America's Housing Challenge Ownership and Tenure

...OWNERSHIP AND TENURE Fanciful thinkers may well imagine a world where home ownership would be unknown, a state of affairs that would satisfy those who characterize property as theft Human dwellings could be produced like birdhouses, left to be lived m and, hopefully, maintained by any family or passerby m search of a place to settle One must wonder, however, how long this casual housing would remain in satisfactory condition if no person or agency were responsible for its upkeep or entitled to expect some long-term benefit for such care Presumably, anyone would be free to move to another birdhouse whenever he got weary of his present domicile Ownership, m one form or another, has survived the test of time because it provides a social balance between two opposing drives that characterize the relationship between persons and property the impulse to enjoy possessions for the immediate moment, and the prudence to preserve them for a long period of years The record of how poorly the world balances consumption with conservation in the case of, say, whales—which are no one's property since they inhabit the ownerless sea-—suggests that even an arbitrary or despotic form of ownership (and a corresponding weakness of tenure) is better in the long run than none at all Despite an unthinking acceptance of the principle of ownership, the history of housing in this country has been marked by a continuing disagreement over the mode of tenure and ownership most likely to satisfy the wishes of occupants or, perhaps, least likely to conflict with other American institutions such as private property and "neighborhood stability " In the second half of the 19th century reformers argued that "enlightened" philanthropic owner-investors, content to receive a modest return on their apartment holdings, would provide suitable ownership for housing resources Enthusiasm abated over the years as it became obvious that not enough philanthropic investors could be expected to appear on the scene to take the measure of the urban housing need It also became clear that the gap between the cost of housing accommodations and the incomes of many of the poor could not be bridged by a small (or even a large) concession on the rate of profit The benevolent entrepreneur of the late 19th century was reincarnated m the 1920s, when large insurance companies took upon themselves the responsibility of owning apartment houses Such projects dot the landscape in San Francisco, Chicago, New York, Worcester, Massachusetts, and many other American cities Yet it was evident even in the '30s that, desirable as these developments were, they could not produce housing at a rent low enough for the poor, the insurance company programs ended up catering largely to subprofessionals or highly skilled workers By 1961, when the Federal government was finally ready to crank in sufficient subsidies to achieve low rents under private ownership, the insurance companies had for the most part decided to get out of the apartment house business Bitter arguments over rent increases in inflationary times and battles over tax exemptions, race relations and local subsidies convinced most insurance executives that there was no public-relations reward for what they had looked upon as semi-philanthropy, semi-sales promotion Their interest, as Louis Winmck noted in his Rental Housing, receded to a willingness to hold mortgages rather than equity Cooperative ownership, then' In the '20s New York was the locale of the nation's first serious cooperative housing experiments The Amalgamated Clothing Workers of America built co-ops in the Bronx, with the help of special tax exemptions authorized by the state, in 1926, its work and that of several other groups has survived In the postwar years, co-ops were stimulated by extremely high loan-to-value mortgages insured by the Federal Housing Administration (FHA) Cooperative housing will surely continue to be a useful type of tenure, but it has not been without its problems Experience has shown that it works best when the tenant-cooperators share interests beyond merely deriving income tax benefits from their ownership or securing somewhat cheaper housing than might otherwise be available While many cooperative ventures have been successful, others are mired in factional fights for control of their boards of directors, and some are facing severe financial troubles More important as an indication of the cooperative's limitations is the difficulty of organizing one in the face of inflationary cost rises Prospective members place their down payments expecting a certain level or carrying charges that often turns out to be considerably lower than the charges actually required upon occupancy Laws protecting cooperators from deceptive solicitation further complicate the situation On the one hand, co-op administrators are afraid of being accused of inveigling prospects into unwise investments, on the other, they tear that inclusion of possible cost increases in the projected carrying charges will make their apartments extremely hard to sell Indeed, in New York the United Housing Foundation (UHF), a labor-affiliated organization sponsoring cooperative developments, has been sued by a group of tenant-owners in Co-op City, its largest project They charge that UHF permitted costs to rise in the course of construction and that they had been misled by low carrying-charge projections Recently, the Federal Court of Appeals ruled unanimously that the purchase of shares in a cooperative corporation constitutes a purchase of "securities" and thus comes under Federal jurisdiction Whatever the final outcome of the suit, the cost of the litigation and the bitterness engendered among UHF trustees as well as the Co-op City residents will have an unquestionably depressing effect on any group that seeks to develop future housing cooperatives for humanitarian reasons