A FLAWED ANALYSIS THAT DISTORTS THE REALITY OF AFFORDABLE HOMEOWNERSHIP IN DC
Manna, Inc. is one of DC’s nonprofit affordable housing organizations specializing in affordable homeownership. Manna, Inc. has developed and/or built and sold nearly 1000 affordable homes since 1982. These efforts have resulted in the creation of over $50 million in equity for low-income persons and helped revitalize many disadvantaged DC neighborhoods.
Manna staff has analyzed Mr. Ed Lazere’s DC Fiscal Policy Institute (DCFPI) Report on affordability controls and disagrees with his approach, assumptions and conclusions. The Report used a hypothetical example that is not based in reality because it uses assumptions that are incorrect, left out key expenses and skewed other expenses, and grossly overstated the financial benefits to low-income homeowners subject to these restrictions.
Manna’s analysis of the report is based on its daily experience of working with existing government programs in the DC Department of Housing and Community Development, the National Capital Revitalization Corporation, and with thousands of low and moderate income DC residents who are trying to become homeowners and better their lives. Manna believes there are reasonable, more equitable and just alternative approaches to the current long-term affordability restrictions. These alternatives would help preserve affordable housing in high cost areas without denying the financial benefits of homeownership related to equity build-up for low- and very-low income households over the key periods of their families’ financial lifetimes.
Manna’s staff feels The Report is severely flawed in several respects. Here are Manna’s analyses and conclusions:
PART I – Response to the Example Used by DCFPI
1. The Report uses an overly simplified and hypothetical example that does not address the key affordability restriction: the income of the subsequent buyer. In reality, there have been and are many projects on which affordability restrictions have been placed. To our knowledge, the one hypothesized by DCPFI, limiting resale prices to a 3% annual increase on original sales price, hasn’t been used. All of the affordability restrictions Manna has seen involve restrictions on the income of the subsequent buyer. DCFPI’s 3% limit introduces a significant additional reduction in resale value. Even if DCFPI’s hypothetical structure had been used, the assumption and analysis of the economic effect is flawed.
2. Having an income restriction for a subsequent buyer reduces expected future sales value. Any time an affordability program requirement limits resale to a person in the same income category, the price for which a property can be resold automatically is controlled by what a future buyer can pay, and that is severely limited by interest rates. Manna feels this is a dangerous approach and puts the low-income buyer at great risk. We all know how interest rates fluctuate and we have been in a period of historical low rates. In the short and medium terms, if the resale occurs during a period of interest rates that are higher than when the original buyer bought, then it’s likely that the net resale price would be lower than the original purchase price.
3. The Report’s calculated value of homeownership relies heavily ($77,000 of the $212,000 value) on the “savings” from avoiding rent increases, which imply a fictitious scenario where homeownership and rental costs are the same. Manna’s experience is that every buyer of an affordability-restricted home has faced increases of monthly housing expense (PITI) of at least $300 above their prior monthly rent. The “savings” from avoiding future rent increases would only be savings if you ignore the higher monthly housing payment from homeownership, which The Report does. A $300 monthly homeownership payment that is $300 higher than rent amounts to $54,000 over 15 years – effectively equal to the amortization that is included in DCFPI’s net equity calculation. The expense of higher homeownership payments is reduced, but not completely offset, by future rent increases that the homeowner avoids. However, it is grossly incorrect to ‘credit’ the homebuyer with ‘savings’ from avoiding rent increases without recognizing the higher monthly payment of homeownership.
4. The DCFPI example uses an inappropriately high income and property sales price. The Report assumes an income of $72,000 which represents 80% AMI for a family of four. That is doing a disservice to the cause of affordable homeownership housing. One should not use the highest possible income as an assumption if one is seeking to provide affordable housing to those earning up to 80%AMI because almost all affordable buyers, by definition, earn substantially less. Additionally, the $72,000 family of four income is only 80% of AMI for the Housing Production Trust Fund related projects. Other affordability restrictions using the CDBG/HOME HUD 80% AMI calculations cap a family of four to $59,600 per year. In addition, most buyers tend to be one and two person households with 80% AMI incomes capped at $41,700 or $47,600. The use of $72,000 income example in The Report skews the analysis by supporting a relatively high $225,000 sales price and a high estimated benefit from homeownership. Most of the affordability-restricted units are substantially lower in price.
5. Calculation of itemized income tax deduction savings is misleading, since it doesn’t recognize the Standard Deduction alternative. Those who are producers of affordable housing realize that if you’re serving very low and low-income persons, their incomes are usually in an income tax bracket where it makes more sense to use the standard deduction, which is $5,000 for each tax payer and $800 for each dependent child, than to itemize deductions. In theory itemizing sounds good; but in reality it’s not needed. And, even if it’s used, one should use the marginal benefit over the standard deduction rather than assume the entire benefit of itemizing. The report attributes $31,000 of the $212,000 of ‘benefit’ to the tax deduction which exaggerates the total benefit.
6. Manna estimates that real estate taxes would increase the homebuyer’s cost by an additional $28,000 over the taxes assumed in The Report. While principal and interest are fixed–assuming a 30-year fixed rate loan–taxes and insurance are not. Even though real estate tax increases are addressed, the calculation only uses 3% per year. The increases for below market affordability- restricted property will likely increase by the current maximum of 10% per year for the full 15 years of the scenario, as the tax level tries to catch up to the market price of the affordable home (assuming market values increase 3% a year).
