MSHDA is the state's primary vehicle for setting low-income housing policy in Michigan. This Midland project was built in conjunction with the federal government's "Section 8" housing program.
Privatization, in its broadest sense, is the transfer of assets or services from the tax-supported and politicized public sector to the entrepreneurial initiative and competitive markets of the private sector. Privatization takes on many forms including, but not limited to contracting out, public-private partnerships, and "asset shedding," or ending government involvement in a particular endeavor altogether. Low-income housing is an area where state policy makers should consider this latter form of privatization.
The private sector provides an estimated 92.9% of low-income housing in Detroit, while MSHDA's loans have resulted in less than 8.1% of that housing.
The Michigan State Housing Development Authority (MSHDA) is the primary vehicle for setting low-income housing policy in Michigan. While MSHDA does not directly own or rent low-income housing, it does act as a "bank" by selling bonds and using the proceeds to provide loans to developers and individuals who promise to erect low-income housing.
MSHDA has more than $2.3 billion in bonds outstanding at this time. The proceeds from the bonds are lent to developers and homeowners, sometimes through private lending agencies. These bonds are limited obligations, and the mortgage payments from each MSHDA-financed project are the backing for the bonds. However, should any of MSHDA's projects turn sour, the state government would not allow MSHDA to default on its bonds: Taxpayers would be forced to make the payments.
So what is wrong with government-backed low-income housing loans? For one thing, they are unnecessary. In order to keep its bond rating high and avoid defaults, MSHDA tends to lend for the sort of low-income housing projects that are most likely to be financed by the private sector, anyway. In other words, MSHDA uses its status as a tax-free government entity to compete with standard, for-profit lenders. The main beneficiaries of this arrangement are developers, not low-income renters. To the extent that rents are kept low to benefit the poor, the bonds become riskier, and MSHDA must put the taxpayer in a vulnerable situation.
Has MSHDA ever defaulted? No. MSHDA-financed housing projects are generally well managed; however, the real problem is that MSHDA encourages the misuse of scarce resources by providing developers with artificially low loans. How? The housing market naturally provides low-income housing through an efficient mechanism. Housing typically filters down naturally through the distribution of income. As the market produces new higher-income housing, and as higher-income families move into the new housing, the older housing stock becomes available for low-income tenants.
Economies make the most efficient use of resources when the amount that consumers will pay for a product is at least equal to the value of the resources that get used up in producing the product. The fact that the market typically produces low-income housing through the passing on of former high-income housing, indicates that this is the best use of resources. MSHDA distorts this economic process by encouraging developers to do something that ultimately does not make the most efficient use of resources: that is, build new low-income housing. This results in fewer resources available for all citizens, both poor and nonpoor.
Despite the enormous amount of money MSHDA lends, the resulting amount of housing built is actually quite small relative to the available housing stock. For example, the city of Detroit has slightly under one million people, about 32 percent of whom are below poverty level. This means more then 300,000 residents are in need of, on average, 100,000 low-income housing units. MSHDA currently provides financing for only 8,123 housing units in Detroit, and not even all of those are low-income. In other words, the private sector provides an estimated 92.9% of low-income housing in Detroit, while MSHDA's loans have resulted in less than 8.1% of that housing.
If MSHDA is unnecessary and ineffective, why have it? Part of the reason for the existence of MSHDA is that several federal programs that also distort the housing market require a state agency to administer. For example, there are federal tax credit programs available for developers of low-income housing and for first-time homebuyers. MSHDA is the agency through which these credits are administered.
Such federal programs are not directly under the control of state officials; however, Lansing policy makers could do two things to encourage an increase in the availability of low-income housing while removing bond default risks to taxpayers and minimizing public debt.
The first is loosening up zoning laws and building regulations. More new low-income housing would be produced in Michigan if state and local requirements for certain square footages or certain types of building materials did not drive up the price of housing beyond the means of low-income families. Policy makers should re-examine the wisdom and necessity of such regulations.
Secondly, state lawmakers should end the government's involvement in new low-income housing and let the competitive private sector provide this housing in the most efficient manner. Indeed, as has been shown, the truth is that the private sector is already providing the vast majority of low-income housing units and could do even more if MSHDA were abolished.
As the MSHDA mortgages become due, policy makers should retire the existing bonds and eliminate the vast expansion of state debt that is used to construct housing whose value is less than the value of the resources being used to construct it.
More low-income families would benefit if the government retained MSHDA solely as the agency that administers federal tax credits and ended the state's involvement in the housing business altogether.
Gary Wolfram is George Munson professor of political economy at Hillsdale College.