Elizabeth Warren must be given credit for the breathtaking audacity of her ideas—whether it’s her recent proposal to radically change corporate governance or her new affordable housing plan. On Tuesday, Warren unveiled a bill to fund more than three million new "affordable" housing units through an increase in the federal estate tax. Her plan would clear the way for the construction of such units in higher income municipalities by offering suburbs the carrot of increased federal funding for parks and amenities in exchange for relaxed zoning rules. She'd also increase the pressure on banks to lend to those with low incomes under the Community Reinvestment Act.
Warren Understands the Problem—but Not the Solution
She is not wrong about one thing: Low-income homeowners, especially minority owners, saw the value of their homes plummet during the financial crisis. Warren is seeking to correct this through federal assistance. Though she has identified the right problem, her solution is deeply flawed.
Any policy that encourages lending based on low-income status rather than credit-worthiness harms more than it helps because it sends the message that need—rather than accomplishment and savings—should matter most.
It’s true that minority homeowners and renters have fewer financial assets compared to the average American. But Warren fails to understand that decades of pressure on banks to lend in poor neighborhoods made matters worse. The Community Reinvestment Act, along with the "affordable housing mandates" of the federal housing finance giants Fannie Mae and Freddie Mac, pushed banks to loan whether buyers were credit-worthy or not. When homeowners could not repay those loans during the financial crisis, hard-working, credit-worthy neighbors saw foreclosures invade their neighborhoods, undermining the value of their assets. Any policy that encourages lending based on low-income status rather than credit-worthiness harms more than it helps because it sends the message that need—rather than accomplishment and savings—should matter most.
Construction of three million "affordable" rental units sounds attractive, but upon closer inspection, it’s not an efficient use of public funds. As the Government Accountability Office recently reported, such units, typically financed through the federal low-income housing tax credit, come at a high cost, with big fees going to developers—more than $300,000 per unit in Chicago, for instance. A renter lucky enough to end up in one of these units will get the lifetime prize of a low-cost apartment, while others are disappointed. One qualifies by income and often pays rent with the help of a federal housing voucher, usually distributed through a lottery. As the Center for Budget Policy and Priorities notes, about seven of ten low-income families who qualify do not receive housing assistance. Further investment in expensive new units devotes more funds to a fortunate few. What’s more, those shiny new units will compete with older housing, leaving older units vacant and surrounding neighborhoods worse off.
An Effective Path Forward
Creating low-income neighborhoods that are safe and have good schools, clean streets, and attractive parks is a far better pursuit than relocating a fortunate few to the suburbs, where they may or may not prosper.
The right approach can be summarized this way: Make poor neighborhoods good neighborhoods. That was the original goal of federal Community Development Block Grants, which were meant to ensure that poorer neighborhoods were physically upgraded, even in communities with limited property tax resources. But many of those grants were put toward ill-considered projects. Creating low-income neighborhoods that are safe and have good schools, clean streets, and attractive parks is a far better pursuit than relocating a fortunate few to the suburbs, where they may or may not prosper. Making sure all neighborhoods have good public services is the proper role of government.
Warren is also right that restrictive zoning constrains the housing supply in ways that likely increase income inequality. The ambitious tech guy from Buffalo simply can't afford to move to San Jose, nor can low-income city dwellers move closer to suburban employment. But Warren’s solution is not the only path forward. She should consider HUD Secretary Ben Carson's recent, creative proposal to link federal community development funds to zoning that allows for "more housing choices." In other words, Carson is trying to incentivize communities to relax zoning laws so there is a full range of affordable housing types: two and three-family houses, small apartments, and even “tiny homes.” This is a far better approach than spending a great deal of federal money on a small number of gilded rental units.
Since the New Deal, the federal government has tried one housing scheme after another—from public housing to affordable housing mandates. It's time to retire the grand plan approach. What we need is governmental modesty that focuses on providing goods and services to all neighborhoods, rich and poor.