Public Housing is not Dead. How Montgomery County is Changing the Game by Using Public Resources for the Social Good.
It turns out that the reports of public housing being dead in the United States have been greatly exaggerated. Case in point, the New York Times recently published an article titled, “This is Public Housing. Just Don’t Call It That” which tells the story of the Laureate. The Laureate is municipally-owned housing built just outside of Washington, DC in Montgomery County, Maryland. The building contains 268 apartments, of which 30% are set aside as affordable. The Laureate is essentially a mixed-income public housing model, what many (including myself) refer to nowadays as “social housing”. This model is new to the United States but has shown itself to be highly successful in other parts of the world, most notably, Vienna, Austria. In its development of the Laureate, the Housing Opportunities Commission (H.O.C.), Montgomery County’s housing agency, is showing how this game-changing model can be implemented successfully here in the U.S., specifically to bring down housing costs in one of the most expensive housing markets (the DC Metro area) in the country.
I highly recommend you to take a look at the NY Times profile of the Laureate for an in-depth account of the project. What I offer you below is a discussion of how the fundamentals that underlie social housing models like the Laureate hold the key to ultimately solving the affordable housing crisis.
To best understand why what H.O.C. doing at the Laureate is such a game-changer in today’s housing market, we must turn briefly to the past.
The Reagan Doctrine
“Government is not the solution to our problem, government is the problem” -Ronald Reagan
Ronald Reagan was elected president with a mandate to cut domestic spending and shrink government. Public housing was on the chopping block and unfortunately presented an easy target. The Reagan administration argued that government should get out of the housing business and instead subsidize the private market to provide affordable housing. Many in Washington shared this view which led to a period of substantial disinvestment on behalf of the federal government to local housing authorities. Much of the country’s public housing stock had been built in highly segregated neighborhoods which concentrated poverty through the implementation of strict income limits. Not only did these income restrictions concentrate poverty, they made it impossible for the public housing system to operate without depending on massive operating capital to fund repairs and keep buildings in working order- funds which historically had come from the federal government. As such, the Reagan administration’s budget cuts resulted in public housing complexes across the country falling into severe disrepair. Reagan then cynically used the dilapidated state of public housing to help institutionalize the idea that government was inherently incompetent and that the private market would offer a better alternative to low-income people seeking affordable housing.
The rise of Neoliberalism, The Economic Crisis of 2008, and Lessons not Learned
The 1990’s ushered in a wave of public housing privatization as the Clinton Administration fully embraced Reagan’s free market approach to housing and welfare reform. Official policy was to offload federally subsidized public housing stock and to prohibit the creation of new public housing. Clearly, the federal government wanted out of the affordable housing business.
This housing policy was coupled with radical bank deregulation which repealed laws that had been on the books since the 1930s, originally put in place to prevent the type of widescale financial speculation that had collapsed the economy, leading to the Great Depression.
Decision makers ignored lessons from the country’s financial past and instead worked to super-charge the economy by unleashing the power of Wall Street. It was a return to the policies of the roaring 1920s. And like in the 1920’s, financial speculation and outright fraud led to a meltdown which threatened the stability of the global economy. The crisis was so dire that it caused Ben Bernanke, then the Chairman of the Federal Reserve to reflect:
“September and October of 2008 was the worst financial crisis in global history, including the Great Depression,” Of the 13 most important financial institutions in the United States, 12 were at risk of failure within a period of a week or two.”
The federal government intervened with a trillion-dollar bailout which saved the U.S. banking industry from total collapse. However, unlike the response to the 1920’s financial disaster, there was no real systemic reform of the financial system. Instead, the system used public money to prop itself up while reanimating itself in substantially the same image as before the crisis. This involved using many of the same complex financial tools as it had in the past. As a result, the country is now firmly entrenched in the era of vulture capitalism as private equity seeks to buy up assets and maximize profits by any means necessary. For workers this means lower wages, layoffs and benefit cuts. For renters, it means higher housing costs as the real estate industry becomes increasingly financialized.
