The Great Debate on Solving California's Housing Crisis

For the first time in recent memory, there is a broad consensus in California that we have a housing crisis. Numerous media and research reports show that we are not building anywhere near enough units to house the growing population, and that a significant portion of the population cannot afford to live in the state. There is general agreement that the housing crisis is a drag on the economy, deteriorates our quality of life, and is a problem that must be solved.

Now that the problem has been identified, a debate is underway about how to solve it. Is it a problem of inadequate housing supply overall, or should resources be targeted to those with the lowest incomes? Can the problem to solved with government resources, or should the private sector take on the responsibility? Is the problem overregulation, or inadequate funding? Should we be increasing the supply of housing, or addressing households' ability to afford it?

Jerry Brown initiated the debate in earnest when he presented his budget, which included a provocative proposal to deregulate the permitting process for affordable housing development. Developers that commit to make 10%-20% of a project's units affordable to low income households would be entitled to build by right on properties zoned for high density residential, without requiring a permit and associated discretionary local reviews.

Some have questioned the effectiveness of Governor Brown's proposal. The greatest concern is whether jurisdictions will cooperate. The Governor's proposal does not address the problem of cities that do not have adequate land zoned high density residential in the first place. Communities may also re-zone high density residential land to other uses. While State Housing Element law requires communities to zone adequate land for high density housing, there is no straightforward way to ensure compliance other than extended inter-jurisdictional wrangling and protracted lawsuits.

Meanwhile, the legislative branch wants to allocate funds to subsidize the development of affordable housing. The Senate passed a bill to put a $3 billion bond for housing on the November ballot. It still requires approval of two-thirds of Assembly members and the Governor. The Assembly is proposing an allocation of $650 million for a range of affordable housing programs. However, the Governor has stated that he does not believe that allocating funds to affordable housing will make an impact that is worth the expenditure. He has voiced support, however, for housing subsidies and services targeted to homeless individuals.

Yet another approach being debated is to not incentivize private sector development, but require the private sector to set aside affordable housing units through inclusionary zoning. San Jose's inclusionary ordinance was recently upheld by the courts after a long legal battle with home builders. The housing market in San Jose is so expensive that government subsidies are currently far inadequate to address it without assistance from for-profit developers.

San Francisco, another one of the most expensive housing markets in the country, has arguably the greatest challenge of any California city in addressing housing needs. Proposition C will give voters the opportunity to vote for a revision of the current inclusionary housing ordinance that would raise the required affordable housing unit set-aside for market rate developments from 12.5% to 25% of all units in a project. The big question is whether this will reduce overall production if it becomes more difficult for projects to pencil financially.

The positive in all of this is that solutions are being debated. For too many years there has not even been a consensus acknowledgement that housing affordability is a widespread problem. We won't ultimately know what strategies will be most effective in addressing the problem until they are implemented and assessed. The crisis has reached a stage where elected leaders are finally willing to propose creative and bold solutions. That is movement in the right direction. If some of these initiatives are implemented, we will know much more about how public policy can improve the housing situation in the coming years.

The National Housing Trust Fund and Latest Federal Housing Policy Trends

I was at the Housing California Conference last month and attended the session titled "Federal Housing Policy in a Presidential Election Year" with panelists Peter Lawrence from Novogradac and Linda Couch from the National Low Income Housing Coalition. Below are some noteworthy trends and developments.

The National Housing Trust Fund

The National Housing Trust Fund (HTF) has released its first allocation of $174 million. Each state will receive $3 million plus an additional amount based on need. Funds will be distributed to states this summer. At least 80% of each grant must be used to produce rental housing affordable to Extremely Low Income and Very Low Income households.

