On the equity effects of taxing imputed rent: Evidence from Australia

Abstract

Taxation of net imputed rent from owner‐occupied housing (and mortgage interest deductibility) has been advocated in Australia on grounds of both efficiency and equity. The current tax system (no taxation or deductibility) favors owner‐occupied housing over business investments, and in the owner‐occupied sector it favors high‐income, low‐debt households over others. Nevertheless, imputed rent taxation has been criticized on the empirical grounds that its direct burden would fall more heavily on low‐income households than high‐income households.

Using micro‐level data from the 1986 Income Distribution Survey, we show that the burden does not fall more heavily on low‐income households when net imputed rent is included in owners’ incomes and when life cycle effects are controlled for. Moreover, for married couples aged 25 to 54, the taxation of imputed rental income would be not only progressive, but more progressive than the taxation of other household income.     

Beneficiaries of federal housing programs: A data reconnaissance

Abstract

This article reports on a reconnaissance of information systems containing data on the beneficiaries of direct and indirect federal housing expenditures. It covers data in the U.S. Departments of Agriculture, Housing and Urban Development, Veterans Affairs, and the Treasury; the Resolution Trust Corporation; financial regulatory agencies; and secondary mortgage market actors.

Data varied widely across agencies in availability, accessibility, and quality. Data are more systematically collected for low‐income beneficiaries of housing programs than for the more affluent beneficiaries of indirect housing expenditures. The systems need improvements in data quality and coverage and database format, though they have improved recently. Many research topics can be explored with new and underused data systems: the characteristics of beneficiaries of rural housing programs, urban rental housing programs, low‐income homeownership programs, and mortgage guarantee and insurance programs. But the lack of information on the systems themselves makes data difficult to locate and access.     

The excessive costs of creative finance: Growing inefficiencies in the production of low‐income housing

Abstract

The paper examines creative finance as a means of low‐income housing production and preservation. The low‐income tax credit has evolved as the main federal housing production program in recent years. But this evolution can only be understood as a last resort. The inefficiencies of this approach outweigh any advantages. High transaction costs, inappropriate targeting of benefits, and insufficient monitoring are among the problems. Recent changes in the tax credit may actually cost the government more. Furthermore, current policy in fact creates the same time bombs now exploding in the prepayment projects. Current proposals for housing reform and revitalization have positive features, but are either underfunded or still rely on creative finance. What is needed is a direct one‐ or two‐step low‐income production program.     

The reverse mortgage as an asset management tool

Abstract

Reverse mortgages are usually seen as a vehicle for increasing the income of poor, elderly households. This perspective, coupled with the relatively slow growth of reverse mortgage programs, has led some observers to question the growth potential of the reverse mortgage market. This article presents a more expansive view of reverse mortgages as a financial tool for tapping housing equity for various purposes and at various stages in the life cycle.

Three market segments for reverse mortgages are discussed: elderly persons living alone, other elderly households, and non‐elderly households. Potential uses include turning housing equity into personal human capital investment accounts, enabling children to provide care for their disabled parents, funding elderly households’ long‐term care insurance, and sustaining consumption. Recent progress in product development and availability and political pressures to find private financing for health and long‐term care suggest that the reverse mortgage market has considerable growth potential.     

Rural rental housing preservation: The FmHA experience∗

Abstract

This paper summarizes the history of the prepayment issue for the Farmers Home Administration (FmHA) Title V Rural Rental Housing Programs and outlines the provisions of the 1987 and 1989 housing acts and FmHA implementation. Several ongoing studies are noted. Replication of the FmHA experience is deemed premature, pending results from regulation revisions and completion of the study. The author notes that the early experience provides some guidance relevant to the cost of preserving assisted housing and protection afforded low‐income tenants. The preliminary conclusions are that (1) the use of incentives is more economical than constructing replacement units, although not necessarily the least costly alternative, (2) FmHA regulations implement the law inadequately, and (3) agency staff are not uniformly or effectively implementing the regulations.     

