Slide #1.

Chapter 15 Housing Policy
More slides like this


Slide #2.

Introduction A. Low-Income Housing Policy: $30 billion per year   Supply side policies: Public housing, subsidized private housing, low income housing tax credits Demand side policies: vouchers B. Middle and High income housing: $66 billion per year to subsidize home ownership
More slides like this


Slide #3.

Inadequate or Unaffordable Housing   Number of households with a high rent burden Number receiving assistance
More slides like this


Slide #4.

Why Housing?  Affordable housing as an amenity in attracting skilled labor  Segregation as an outcome of the housing market  Student achievement and housing security
More slides like this


Slide #5.

Housing and Poverty  “Having a safe, stable place allows people to work on their other problems. You can’t improve your life if you’re living out of a shelter, checking in and out every day, sleeping with bedbugs, having your things stolen, and possibly experiencing sexual or physical violence—those aren’t optimal conditions for finding and keeping a job or stabilizing mental illness. Recent evidence from Seattle shows that people who move from the street into stable housing do improve their lives—for example, they may
More slides like this


Slide #6.

A. Low Income Housing Policy I. Public Housing  The government acts as a supplier of low income housing  About 1.3 million households in 1998  The budgetary cost about $7 billion in subsidies and maintenance  Managed by local housing authorities  Rent no greater than 30% of recipient income
More slides like this


Slide #7.

Public Housing and Recipient Welfare  Evaluate the efficiency of public housing programs: Can the same welfare level be achieved at a lower cost?  Assumptions and numbers – Income = $800 – housing price = $1 per unit of service – Rent on public housing = 30% of income
More slides like this


Slide #8.

 Indifferrence curves of a typical household  Budget line Without public housing:  Point i maximizes initial utility: (h = 300; A = $500) All Other Goods Without Public Housing 800 500 i 300 800 Quality of Housing
More slides like this


Slide #9.

The government offers housing service=540 at a price equal to 30% of income  Rent is 30% of income = 0.3* 800=$240  A = $800 - $240 = 560  Public housing adds point j to budget set  Is the consumer better off? Higher utility: U1 > U0 All Other Goods Public Housing An Option 800 560 500 j i U1 U0 300 540 Quality of Housing 800
More slides like this


Slide #10.

      An alternative: a cash transfer How much money would make him indifferent to the public housing? Income Cash transfer of $200 gets recipient to U1 Same utility level but less housing (360) and more other ($700) Subsidy = $300 = $540 (market value of 540-unit dwelling) - $240 rent Value to recipient ( $200) is 2/3 of subsidy, consistent with studies All Other Goods Value of public housing to recipient 1000 800 640 560 500 k j i U1 U0 300360 540 Quality of Housing 800
More slides like this


Slide #11.

Efficiency of Public Housing    Public housing is costly because: – new (in comparison to used housing) – public (inefficient production) Production efficiency = Market value / production cost Bang per buck=recipient value/budgetary cost Tax money used to build public housing =$1080 Production efficiency =540/1080 =0.5 Value to the recipien t= $200 Market Value = $540 Bang per buck=200 /(1080240)
More slides like this


Slide #12.

Discussion: Problems with public Housing   What are some of the problems associated with provision of public Housing? – Segregation – Poverty concentration – Crimes, drugs, school dropout rate. Possible solutions: – Demolitions and relocation programs (problems: political opposition) – Housing vouchers (problems: affects housing prices, spread of crime)
More slides like this


Slide #13.

Problems with public housing  Location:   – neighborhoods with low median incomes, disproportionate share of minorities – does not offer access to public transportation or other city resources Mostly female headed households Poverty concentration results in   High school dropout rates and low student achievement High crime rates
More slides like this


Slide #14.

Problems of Public Housing  “Low-income families that live in distressed, high-poverty neighborhoods face especially daunting challenges as they attempt to leave welfare, find jobs, earn an adequate living, and raise their children. In these neighborhoods, crime and violence are common, jobs are scarce, schools are often ineffective, and young people see few opportunities for success. A growing body of social science research indicates that living in these high-poverty communities undermines the long-term life chances of families. Historically, federally subsidized rental housing projects have intensified the concentration of poor people—especially
More slides like this


Slide #15.

II. Subsidies for Private Housing   The government encourages the private sector to supply low income housing through a system of subsidies Features of Section 236 and Section 8Project Based – Tenant pays 30% of income as rent (R) – Fair market rent (F) determined by cost or prevailing rent – Government pays owner subsidy: S = F - R – Example: Income = $800; F = $500; S = $500 - $240 = $260
More slides like this


Slide #16.

Low Income Housing Tax Credit   Tax credits create incentives for investments in affordable housing Set-asides: fraction of dwellings restricted – Rent restricted: maximum rent (30% of qualifying income) – Occupant restricted: maximum income – 20/50 test: at least 20% of dwellings occupied by households with income no greater than 50% of median area income – 40/60 test: at least 40% of dwellings; 60% of median income
More slides like this


Slide #17.

Effects of Subsidy on Housing Stock  Displacement effects: Effects on unsubsidized housing – If subsidies generate 100 new housing units, demand for unsubsidized dwellings decreases by 100 – Leftward shift of the demand curve – decreases price and equilibrium quantity of unsubsidized dwellings (300 to 220)
More slides like this


Slide #18.

III. Housing Vouchers  Demand side policy that , like food stamps, allows recipients to choose  Recipient must occupy dwelling meeting minimum standard  Face value = Fair market rent - 0.30 • Income  Fair market rent = 45th percentile of rent in metropolitan area
More slides like this


Slide #19.

   How will a voucher of $300 change the budget line? The consumer can choose H=300 and spend $800 on all other goods Any H<300, will give him a maximum of $800 to spend on all other goods All Other Goods Vouchers and Consumer Welfare 800 500 i 300 Quality of Housing 800
More slides like this


Slide #20.

   Household maximizes utility at point v: (h=400, A = $700) Voucher generates higher utility than public housing (point j) because it gives more options Bang per buck of voucher = 1 (versus 0.24 for public housing) All Other Goods Vouchers and Consumer Welfare 1100 800 700 560 500 v j 300 400 540 Quality of Housing 800
More slides like this


Slide #21.

B. Middle and High Income Housing Policy: Mortgage Subsidy  Tax breaks to homeowners: deduct mortgage interest payment from gross income when paying income taxes  Benefit increases with income
More slides like this


Slide #22.

Mortgage Subsidy and Efficiency  With the mortgage subsidy: MSC>MSB from housing consumption  Overconsumption of Housing, resulting in DWL
More slides like this


Slide #23.

Mortgage Subsidy & Home Ownership  Assumptions about housing – Identical rock houses with market value = $100,000 – Perfect competition: Interest payment=rent – Annual rent = $8,000 = $100,000 • 8% interest rate  Effect of switch from renter to owneroccupier – Pay $8,000 in mortgage interest instead of $8,000 rent –
More slides like this


Slide #24.

Bias Toward Ownership  Subsidy decreases cost of ownership relative to renting  Eliminate bias by eliminating deduction?  Eliminating bias by having owner declare imputed rental income (IRI) – IRI: Money that could be earned by renting dwelling to someone else – Bedrock example: $8,000 = annual rent
More slides like this


Slide #25.

Rationale for Mortgage Subsidy?  Neighborhood  Community  What effects? stability from ownership? about low-income households?
More slides like this


Slide #26.

Assignment  Questions: 3, 5, 6 and 8.
More slides like this