Similar problems arise when the government or an eleemosynary enterprise seeks to organize tenant co-ops in old apartment houses But every so often a deteriorating building produces a natural leader who can inspire the formation of an effective tenant cooperative, borrow money from governmental or even private sources to repair outstanding defects, and manage the property efficiently thereafter Many plans have been developed around the country seeking to transform this occasional miracle into a consistent, workable tool It cannot yet be said that a formula has been discovered tor making cooperative conversion —as the process is sometimes called —a useful, standardized program And the less standardized the program, the greater the overhead in administering it, and the more difficult the exercise of discretionary power by the government official who has to decide whether to support a co-op of this kind with a loan and other help Most appealing of all to the romantic, and most troublesome to the official trying to help, are the co-ops in which each tenant-member makes his investment in the form of contributed labor rather than cash These enterprises have been given the sobriquet Sweat Equity Projects One difficulty here is the need for money to buy supplies at the outset, before anybody can be certain that the prospective co-operators will actually be capable of using them Local governments and private philanthropic foundations are usually looked to for this early-outlay, high-risk capital But how can either of these sources be expected to provide funds unless there is a reasonable probability of repayment, at present a largely un-proven proposition The more complex tasks of building reconstruction—involving the electrical, plumbing and steam-heating systems—must of course be done by licensed specialists, leaving basically the rough carpentry and painting to the co-op members Undoubtedly successful self-help cooperatives stimulate a rebirth of neighborhood pride in discouraged sections of a city, yet it is hard to believe the economics of this division of labor have been reversed so completely that the nation can reduce the cost of its capital investment by turning over a significant share of residential construction to an untrained work force The American Ideal Single-family home ownership has been held in widely varied esteem by those concerned with programs for the housing poor Still, all large U S cities except New York depend on it for the majority of their housing units The American ideal of owning one's home was so taken for granted by President Herbert Hoover that he did not feel the need to include the one-family house in his catalogue of the car, the garage, the chicken, and the pot as the natural heritage of all Americans Then came the extensive loss of value suffered by home owners in the 1929 economic debacle, prompting most housing reformers to see the one-family home as a trap The late Charles Abrams, in his 1942 book The Future of Housing, decried the ideal of universal home ownership as unsound, both economically and sociologically For low-income families, he noted, it meant being forced to save in an illiquid form of property and being frozen in a specific location By the mid-'60s, however, rising expectations of equality and great disappointment with other forms of housing tenure encouraged a new examination of one-family ownership The same Charles Abrams, in his 1964 book The City Is the Frontier, suggested that anything less would not constitute a "solution" of the housing problems of America's poor Apparently agreeing with Abrams' later view, Congress in 1968 passed legislation (FHA-235) which—until its abandonment at the start of Nixon's second term—enabled low-income families to purchase new, modest homes with subsidies that reduced the total payment for interest and amortization to 1 per cent of the outstanding mortgage balance Although other government policies—insuring mortgages, allowing mortgage interest and local taxes to be deducted from Federal taxes—had served to stimulate home ownership, FHA-235 was the first program to consistently give a cash subsidy (actually paid to the mortgagee rather than the mortgagor, but paid in cash nonetheless) for the benefit of a private individual buying private residential property (The urban renewal statutes had provided a small cash grant for a private owner of insufficient means to help renew the property ) The politics of the program was rather touchy, since subsidized and unsubsidrzed homes located close to each other might well be occupied by families whose incomes did not differ greatly To overcome this problem, the regulations governing FHA-235 restricted its application to families spending 25 per cent of their income on housing, and the ratio was maintained by reducing the amount of subsidization as family income rose As a result, FHA-235 families tended to have less income at their disposal than they needed to maintam their homes in sound condition Furthermore, the subsidies did not facilitate the type of tenure some housing observers consider more promising than any other the two-to-four-family housing that has proven so successful on an unsubsidrzed basis in many cities Where previously FHA regulations had lumped these into the single-family category for statistical purposes, FHA-235 was limited exclusively to housing containing no more than one family The postwar turn to the one-family home for social housing was a reaction to what many former enthusiasts came to regard as the failure of public housing, established in the United States in 1937 with the passage of the National Housing Act The act allowed the Federal government, in effect, to pay the entire construction cost of housing developments owned by local public agencies called housing authorities The rents charged the residents, supplemented by whatever subsidies local governments might choose to offer, were expected