State and local governments: New initiatives in low‐income housing preservation

Abstract

Preservation of the federally assisted low‐income housing stock is a critical issue in housing policy for the 1990s. Most of the low‐income housing initiatives that emerged over the last decade at the local and state levels were in response to changing economies and housing markets, to shifts in composition of the low‐income population, and to cutbacks in federal housing assistance as well as potential losses in the federally assisted housing inventory. The expansion of housing initiatives at state and local levels has critical ramifications for federal housing policy. It is a challenge to the federal government, which has not undergone a similar dramatic change in housing assistance policies. A number of areas of a new “federal partnership” need to be explored.     

Comment on Steven C. Bourassa and William G. Grigsby's “income tax concessions for owner‐occupied housing”

Abstract

Federal income tax deductions for mortgage interest and property taxes are defensible on grounds of both economic efficiency and the social benefits of homeownership. Homeowners should be treated as landlords renting to themselves; as such, they benefit because they do not pay a tax on the imputed rental income they receive, while rental property owners do. Both receive deductions for mortgage interest and property taxes, and both should.

The mortgage interest deduction generates symmetry between debt and equity financing of a home; if interest were not deductible, those whose income derives largely from property would have an advantage over those whose income comes from labor. Because workers would be disadvantaged, repeal is unlikely to generate the revenues Bourassa and Grigsby expect or modify the distribution of the tax burden in the way they favor. Finally, the deductions promote homeownership, which is socially desirable.     

The HOPE VI Program: What about the residents?

Abstract

During the 1990s, the federal government dramatically changed its policy on housing the poor. Under the HOPE VI (Housing Opportunities for People Everywhere) Program, the U.S. Department of Housing and Urban Development intended to address the concentration of troubled low‐income households in public housing by moving away from its reliance on project‐based assistance and promoting instead the construction of mixed‐income housing and the use of housing subsidies.

This article presents important evidence from two systematic, multicity studies on how the original residents of HOPE VI developments have been affected by this radical new approach to public housing. While many residents have clearly benefited, the findings raise critical questions about whether the transformation of public housing will achieve its potential as a powerful force for improving the lives of low‐income families.     

Income tax concessions for owner‐occupied housing

Abstract

This article considers arguments for and against the major tax concessions for owner‐occupied housing in the Internal Revenue Code—concessions that have a significant effect on the federal budget. It recommends retaining two of the concessions— nontaxation of net imputed income and exemption of capital gains—and abolishing two others—the mortgage interest and real estate tax deductions.

After a review of the market impact of removing each deduction, the article concludes that an appropriate phase‐out period of 15 to 20 years would virtually eliminate adverse effects on house prices and homeowners.     

Housing needs and effective policies in high‐tech metropolitan economies

Abstract

What are the most effective ways to provide low‐income housing to those left behind in new economy housing markets? Do winners and losers in high‐tech competition require federal housing strategies geared to metropolitan differences? This article examines 45 large metropolitan areas grouped along a high‐tech spectrum to see who is dis‐advantaged and to deduce effective local low‐income housing strategies from market characteristics.

Finding affordable housing was, on average, more difficult for low‐income renters and owners in high‐tech economies in the 1990s. Nonetheless, high‐tech metropolitan economies, like other local/regional markets, vary greatly. Sharp differences among and within metropolitan markets make it essential that federal strategies allow local policies to respond to local conditions. To most effectively provide low‐income housing to those left behind in all markets, federal policy should target sufficient resources to severe housing needs through many more vouchers and programs that permit and encourage effective local choices.     

Preservation policies in perspective

Abstract

This paper looks at the housing stock serving low‐income households and provides recommendations for future analysis and action. It concludes that too little attention is being paid to preserving the stock of unassisted units affordable by very low‐income families. This stock has shrunk in recent years, while the number of poverty‐level families has increased. Several recommendations for action by local governments are enumerated. Moreover, while much attention is focused on preserving projects developed under early federal assistance programs, policies for preserving units developed under the Section 8 program are needed to preserve owners’ incentives for maintaining these projects. Additionally, preservation issues must be considered in designing any new production programs. The paper outlines one option for a new program with a radically simplified financing structure.     

Homeownership and Wealth among Low- and Moderate-Income Households

Abstract

Although currently neither politically nor fiscally feasible, the notion that access to inexpensive, presumably high‐quality housing should be a government‐guaranteed universal right would be a terrible idea even if it were popular and affordable. The proposition fails on three counts. It isn't necessary. It doesn't make economic sense. And, most compelling, were such a policy to be implemented, its putative beneficiaries would not thank us.

