fact, the main perk—is that you get to live on it. Or so we thought until we learned of a homeowner in Colorado who was told flat-out that her family can’t live on their own land. What’s going on?

Here’s the backstory: In June, an electrical fire left the Lafayette house of 70-year-old Marilyn Minor uninhabitable. Minor began repairs to her home so it would pass city inspections. But lacking the cash for a hotel or other accommodations, she and her home’s other residents—her son Wayne, daughter Charity, and Charity’s two kids—had nowhere to live. So they moved into their van, parked on their own land. It sounds reasonable enough, right?

Wrong.

Their living situation didn’t sit well with some neighbors, who alerted Lafayette city officials, who came back to Minor and told her that vacating her home wasn’t enough. Nope, until her place passed all inspections, the Minor family weren’t allowed to live anywhere on her property at all.

Why? That’s a question Minor is dying to get answered.

“Why can’t I live on the property that I pay taxes for and where I pay the mortgage?” she asked during an interview with Denver7. “I’ll go down fighting. This is my home.”

Although Minor anticipates her house will be fixed up in a few weeks, she’ll be dragged back into housing court next week and could face substantial fines if she remains on her property. And while some of her neighbors clearly disapprove, others are sympathetic.

“They shouldn’t have to be anywhere else,” one neighbor told Denver7. “This is their house.”

True, it’s their house, their land, their home. But according to experts we spoke to, that doesn’t mean they can live there however they please.

“Until the modern era, the common law was based on the understanding that, in many ways, every man’s home was his castle,” says David Reiss, a professor of law at Brooklyn Law School and academic program director at the Center for Urban Business Entrepreneurship.

“But for well over 100 years now, courts have acknowledged that governments have many legitimate reasons to restrict how property owners use their property. For instance, local governments regulate fire safety and sanitation issues, among other things, for the benefit of property owners themselves as well as their neighbors and the broader community.”

Two Cheers for Obama’s Housing Development Toolkit

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photo by Daniel Schwen

As the Obama Administration nears the end, the White House released a Housing Development Toolkit. It opens,

Over the past three decades, local barriers to housing development have intensified, particularly in the high-growth metropolitan areas increasingly fueling the national economy. The accumulation of such barriers – including zoning, other land use regulations, and lengthy development approval processes – has reduced the ability of many housing markets to respond to growing demand. The growing severity of undersupplied housing markets is jeopardizing housing affordability for working families, increasing income inequality by reducing less-skilled workers’ access to high-wage labor markets, and stifling GDP growth by driving labor migration away from the most productive regions. By modernizing their approaches to housing development regulation, states and localities can restrain unchecked housing cost growth, protect homeowners, and strengthen their economies.

Locally-constructed barriers to new housing development include beneficial environmental protections, but also laws plainly designed to exclude multifamily or affordable housing. Local policies acting as barriers to housing supply include land use restrictions that make developable land much more costly than it is inherently, zoning restrictions, off-street parking requirements, arbitrary or antiquated preservation regulations, residential conversion restrictions, and unnecessarily slow permitting processes. The accumulation of these barriers has reduced the ability of many housing markets to respond to growing demand.

Accumulated barriers to housing development can result in significant costs to households, local economies, and the environment. (2, emphasis in original)

Glaeser & Gyourko identified the tension between local land use policies and federal affordable housing policies a long time ago, but the federal government has never really done much about it. To its credit, the Obama Administration had touched on it recently, but never in this much depth. So one cheer for the toolkit’s focus on local land use policy as an issue of national concern.

And a second cheer for highlighting actions that states and local governments can take to promote more dynamic housing markets. They include,

  • Establishing by-right development
  • Taxing vacant land or donate it to non-profit developers
  • Streamlining or shortening permitting processes and timelines
  • Eliminate off-street parking requirements
  • Allowing accessory dwelling units
  • Establishing density bonuses
  • Enacting high-density and multifamily zoning
  • Employing inclusionary zoning
  • Establishing development tax or value capture incentives
  • Using property tax abatements (3)

I withhold the last cheer because the toolkit spends no time discussing how the federal government could use its immense set of incentives to encourage state and local governments to take steps to increase the housing supply in high-growth areas. The federal government used such incentives to raise the drinking age and it did it to lower the speed limit. Isn’t the nation’s affordable housing crisis important enough that we should use incentives (such as preferred access to HUD funds) to spur development that is good for Americans collectively as well as for so many Americans individually?