A Broken System
“Housing and real estate markets worldwide have been transformed by global capital markets and financial excess. Known as the financialization of housing, the phenomenon occurs when housing is treated as a commodity—a vehicle for wealth and investment—rather than a social good.” Leilani Farha- U.N. Special Rapporteur on Housing
The financialization of housing has created a system that is increasingly disconnected from reality. To illustrate this point, consider that in the midst of a nation-wide affordable housing crisis the vast majority of what is being built in the United States is at the highest end of the real estate market (luxury real estate). This is despite a chronic oversupply of luxury housing that already exists. This reality flies in the face of the most basic concepts of supply/demand. The reasons the supply (luxury housing) is divorced from the need on the ground (massive investments in affordable housing) are vast and complex. However, in the most basic sense, a system created to build vast amounts of wealth and move massive amounts of capital will inherently incentivize behaviors such as speculation, monopoly and exploitation. This being the case, it should come as no surprise that increased financialization has coincided with working class renters being driven to the brink.
The Blue Print for A Better System
“The private sector is focused on return on investment. Our return is the public good.” Chelsea Andrews, H.O.C.’s executive director.
The reason that the work of the Housing Opportunities Commission of Montgomery County (H.O.C.) is so important is precisely because it strikes a direct blow at the model described above. It does this by eliminating speculative investor capital from the financing of their projects, thereby lowering production cost, and passing those savings on to the consumer in the form of lower rents. The NYTIMES article does a great job of breaking this down by explaining how the involvement of private equity in housing production drives rent inflation:
“When a developer builds a project, it typically teams up with a private equity firm that puts up about a third of the cost. (The rest comes from a bank loan.) They want a return, however, and the money isn’t cheap. The going annual rate in private equity is in the mid-to-high teens… A $50 million investment, for example, is expected to return about 90 million after four years- money that is made up with rent.”
This example could not be more straightforward. Private equity demands large returns for initial capital investment, that dynamic leads to pressure to charge higher rents. H.O.C.’s solution to the problem is simple. It replaces the private equity firm as the investor and settles for a modest 5% return on investment. As the NYTIMES article points out, this reduces the project’s cost by tens of millions of dollars. Lower project costs lead to lower rents once the building is leased up. However, H.O.C. then takes the process a step further by becoming the controlling owner of the property. Municipal ownership ensures that the county can maximize the public good (i.e.: low rents) while creating a valuable public asset. Municipal ownership interrupts the current speculative process in another important way. It incentivizes projects that build housing which is rationally related to the needs of renters; this means no more building luxury apartments that cannot be filled. In other words, Municipal ownerships ensures that H.O.C. is focused on building housing to meet the needs of the residents of Montgomery County.
Some affordable housing advocates have been slow to embrace social housing and have criticized the Laureate in particular for not providing enough deeply affordable units to very low-income renters. This criticism ignores two points. First, the Laureate is new construction which produced 80 units of affordable housing without using an upfront public subsidy. That is significantly more affordable units than are created by any market-rate new construction coming on-line in the DC metro area. Furthermore, different projects can necessarily build in different levels of affordability depending on the nature of those projects. For instance, a project that entails acquisition and rehab of existing housing may be cheaper than new construction and thus support deeper affordability. Moreover, projects can be layered with other forms of subsidies (such as tenant-based vouchers) to build in greater affordability.
Secondly, and this is the most important part, we will never solve the housing crisis unless we develop a systemic alternative to the highly financialized, profit-driven, private-model that currently exists. By replacing private equity as a source of capital investment, and taking an ownership stake in new construction, H.O.C. is providing a roadmap on how to de-commodify housing in a high rent/high-cost region. The mixed-income nature of the Laureate means that rents will be able to cover operating costs and the asset will be self- sustaining. Further, the self-sustainability built into the H.O.C. model makes it replicable, thus ensuring the model can be scaled. This is exactly what housing advocates should be getting behind; self-sustainable and de-commodified housing models that remove speculative capital (private equity) from the production process. Of course, these models will take time to scale and alone are not an immediate silver bullet to end the current housing crisis. However, imagine if municipalities across the country embraced social housing models that normalized public investment in sustainable and permanently affordable publicly-owned housing. Now imagine federal investment to jumpstart these municipal projects with a focus on housing, jobs, and green infrastructure. Seems to me this is something we should all be working toward.
In the end, to actually achieve Housing as a Human Right, the current hyper-financialized housing system must be defeated. The power of projects like the Laureate is that they give us the blue print to do it. And that changes the game.