7. The Report uses 10 and 15-year horizons, but those time frames are in excess of the average turnover period for housing in the DC area, which is about 7-8 years. The financial benefits available to low- and very-low income homebuyers under affordability restrictions, in the time periods when they most need those benefits, are even less than presented by The Report’s longer term focus.
Therefore, in summary for PART I of Manna’s analysis, DCFPI’s Report (1) doesn’t address the most widely used affordability restrictions, specifically the restriction of the AMI of subsequent buyers that ties future sales prices to changes in interest rates, and therefore doesn’t represent a useful analysis for evaluating the real world affordability debate; and (2) distorts the financial benefits by using unrealistic and hypothetical assumptions of: a) new housing expense equaling rents for comparable homes to calculate ‘rent increase avoidance’ savings, ignoring the real world issue of low-income homebuyers making the sacrifice of paying more for homeownership than rent , b) using the highest income allowed by government programs to create the highest home price possible when most affordable dwelling units are substantially lower in price and buyers are substantially lower in income, c) treating itemized interest deductions as savings, when in a large percentage of affordable housing transactions, buyers are just as well off by using the same standard deduction they’d use as renters, and d) not properly calculating the real estate tax increases that below market affordability-restricted units will face.
Manna believes that the income tax deductions, rental increase avoidance and real estate taxes in The Report overstate the benefits by about 60%. If the impact of the restriction on resale to AMI-limited households, and risks related to interest rate increases are included, the overstatement is substantially greater.
There are real benefits of homeownership over renting under currently imposed affordability restrictions, but they are substantially less than the Report calculates. They create very little usable equity that a low-income family can use to manage its finances. Simply put, the majority of the $212,000 in financial benefits The Report projects is greatly exaggerated and cannot be used or leveraged by low-income homeowners.
PART II- The People and Fairness Issue
In addition to the above, it is unfortunate that most reports that rely simply on statistics, like DCFPI’s, completely ignore the indirect financial and non-financial impact on real people who are trying very hard to improve their lives and gain a share of the wealth being generated in the real estate market. While Manna supports long term affordability, through experience we have learned to understand the obstacles that low-income homeowners may face in the future. When a low-income person is earning an income at 80% or less of the AMI, then that person is usually living on the margin. When one relies solely on statistics, the real life human experiences of individual persons associated with important issues like these, are, by and large, ignored.
We know that many low-income owners have little savings. We know that most affordable homeownership units being developed now and in the near future will be condominium. We know that most condos now being developed, both affordable and market rate, consist of one and two bedroom units. We know that a large percentage of the buyers will be singles or single mothers. We know that the low-income persons we serve have rates of salary increases much lower than the population in general and lower than middle and upper income persons. And we know that earning disparities continue to grow. We, and other developers of affordable for-sale housing, know these facts are true because they represent the real world that low-income people have to contend with and the marketplace in which we work.
Now, we pose the following questions, which relate to common real life situations, to all those who favor long term affordability controls:
1. If a low-income person gets married, or a couple has a child, and needs to trade up to a larger home in the same neighborhood, where will the equity come from to enable them to buy a larger home in DC? As second time homeowners, they will not be eligible for the same benefits they could get as low-income, first time homebuyers.
2. If a low-income owner has a health or other personal crisis requiring substantial expenses, or needs money to pay college tuition for a child, where does the money come from since there wouldn’t be sufficient equity to permit a home equity loan? Every low-income college age student will not get a full scholarship. Additionally, some scholarship eligibility criteria uses home ownership and equity calculations as part of eligibility requirements, but would not likely have adjustments for homeowners restricted in their use of equity due to affordability restrictions. (PLEASE NOTE: To Manna’s knowledge no local programs address the issue of home equity loans which play a major role with the middle and upper-income population.)
3. If a low-income owner has a better job opportunity in another location, how will he/she be able to remain a homeowner unless reasonable equity can be realized so that a home can be purchased in another area? Even in an area with lower prices, substantial down payments are often needed for low-income persons.
4. What happens if the housing market declines and there is a financial loss? The Report only addresses the limited financial benefit a low-income buyer is allowed to share in. It would appear that the low-income owner bears the full burden of all losses whereas the same owner is severely restricted in what he/she can realize. This strikes us as grossly unfair.
In summary, without the ability to accumulate reasonable equity over time, not simply financial benefits that are dubious under the Report’s assumptions, the low-income buyer can easily become trapped in a homeownership situation and forced to sell rather than be able to cope with adverse life situations which are common and which are much more easily dealt with by those who aren’t subject to long term affordability restrictions. In short the people who can least afford it and are in need of the economic opportunity only homeownership can give them, are being forced to shoulder a disproportionate share of the burden in creating affordable homeownership in DC. We and the population we serve feel this is unfair and discriminatory.
Manna believes that better options are available, with more reasonable affordability controls than the restrictions being imposed and proposed. We are saddened that more creative energy and effort has not gone into creating a plan that does not pit the goal of long term affordability against the goal of reasonable equity gain and opportunity for low-income persons to share in the economic benefits of homeownership. The sacrifices and efforts that low income families put into obtaining and sustaining homeownership should offer benefits to the homeowner and their children, and not be restricted to only benefiting their grandchildren in 20 or 30 years.
Rev. Jim Dickerson, Chairman & Founder, Manna, Inc.
George Rothman, President & CEO, Manna, Inc.
Frank Demarais, VP & General Manager, Manna Mortgage Corp.