2-4 Unit Properties: Housing’s Middle Child

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The Urban Institute’s Laurie Goodman and Jun Zhu have posted Do Two- to Four-Unit Properties Have Higher Credit Risk? An Analysis of Default and Loss Experience to SSRN. The abstract reads,

Two- to four-family properties make up 19% of all rental housing but receive almost no attention. Using a unique dataset from Freddie Mac and Fannie Mae, we show that, for any given set of loan characteristics and compared with one-unit properties, two- to four-unit properties are more likely to default, its owner-occupied (investment) properties are less (more) likely to liquidate, and all two- to four-unit properties are more likely to have a higher loss severity upon liquidation. Historically, these patterns have led to higher losses on two- to four-unit loans. Current tighten credit results in loss rates much closer to those on one-unit owner-occupied properties, indicating that policymakers can relax the credit requirements of two-to-four properties to better serve affordable rental housing.

It is great that the authors are looking at the neglected, middle child of the rental housing market. Providing 19% of the rental housing stock is nothing to sneeze at, even if other segments of the housing stock provide more.

It is particularly interesting to me that owner-occupied 2-4s do better than investor-owned 2-4s in terms of liquidation, even while overall 2-4s are roughly on par with 1-unit owner occupied properties in that regard. There are a lot of other interesting tidbits about this housing stock in the paper, such as the fact that these properties are more likely to be owned by lower-income households and that 2-units have the highest default rates of 1-4 unit properties.

The authors make the case that

though predicted losses on two- to four-unit production are now on par with one-unit owner-occupied properties, the low volume suggests that many borrowers (who are disproportionately likely to be low and moderate income and minority) are getting squeezed out. In the interest of expanding credit to these underserved populations and expanding, or at least preserving, the supply of affordable rental housing, the government-sponsored enterprises (GSEs) could relax the current loan-to-value requirements. If this relaxing were coupled with counseling for landlords, we believe it would make financing more available for this critical part of the market, with little additional risk to the GSEs. (3)

This all sounds good, although I am somewhat skeptical of the claim that reduced financing costs for owners will be passed onto tenants in the form of lower rents or rent increases. There are a lot of factors that go into rent levels, and costs are just one of them. The local demand for housing as well as the competing supply cannot be ignored. Owners may be able to keep all of those reduced financing costs as additional profits, depending on those local conditions.

The main question I am left with after reading the paper is — why haven’t Fannie and Freddie, whose data the paper is based upon, already reached the same conclusion about loosening credit for this type of housing? Do they know something about it that the author’s don’t?

Dipping Into Home Equity

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photo by Aitor Méndez

TheStreet.com quoted me in Americans Are Increasingly Dipping Into Home Equity. It opens,

Is there a flipside to rising home values across the nation?

Take California, where stronger home value figures “are giving many homeowners a reason to tap into their equity and spend money,” according to the California Credit Union League.

The CCUL states that approximately 5.2 million homes with mortgages across 11 different metropolitan statistical areas in the Golden State “had at least 20% equity as of June 2016,” citing data from RealtyTrac. Meanwhile, home equity loan originations rise by 15% over the same time period, to $2 billion. “Altogether, HELOCs and home equity loans (second-mortgages) outstanding increased 5% to more than $10 billion (up from a low of $9.2 billion in 2013 but down from $14.2 billion in 2008),” the CCUL reports.

The organization doesn’t see all that home equity lending and spending as a bad thing.

“The local surge in home-equity lending and cash-out refinancings reflects a strong national trend in homeowners increasingly remodeling their homes and enhancing their properties,” said Dwight Johnston, chief economist for the California Credit Union League.

Financial experts generally agree with that assessment, noting that American homeowners went years without making much-needed upgrades on their properties and are using home equity to spruce up their homes.

“Homeowners are cashing in on home equity again because they can,” says Crystal Stranger, founder and tax operations director at 1st Tax, in Wilmington, Del. Stranger says that for many years, home values have decreased or only increased very minor amounts, but now home values have finally increased to a significant enough level where there is equity enough to borrow. “This isn’t necessarily a bad thing though,” she says. “With the stagnant real estate market over the last decade, many homes built during the boom were poorly constructed and have deferred maintenance and upgrades that will need to be made before they could be re-sold. Using the equity in
a home to spruce up to get the maximum sale price is a smart investment.”