to cover all of the operating expenses Though Federal law restricted the projects to occupancy by low-income families, local freedom to define "low-income" was permitted, but rents were required to rise proportionately with tenants' incomes In recent years, this system has failed to work because the rise in operating costs has far outstripped the rise in tenants' ability to pay The Federal government has limped to the rescue by grudgingly offering to meet part of the local housing authorities' operating deficits, but only after the authorities' reserves have been depleted and the "frills" ot public housing administration have been cut down The "frills," as it happens, include important social programs to care for troubled and troublesome families, and even significant maintenance work The gap between Federal assistance and the need for it is widening Pruitt-Igoe, the notorious project in St Louis, was ordered demolished by official explosives because, following years of partial occupancy and widely discussed vandahsm, its operating deficits and yawning disrepair could no longer be tolerated by local or Federal officials Regrettably, it is often regarded as archetypical of public ownership, in reality, it is archetypical of what happens when large apartment houses are erected m areas too unsavory to attract poor families with stable personal habits and hopes of economic advancement Yet Pruitt-Igoe is by no means the only public housing development to close its doors in the past few years A number of housing authorities have abandoned projects for the simple reason that they must spend more on them than they can take in, and local government refuses to make good the difference Attacks Without End The current fiscal crisis in public housing—underscored by the prediction that the New York City Housing Authority will lose more than $140 million m 1974—is but the latest cause for attacks against the program, which has been criticized continuously since its founding In the '30s, the strongest opposition came from the real estate boards of the country They denounced public ownership as a socialist innovation that threatened free enterprise generally and particularly weakened the ability of private tenement-house owners to rent their properties because of unfair, subsidized competition Between 1937 and 1974, a large part of the urban real estate investment community came to recognize that rapidly rising operating costs and taxes had made the provision of housing for low-income families into a rarely profitable business It is surely unprofitable if the owner tries to maintain his apartment house within the standards of the law This basic economic truth has muted some of the opposition to public housing by the real estate boards, but a new kind of criticism has emerged from the political center and the near-Left The new critics argue that most existing projects are architecturally dreary, that bureaucracy lays a heavy hand on housing management, and that the poor are disproportionately black—so that housing them in a separate complex of ouildings amounts to making permanent a form of racial segregation in brick structures put up with government funds Equally important in the politics of government ownership is the progress of yesterday's low-income population to the status of home-ownership and middle-class consciousness The very people who supported public housing 25 years ago are now concerned that the construction of a project across the street from their homes will threaten their market values along with the socioeconomic character of their neighborhood Those who have remained reasonably loyal to public housing have pointed out that the objections heard from the liberals constitute a commentary on the general problem of housing low-income families rather than a specific complaint against government ownership Nevertheless, the partisans of public ownership have to admit it failed to provide anything remotely approaching the 810,000 units in 10 years promised by the Wagner-El-lender-Taft Housing Bill that became the National Housing Act of 1949 Frequently during the late '50s, the level of funding restricted construction to an annual rate of 35,000 units, and it wasn't until 1972, some 23 years later, that the goal was reached Yet perhaps a more telling fact is that the Housing and Home Finance Agency—predecessor to the Department of Housing and Urban Development (hud)—had no easy time getting rid of its subsidy funds The law precludes any single state from acquiring more than 15 per cent of the total appropriated in any year unless a surplus is left over after all the states have had an opportunity to apply In many years, the Federal government used up its subsidy allowance only because a few states, like New York and Alabama, stood ready to absorb the units other states chose not to build The political rejection of public housing was abetted by the absence of any strong constituency of prospective tenants to generate support for it Nor was any economic group, such as a class of real estate developers and promoters, prepared to exert the necessary leadership in the certainty of profiting significantly from the erection of public housing Unfortunately, the nation has not developed a housing industry for low-income families possessing the same clout the "military-industrial complex" is alleged to exert on government arms spending Of course, the contractors who build public housing make a profit, but for any individual firm success in bidding under a system of public letting is largely problematical And in the housing field, organized political activity by entrepreneurs is usually inspired by the sense of certainty with which they approach their work Accordingly, it is no accident that in its final stages the public housing program has come to depend heavily on so-called "turnkey" construction, with the Federal government's blessing Under this arrangement, the