The HTF regulations are largely modeled after the HOME program, but with deeper affordability targets. In fact, all of the HTF allocation must assist Extremely Low Income Households earning less than 30% of Area Median Income until the HTF balance reaches $1 billion. After the HTF balance exceeds $1 billion, 75% of the HTF allocation must assist Extremely Low Income Households. Because projects serving this income level will have limited revenue, the program allows HTF to fund operating reserves when project-based Section 8 subsidy is not available. Initial commitments for reserves will be allowed to subsidize operations for up to five years at a time, although they can be renewed with subsequent grants to each State. It is yet to be determined how compatible this arrangement will be with debt underwriting standards. Hopefully norms and agreements can be established similar to underwriting of Section 8 Project-Based subsidies. The amount of funding for operating reserves allowed will be determined by each State. Providing flexibility for operating reserves will be key to making the program work for Extremely Low Income households.

The National Housing Trust was established under the Housing and Economic Recovery Act of 2008 and is funded by new business value from Fannie Mae and Freddie Mac transactions. Now that those institutions have rebounded from the recession, funds are available for allocation for the first time. More information about the National Housing Trust Fund and the Interim Rule is available on HUD's HTF website. A list of the allocation amounts by state are found here. While $174 million is a drop in the bucket to address the nationwide need, creation of the HTF is an exciting development in that it creates a structure for future investments of a much more significant scale.

Proposed Section 202 Changes

The "PRAC" operating subsidies for Section 202 projects do not currently allow for capitalization with new financing. The President's 2016 budget proposes moving PRACs to a Section 8 structure that can support refinancing of existing 202 projects and take on debt.

HR 3700

Also named the "Housing Opportunities Through Modernization Act (HOTMA)", the House passed this bill unanimously. It would increase flexibility for housing authorities to project base a larger portion of their Section 8 vouchers, and allow more project based vouchers per property, while requiring more project based Section 8 to assist homeless households.

Low Income Housing Tax Credit Expansion

Senator Cantwell supported legislation that successfully set the 9% tax credit factor permanently. She is now co-sponsoring legislation with Senator Schumer that would increase the allocation of 9% tax credits by 50%. The bill would also allow use of income averages to meet affordability targets, set the 4% tax credit factor permanently, and provide a 50% basis boost for Extremely Low Income projects.

An Explanation of HUD's FY2015 Homeless Grant Awards

On March 8th, HUD announced $1.6 billion in homeless grant awards for the FY 2015 Continuum of Care (CoC) NOFA. Those of you tracking this program may have been perplexed about how HUD came to their funding decision. First, not all of your CoC grant requests, including renewals, were funded. Second, awarded funding was increased over the amount requested for many of the grants.

To answer the first question, HUD is not awarding all of its FY 2015 CoC funds at once this year. They announced $1.6 billion in Tier 1 awards on March 8th, and will award another $300 million in Tier 2 awards at an unspecified date later this spring. CoCs were required to rank their grant requests, grouping their highest priority grants that equal 85% of their Annual Renewal Amount in Tier 1, and the remaining 15% of their Annual Renewal Amount, plus the amount of their Permanent Housing Bonus, in Tier 2. Tier 1 grant requests were generally awarded funds on March 8th. Those grant requests that were split between Tier 1 and Tier 2 were not awarded funds at that time.

On the second question, HUD made adjustments to their awards based on the FY 2016 Fair Market Rents in effect at the time of application submission. In addition, adjustments were made to permanent housing project operating and leasing costs based on increases in the Fair Market Rent, weighted for population density.

See HUD's complete explanation and the list of awardees here.

As stated in HUD's news release, the CoC NOFA has become increasingly competitive in recent years. The major scoring criteria is the extent to which grant requests meet the program's principal priorities: serving the Chronically Homeless, lowering barriers to access housing, and implementing rapid re-housing and permanent housing. Many CoCs are moving funds from projects that do not address these priorities to projects that do meet them. In addition, CoCs are required to invest more time and money in developing an infrastructure to coordinate CoC programs, including governance structures, coordinated intake and assessment, program evaluation, and HMIS. These investments require a larger commitment of non-HUD funds to CoCs than have been committed in the past, as HUD does not allocate funds for CoC administration other than small, infrequent planning grants.