U.S. homeowners have apparently learned a harsh lesson from the Great Recession and the slow-growth years that followed, others say.

“Before the financial crisis, many used home equity as a piggy bank for such lifestyle expenditures,” says David Reiss, Professor of Law at Brooklyn Law School, in Brooklyn, N.Y. “Many who did came to regret it after house values plummeted.” Since the financial crisis, homeowners with home equity have been more cautious about spending it, Reiss adds, and lenders have been more conservative about lending on it. “Now, with the financial crisis and the foreclosure crisis receding into the past, both homeowners and lenders are letting up a little,” he says. “Credit is becoming more available and people are taking advantage of it.”

“Nonetheless, good financial advice is timeless, and that hard-earned home equity should be protected from casual expenditures,” Reiss notes. “Your future self will thank you for it, no doubt.”

Other financial industry insiders agree and warn homeowners who take out home equity loans that there is great risk attached to using the money in non-essential ways.

Is The Mortgage Interest Deduction Inequitable?

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photo by Elana Centor

I have certainly thought so, as do many other housing policy types. Daniel Hemel and Kyle Rozema have a more nuanced view in their paper, Inequality and the Mortgage Interest Deduction, that was recently posted to SSRN. The abstract reads,

The mortgage interest deduction is often criticized for contributing to after-tax income inequality. Yet the effects of the mortgage interest deduction on income inequality are more nuanced than the conventional wisdom would suggest. We show that the mortgage interest deduction causes high-income households (i.e., those in the top 10% and top 1%) to bear a larger share of the total tax burden than they would if the deduction were repealed. We further show that the effect of the mortgage interest deduction on income inequality is highly sensitive to the alternative scenario against which the deduction is evaluated. These findings demonstrate that claims about the distributional effects of the mortgage interest deduction depend critically on the counterfactual to which the status quo is compared. We extend our analysis to the deduction for state and local taxes and the charitable contribution deduction. We conclude that the appropriate counterfactual for distributional claims is dependent upon political context — and, in particular, on the feasible set of politically acceptable reforms up for consideration.

To make this a bit more concrete, the authors offer a simple hypothetical:

to show how a provision of the tax code can provide a disproportionate share of dollar benefits to the rich while also causing the rich to bear a larger share of total tax liabilities. Imagine a society with two households—a rich household with pre-tax income of $100, and a poor household with pre-tax income of $50. Further imagine that the rich household pays $12 in mortgage interest and the poor household pays $9 in mortgage interest. Say that the tax system is structured such that the tax rate on the first $50 of income is 20% and the tax rate on all income above the $50 threshold is 40%.

If the tax system does not allow a deduction for mortgage interest, the rich household would pay a tax of $30 ($10 on the first $50 and $20 on the next $50), and the poor household would pay a tax of $10. Thus the government would collect a total of $40 in revenue; the rich household would bear 75% of the total tax burden ($30 divided by $40); and the poor household would bear the remaining 25%. If the tax system allows each household to deduct mortgage interest, the rich household would receive a benefit from the deduction of $4.80 ($12 times 40%), and the poor household would receive a benefit from the deduction of $1.80 ($9 times 20%). The benefit of the MID in dollar terms is clearly greater for the rich household than for the poor household. In percentage terms, the rich household received 72.7% of total MID benefits, while the poor household received 27.3% of total MID benefits. And yet the rich household now bears 75.45% of the total tax burden ($25.20 divided by $33.40), as compared to 75.0% before, while the poor household now bears 24.55% of the total tax burden ($8.20 divided by $33.40), as compared to 25.0% before. (Government revenue decreases from $40 without the MID to $33.40 with the MID.) (8, footnote omitted)

The authors conclude that their analysis “simultaneously confirms and challenges widespread beliefs regarding the effect of tax expenditures on inequality. The mortgage interest deduction does indeed appear to be inequality-increasing relative to a counterfactual in which the deduction is repealed and revenues are reallocated to all households on a equal basis; when the mortgage interest deduction is evaluated against other counterfactuals, however, the distributional effects are more nuanced.” (40)

Where does this leave us? It reminds us that we should be careful about promoting simple policy proposals without taking into account the likely context in which they might be implemented.