businessman builds to his own designs, approved in advance by the local housing authority, knowing he will be able to negotiate a price and sell his development after its completion In these circumstances, the turnkey contractor tends to support the local authority's objectives much the same way any real estate developer backs those government activities that aid private construction Coming Full Circle In the hope of avoiding the problems of public ownership, presenting an alternative to the construction of housing exclusively for the poor, and nurturing a private pressure group in favor of the Federal housing program, the Nixon Administration turned to the so-called "public-housing leasing" provided for in Section 23 of the National Housing Act This allows local authorities, with hud approval, to lease apartment units in privately owned buildings at the market rent and sublet them to eligible families at the same rent they would have to pay in a public housing project The loss incurred is reimbursed by hud Leasing would appear to offer several advantages For the private apartment-house owner, it guarantees the security of the leasehold because the housing authority stands between him and the tenant For the tenant, it invokes the prestige and power of the government to establish his tenure and force the owner to maintain proper conditions in the building Since no owner is compelled to lease apartments to the local housing authority, the program is not a threat but a stimulant to the previously waning fortunes of buildings in marginal areas Last spring hud announced it would markedly expand leasing In addition, the department stressed its wish to use state housing finance agencies to fund the program—a gesture toward Federalism Clearly, the Nixon Administration sought to substitute Section 23 for public ownership, though without funding private owners to provide the social services that contributed to the success of public ownership The new emphasis on leasing has, in effect, brought the nation full-circle—back to a reliance on private ownership of apartment houses for low-income families reminiscent of the plan conceived by reformers in the last century Except for one difference In the 1880s, the reformers assumed that private investors could be persuaded to accept a modest return on their money out of their eleemosynary interest in the good of the community, and that this dimple in the heart of the economic system would provide shelter for the poor In the 1970s, no one places much trust in the civic motivation of entrepreneurs Yet if faith in philanthropic capitalism has been undermined, the straightforward profit motive has served no better Certainly it does not encourage ingenuity in construction or cost savings or innovative management Today the builder of desirable housing is rewarded for his patience and dexterity in managing governmental paperwork and weathering the opposition of local householders to the intrusion of unwelcome neighbors Moreover, the reward does not come as a direct cash return (it would be politically impossible to vote such large profits in a visible form), but rather through the significant salable income tax benefits placed at the disposal of the builder who has succeeded in creating a government-subsidized, privately owned example of social housing When he sells these rights to an investor who is willing to pay immediate cash for the opportunity to offset the taxable income he has earned in another way, the builder severs all serious connections with what he has built Current tax laws impose on the purchaser of the equity a responsibility tor operating the building over a period of years, to gam the maximum tax savings he must hold onto the investment for 16 years and 8 months The ultimate effect of this curious arrangement is to promote economic activity in a number of spheres other than housing By offsetting ordinary income earned in any fully taxable way—in playing professional basketball, say—the housing subsidy program encourages people to play basketball professionally, to demand high salaries that might otherwise be taxed at a very high level, to build large stadiums in which to play basketball and, incidentally, to consume materials, labor and land that might otherwise be used for housing purposes The Thankless Task This is not, as might be thought, the creation of an insane mind running not On the contrary, it meets head-on the first challenge to obtaining a more adequate share of resources for housing low-income households m the cities the hard fact that no one wants to own social housing The difficulties of entre-preneurship m this onerous, thankless and basically unprofitable field are so great that one must either offer compensation for them, or else set up a government entity to protect the investor from the risk that a change in Federal regulations or local policy may leave him without a project The stakes put up by the developer of subsidized housing can be quite impressive The preliminary architectural drawings, which have to be detailed enough for serious estimates of construction costs, may run as much as $300-400 thousand for a complex of 1,000 units Then there are legal fees, followed by fees for engineering research on foundation conditions and on environmental factors that must be evaluated before the Federal govern ment will commit itself to subsidizing the project Above all, the developer must devote large amounts of his time, an expensive commodity for anyone engaged in this type of business Finally, if the local municipality does not put up the land, the developer must assemble it lot by lot and hold it intact for months without knowing whether he will be able to use it for the purpose intended The history of private involvement in the ownership of moderate-cost housing consists, essentially, of a long list of publicly offered incentives to make attractive an otherwise unappealing enterprise