Even if we should not promulgate “a right to decent, affordable housing,” we want to assure that all Americans have access to decent, affordable housing. Happily, we can count on the private housing market (coupled with rising prosperity) to serve 95 percent of the country's households. Serving the remaining 5 percent requires concerted measures to scale back onerous housing regulations that prevent the private housing sector from meeting the needs of lower‐income and untypical households.     

Comment on Bruce J. Katz and Margery Austin Turner's “Who should run the housing voucher program? A reform proposal”: Why public housing authorities remain the best solution for running the housing voucher program

Abstract

Katz and Turner propose that the Section 8 program be administered regionally at the metropolitan level by a single organization awarded the contract through a competitive bidding process. We disagree. Local public housing authorities have been successful in providing family housing choice and moving families from the worst neighborhoods through the Section 8 program. The factors that inhibit mixed‐income communities and family mobility, resulting in concentration of poverty, are beyond the control of these authorities and will be affected little by a change in administration. Moreover, the additional cost of these changes would decrease the number of families served and at the same time increase bureaucracy.

We welcome the discussion the proposal has caused. Misperceptions exist about the program, even among those close to it. True, effective program reform can be engendered only by an honest dialogue among housing advocates, administrators, and consumers, both tenants and owners.     

Racial/ethnic differences in housing outcomes for first‐time,low‐income home buyers: Findings from a National homeownership education program

Abstract

Federal housing policies aimed at making homeownership more accessible through education and affordable lending have been successful in raising the homeownership rate among minorities. By marketing homeownership to underserved populations and helping them overcome financial and informational obstacles, such programs might be expected to promote equality in housing outcomes, including housing quality, neighborhood composition, and neighborhood conditions, for minority homeowners.

This article examines the experience of participants in a national home‐ownership education program. While the transition to homeownership has been associated with modest progress, it does not overcome persistent disparities in housing quality. Homeownership appears to lead to poorer neighborhood conditions for all lower‐income buyers—not just minorities—and may be exacerbating social and spatial isolation rather than helping to overcome it. Differences in neighborhood outcomes, however, may be due to locational preference rather than discrimination in housing and mortgage markets.     

“… And a suitable living environment”: The failure of housing programs to deliver on neighborhood quality

Abstract

This article evaluates the relative performance of housing programs in terms of neighborhood quality. We profile neighborhood characteristics surrounding assisted housing units and assess the direction of assisted housing policy in light of this information. The analysis relies on a housing census database we developed that identifies the type and census tract location of assisted housing units—that is, public housing, developments assisted under the Department of Housing and Urban Development, the Section 515 Rural Rental Housing Direct Loan Program, the low‐income housing tax credit, certificates and vouchers, and state rental assistance programs.

We conclude that project‐based assistance programs do little to improve the quality of recipients’ neighborhoods relative to those of welfare households and, in the case of public housing, appear to make things significantly worse. The certificate and voucher programs, however, appear to reduce the probability that families will live in the most economically and socially distressed areas.     

FHA restructuring proposals: Alternatives and implications

Abstract

This article evaluates problems of the Federal Housing Administration (FHA) under its current structure, develops criteria for judging alternative structures, and suggests one alternative—an assigned risk pool—that encourages efficiency in the insurance function while still promoting low‐ and moderate‐income housing. A historical introduction explains how the current institutional relationships came about and created FHA's problems.

FHA's decline resulted from the mixing of a heavy social agenda with the basic insurance objective, a destructive reorganization of the Department of Housing and Urban Development that caused FHA to lose control and focus, and government's inherent inability to respond to market signals. Yet the economic rationale for government involvement in FHA functions is strong. An FHA organized as an independent government agency, a government‐sponsored enterprise, or even a privatized entity structured as an assigned risk pool could improve efficiency of underwriting, pricing, and administration while achieving the redistributional objectives.     