I will revisit this emerging trend further in future blogs. Feel free to contact me if you need help with your CoC.

President's Proposed Budget Would Be a Major Step Forward in Addressing Homelessness

The White House released its proposed HUD budget this past week. I recommend you take a look at the National Housing Conference Blog, which does a nice job of summarizing it. This budget is more aggressive in dealing with homelessness than any of this President's previous budgets. I want to highlight a few elements of his proposal that are significant changes in affordable housing policy:

• Allocates almost $11 billion to house homeless families over the next 10 years. In California, if this is combined with a $2 billion multi-year initiative proposed in this year's legislative session, real progress could be achieved in eliminating homelessness.

• 10,000 new housing vouchers for homeless families

• 25,500 new units of permanent supportive housing for chronically homeless individuals

• Statutory changes to the HOME Program that include eliminating the 24-month commitment requirement, and eliminating the required 15% set-aside for Community Housing Development Organizations (CHDOs). In my view, these changes would allow greater flexibility and more effective use of the HOME Program by Participating Jurisdictions. These requirements often force communities to fund projects that are less feasible or not as ready to start construction as others. As a result, expending HOME funds within the mandated deadlines has been a challenge for many communities, especially those with few soft funding options.

Of course, there is the real possibility that this budget proposal is gutted by the time it gets through Congress. However, there is a glimmer of hope that there is enough bipartisan support for addressing homelessness and using HOME funds more efficiently that those portions of the budget could survive intact.

Accessing Cap and Trade Funds for Housing

California was the first state in the nation to establish a cap and trade program in which polluting industries pay into a state-controlled fund in exchange for the right to exceed greenhouse gas emissions standards. A portion of the money generated from payments into this fund has been aside for smart growth transportation and development, including affordable housing. The program incentivizes development that is integrated into transportation infrastructure that shifts transportation trips from cars to public transit, biking and walking, and can demonstrate a reduction in projected greenhouse gas emissions. The program has been generating more revenue than initially forecast, as the funding allocation has grown from $120 million in 2015 to $320 million in 2016. Find more background here.

The Affordable Housing and Sustainable Communities Program (AHSC) is jointly managed by the California Strategic Growth Council (SGC), and Housing and Community Development Department (HCD). Below I highlight some key aspects of this program.

• AHSC encourages joint applications between housing developers and public entities that build transportation infrastructure (transit authorities, counties, cities, etc.). Housing and connections to transit, pedestrian and bike improvements should be planned holistically, with the intent to facilitate use of these alternative forms of transportation by residents.

• Projects to be funded with AHSC must have completed their CEQA and NEPA environmental review processes prior to application submission in order to qualify.

• Match funding is a key scoring criteria.

• Funding committed to housing development is made in the form of a permanent, residual receipts payment loan, with terms and loan limits similar to HCD's Multifamily Housing Program.

• Housing projects can also apply for Housing Supported Infrastructure for off-site improvements. This funding is made in the form of a grant.

• Housing projects must provide at least one secure off-street bike storage space for every two units. 

• In future funding rounds, AHSC will not subsidize off-street parking costs. These costs will need to be funded by other sources.

As you can see,  putting together an application for this funding requires advance planning, even though the formal NOFA and guidelines have been released just a couple months before the application due date each of the last two years. There are two application phases, with the first due in March of each year. Therefore, Applicants should start planning to submit an application in September or earlier of the prior year.

More information about this year's NOFA can be found at the AHSC website. Feel free to contact me if you need assistance with this program.

Home- It Takes a Village to Build It

With this end of year post, I'm going to take the liberty to veer from my usual technical "how to" post to reflect on the current state of housing in America. Throughout the year, I have read article after article about America's housing shortage- there's not enough of it, it is too expensive, and as a result, many people don't have it, and others are stuck in a cycle of poverty as they try to hang onto it.