Chief among these are exemption from local real property and corporate franchise taxes, the use of government powers of eminent domain to acquire land (granted only reluctantly in specific cases), and government mortgages (preceded, historically, by government insurance of mortgage borrowings) Naturally, these stimulants are administered with a dose of depressants, usually in the form of limitations on the profits of the owner and on the fees contractors may charge in the course of their work Profit limitation has been offset, under current laws, by the tax-shelter benefits to which we have already alluded No matter how strong the depressants, though, or how imposing the structure of controls, the construction cost of socially desirable housing has galloped uphill over the past 15 years of government involvement The melancholy fact is that whatever the level of incentives and subsidies, the cost of producing the housing has risen to absorb them In search of a better ownership vehicle for social housing, the government has investigated the use of nonprofit agencies Finding that it must provide them with the cash to meet the same preliminary expenses that cow the commercial developer, local, state and national programs have supplied "seed money " This cash advance is expected (somewhat half-heartedly) to return to the government when the mortgage agreement has been "closed"—l e , when a governmental or financial institution has agreed to lend enough money to cover practically all development costs, an agreement that usually cannot be reached until all the levels of government have been satisfied The use of nonprofit agencies as a substitute for profit-motivated owner-builders has immensely complicated the recent development of social housing Nonprofit sponsors and wealthy tax-shelter seekers have worked out a magnificently convoluted relationship, it has been compared to the intricate evolution of certain extinct species just before they reached so high a degree of specialization that they died out altogether Some nonprofit sponsors have discovered their "ownership" position to be of such value to tax-shy investors that they can sell their equity investment—most of which usually comes from government in the form of seed money—for far more than its face value, while continuing to hold the undesirable ownership responsibilities of management Decent people can only hope that the proceeds are used for the benefit of those who will be living in the new or rehabilitated housing The salability of the equity in a public housing project has been discovered as well by the state agencies that have sprung up m the past few years to provide risk-taking vehicles for social housing projects The Urban Development Corporation of New York State (UDC), headed by Edward J Logue, who came from heralded achievements m New Haven and Boston, is a prototype It was established by the state government under former Governor Nelson Rockefeller for a number of reasons, among them the desirability of attracting equity investors who did not want to take the pre-tee-off risks of development Funded by advances from the state treasury and armed with mortgage capital collected from the sale of its own bonds, the UDC was once able to do everything preliminary to occupancy of a housing project—from design to approval to construction to management supervision—without having to paddle across the political rapids of the local governments Inevitably, political currents have affected its operations, even resulting in a curtailment of some of its powers, but it continues to function effectively, although the financial soundness of its developments remains unproven To private developers who have learned how to operate within the existing system, agencies like the UDC represent naked government competition, unfair because its basic overhead is covered by a "first instance ' appropriation from the state treasury Yet without UDC, no one knows how many of the ruggedly individualistic developers would continue to process projects fraught with complexity and risk, to be rewarded only when private investors are found who care about tax benefits rather than the intrinsic value of the produced housing This raises the question of the value of private ownership for multiple-family social housing projects that are not cooperatively owned Is private ownership intrinsically worth the difficulty and the obscurantism produced by a frantically improvised search for an alternative to public ownership...

...After all, the equity requirement under most social programs is merely 10 per cent of the project cost (in cooperative developments it may be even less) The result has been an exceedingly complicated government engine to produce social housing under private ownership The reverse might be much simpler to use private engines to produce housing for government ownership that nobody wants to own tor its value By analogy, the present housing program resembles a privately owned navy that is supported by government-owned munitions plants A highly placed hud official recently explained that public housing failed because the courts imposed on it social tasks—the inclusion of multiproblem families and the exclusion of those whose incomes rose—incompatible with decent housing accommodations It seems unrealistic, though, to expect the courts to be less exigent in establishing rules and regulations for private housing as heavily subsidized by the government as that produced under the current social housing program When the truly persistent questioner begins to understand that at least 90 per cent of the resources for social housing come not from its owners but from the government itself, the ironies in the present Administration's condemnation of government ownership of housing become all the more striking If government is the ultimate majority investor in the new subsidized housing, why should it not logically be the owner...