Comment on Jennifer Steffel Johnson and Emily Talen's “affordable housing in New Urbanist Communities: A survey of developers”

Abstract

A long‐time criticism of New Urbanism has been that the housing it provides is affordable only to middle‐ and upper‐income families. Johnson and Talen's survey of New Urbanist developers and developments is intended to see whether this criticism is justified. Although the methodology is limited, the results of this survey would seem to indicate that it is.

Because Johnson and Talen's survey is restricted to New Urbanist developments, it is not possible to compare the results with those for other, more conventional developments to see whether New Urbanist developments may actually contain more affordable units than comparable conventional projects. Also, limiting the definition of affordability to the cost of housing alone prevents the authors from seeing whether the housing New Urbanist communities provide would be considered less expensive if housing and transportation costs were combined.     

“The Color of Money” revisited: Racial lending patterns in Atlanta's neighborhoods

Abstract

In 1988, the Atlanta Journal‐Constitution published “The Color of Money,” an influential series examining mortgage redlining in Atlanta. The articles documented wide lending disparities between white and black neighborhoods of similar income levels. Given sweeping changes in housing finance since 1988, we seek to determine whether Atlanta's racial geographic disparities in mortgage lending have changed.

Analysis of 1992 to 1996 Home Mortgage Disclosure Act data reveals slight improvement. Atlanta's depository lenders made 4.2 times as many conventional home purchase loans per owner‐occupied unit to middle‐income white neighborhoods as they did to middle‐income black neighborhoods; a decade earlier, this ratio was 5.2. Nondepositories post lower ratios, particularly for Federal Housing Administration‐insured loans, but this market segment raises concerns because of potential abuses. By the indicator of most enduring theoretical and policy interest—conventional home purchase lending by depositories—the patterns that aroused concern a decade ago are still evident today.     

Alternative measures for the financial condition of the multifamily housing stock

Abstract

Indicators of the financial condition of the multifamily housing stock can potentially inform several policy issues, such as the loss of affordable rental units, multifamily developers’ access to capital, and the emerging secondary mortgage market for multifamily properties. Several rules of thumb exist for assessing financial condition. This article uses the Residential Finance Survey to investigate whether it matters, from a practical standpoint, which one is employed. Specifically, we ascertain how five measures—loan‐to‐value, debt coverage, rent‐to‐value, net operating income—to‐value, and vacancy loss ratios—relate to each other and rank properties.

We found that Pearsonian correlations among the measures varied dramatically. Factor analysis produced two factors, one corresponding to a rent‐flow measure and the other to a debt‐burden measure. Spearman rank‐order correlations revealed that with one exception, measures yielded noticeably dissimilar financial condition rankings. We conclude that single‐dimensional measures of financial condition should not be used in isolation.     

Market segmentation and lender specialization in the primary and secondary mortgage markets

Abstract

This paper provides a comprehensive evaluation of market segmentation and lender/purchaser specialization in the primary and secondary mortgage markets. It describes and assesses the 1990 Home Mortgage Disclosure Act (HMDA) data, which for the first time provide detailed information on the borrower and neighborhood racial and income characteristics of mortgage loan originations and securitizations in the primary and secondary mortgage markets. Evidence presented in the paper indicates that home purchase loan origination rates for black applicants—and, to a lesser degree, Hispanic applicants—appear to be significantly lower than those of other racial or ethnic groups. Similarly, the HMDA data reveal that home purchase mortgage origination rates in predominantly minority census tracts are significantly lower than those in predominantly white neighborhoods. The HMDA data also indicate a striking reliance of black borrowers on government‐backed forms of mortgage credit.

The paper further reveals that secondary market loan purchase distributions arrayed by borrower and neighborhood characteristics generally reflect those of home mortgage originations. The borrower and locational characteristics of home purchase loans acquired by the Government National Mortgage Association (GNMA) directly reflect that agency's legislated specialization in government‐backed loans, whereas the characteristics of loans acquired by Fannie Mae and Freddie Mac for the most part derive from the borrower and geographic composition of conventional home purchase loan originations. Findings of analyses of HMDA data raise concern regarding the access of minority and low‐income households and neighborhoods to mortgage finance. Those results also raise some question as to whether the federally chartered agencies in the secondary market are adequately promoting the availability of mortgage credit to low‐ and moderate‐income and minority households.