This has become an urgent issue for many cities and their leaders. (Meanwhile, Congress is cutting funding for affordable housing.) Cities like New York, San Francisco and Los Angeles have become economically segregated and prohibitively expensive for a large portion of their workforce. The Mayor of San Francisco recently announced a major initiative to produce more affordable housing, including use of bonds to raise $500 million. The Mayors of Los Angeles and Portland recently declared a State of Emergency due to the homeless problem. But this isn't just a big city problem. The apartment vacancy rate in my town, Chico, California (population approx. 90,000) is under 2%. It's also a statewide problem in California. The 2015 California Economic Summit cited the production of affordable housing as one of the three top priorities for the State in the coming year.

I don't think this issue has started to garner so much attention because leaders have suddenly started to be more sensitive to the needs of poor people. It's because the lack of affordable housing has begun to make an even more evident negative impact on the middle and even upper-middle class (i.e. they can't afford to live where the jobs are), and it effects other things that everyone cares about: economic well-being and the efficient use of public resources. As people appreciate the interconnectedness of the urban environment and the economy, they realize that a housing shortage cannot be isolated or ignored.

In order to refocus our priorities, we need to re-frame the way we think about housing. Since the post-WWII housing construction boom, our American society has viewed housing through the lens of individual choice and responsibility. The single-family home has been personalized like the automobile. This line of thought suggests that the responsibility for securing and maintaining a home lies solely with the head of the household, and it is of no concern to anyone else.

However, the perceived reality of homeowners being fully capable of purchasing and maintaining their home on their own is a myth. An individual's property actually has been everyone else's business for a long time, especially in post-WWII America, where federal stimulus programs (e.g. the GI bill, the mortgage interest tax deduction, government-backed mortgage securities) made it possible for middle America to afford homes. In addition, large-scale government investments in infrastructure, such as the Interstate Highway program, opened access to more land and greater supply, and subsequently more affordable homeownership opportunities. Who paid for those investments? Everyone, especially the wealthy, thanks to a tax structure that was much more progressive than it is now.

In the American experience, safe and sanitary housing has been more available when the government has taken an active role, and less available when that role has been abdicated to private property owners whose primary concern is personal profit. Even the homesteading of the 19th Century was made possible by government investment, such as the U.S. military relocating Native Americans and protecting settlers, and federal investments in rail and land surveying.

What has made a village a "village" from the dawn of civilization has been the communal construction of shelter. Cooperative construction of such shelter was usually the first order of business in establishing the village, and participation in that effort has traditionally been part of the societal social compact.

But even in the age of private property law, a home's monetary value is inexorably linked to developments in the community that surrounds it. If the City decides to put a nice park across the street from your home, you win, whether you did anything to deserve it or not. If the City doesn't help rehabilitate the dilapidated housing across the street from your home, and traffic on your street is awful because most people commute by car instead of living near work, you lose, whether you did anything to deserve it or not.

It's time to start thinking about the availability of affordable housing as a critical common concern of all citizens, and worthy of bold investment on a national scale. I'm not talking about massive communist housing blocks and one-size-fits-all top-down central planning. We already know how to make federal investments in a way that is responsive to markets and sensitive to local decision-making. The Community Development Block Grant (CDBG) program (conceived in the Nixon Administration) provides grants for public improvements benefiting low-income populations to local governments. The CDBG program sets broad spending criteria, and then allows local governments to spend CDBG funds in a way that meets local priorities, fosters local partnerships, and addresses local needs. It has proven to be broadly popular and effective. We need a similar program that will allow local governments to leverage other effective programs such as the Low Income Housing Tax Credit (LIHTC) to stimulate the production of affordable housing.

Unfortunately, Congress is not going to do this on their own anytime soon. In the meantime, housing professionals and activists should recommend and support solutions at the state and local levels. There are many proven models that can be pursued, such as local housing trust funds, social impact bonds, inclusionary zoning, and land use regulatory reform (see Paul Krugman's recent op-ed). We should also ask politicians how they are going to address the housing shortage, and hold them accountable at the ballot box if they do not. As is often the case, change will have to come from the bottom up, in particular from city leaders and their citizens who experience the impacts of the housing shortage on a daily basis.

The Impact of Federal Homeless Policy on Rural Communities

You may have read HUD press releases about progress in eliminating homelessness in the United States. According to HUD, veteran and chronic homelessness have been significantly reduced over the last five years. The reason? The federal government has begun implementing proven, effective models. The key model to this success is "Housing First"- the approach of housing the "Chronically Homeless" (individuals who have been homeless more than a year or who have had four or more episodes of homelessness over the last three years) immediately without placing barriers in their way (such as sobriety, minimum income or criminal record standards), and then after being housed, wrapping those individuals in services that will help them stabilize and maintain housing. This model was first proven to be successful in New York City and other large urban metros. HUD has now tied Housing First implementation to federal homeless funding for the rest of the country.

Yet for the rural Northern California communities in which I work, the decline in chronic homelessness is not evident. On the contrary, it has been on the rise. Our Point-In-Time Surveys show that while the total number of homeless individuals in Butte County has decreased over the last four years as the economy has improved, the number of Chronically Homeless individuals has increased. The visibility of homeless individuals has certainly increased in downtowns and public areas, raising concerns from businesses, chambers of commerce, politicians and the public about the impact of homelessness on the economy and public safety. In Chico and Redding, the increase in homelessness has become a major topic of public debate as those communities seem powerless to stem the tide.

HUD's approach to these problems is to require that all Continuums of Care (CoCs) adopt a specific, prescriptive set of policies and procedures that implement Housing First and an organizational infrastructure to support it. This organizational infrastructure is extensive, with key elements being Homeless Management Information Systems (HMIS) and Community-wide Coordinated Entry into housing and services. This infrastructure involves extensive data collection, monitoring, and evaluation, as well as complex governance structures. (See the HEARTH Act, Opening Doors Plan and the CoC Program Toolkit for more on these policy directives.) As a result of these directives, CoCs carry a growing administrative burden. Instead of sharing in the cost of this administrative burden (like the CDBG program), HUD has left it to communities to come up with the funding.

While many large metro areas have been able to mobilize the necessary resources to implement Housing First and its supporting administrative infrastructure, most smaller cities and rural areas have struggled to do so. Resources available to large metro areas that are less available to rural areas include: larger tax bases; constituencies more supportive of funding homeless interventions; and greater concentrations of philanthropic and CRA-incentivized investment.

Looking ahead, I see the following trends growing out of HUD's CoC policy:

1. Rural communities that do not develop a political consensus to adopt HUD's policies (and raise the resources necessary to implement them) will drop out of the CoC Program and cease to receive competitive federal funding.
2. While chronic homelessness continues to decrease in metro areas, it will continue to increase in rural areas.
3. As the imbalance between cities and rural areas in dealing with the homeless problem continues to grow, government will attempt to make policy interventions to correct the imbalance.
4. The responsibility for implementing HUD directives will increasingly fall to multi-jurisdictional conglomerate rural CoCs with private funding support, and State governments, as these will be the only entities with adequate capacity to maintain the CoC infrastructure required by HUD.

HUD policy is strongly influenced by who occupies the White House, so there is always the possibility of change with election cycles. However, I do not see federal homeless policy changing any time soon. The U.S. Interagency Council on Homelessness within the Bush Administration initiated some of the current policies that have continued under the Obama Administration. Further, the CoC Program is one of the few domestic programs that has had bi-partisan support over the past four years, as CoC funding has not been cut nearly as drastically as other HUD programs such as HOME.

If you live or work in a rural area other than Northern California, I would be interested in knowing what trends in homelessness you see there. My perspective is based on what is happening in Northern California, but there may be other factors at work in rural areas that I am not aware of. Thanks for sharing your insight!