October 20, 2006

Examining the Bond Issues V: Affordable Housing

Marc Comtois
Question 9: Affordable Housing Bonds

Approval of this question will allow for the State of Rhode Island to issue general obligation bonds, refunding bonds, and temporary notes in an amount not to exceed $50,000,000 for affordable housing.

Project Costs - $49,800,000 in principal w/ $37,035,819 in Interest (6% over 20 years) plus approximately $349,000 in issuance costs. TOTAL: $87,184,557. {Source PDF}.

Do we need affordable housing? Most people, including both gubonatorial candidates, say yes.
Urging voters to pass the measure, Republican Governor Carcieri and his Democratic challenger, Lt. Gov. Charles Fogarty, were among more than half a dozen speakers at the kickoff for Vote Yes On 9, a campaign to support Question 9 on the November ballot.

"The goal of Question 9 is to jump-start the construction of affordable housing," said Armeather Gibbs, chief operating officer of the United Way of Rhode Island, who emceed the event from the back porch of a newly renovated affordable house on Douglas Avenue.

Housing advocates say the $50 million would help Rhode Island to leverage some $450 million in federal housing subsidies and private loans, helping to create up to 2,000 affordable houses, condominiums and apartments over four years.

There are many economic and moral cases to be made for approving this bill (go here as a starting point). But the question must be asked: should current Rhode Island (and federal) taxpayers be asked to foot the bill? What factors contributed to this crisis and how do we correct them so that the problem doesn't continue? Basically, this isn't a housing shortage issue as much as it is a tax issue.

There can be little doubt that the governmental policies of "Tax Hell" Rhode Island carry a large amount of blame for the housing pinch. RI's past tax policy helped convince many manufacturers to move out of state, taking their relatively well-paying jobs with them. The service jobs that have filled the void don't measure up. To make matters worse, RI's high tax reputation scares businesses in growing sectors, such as technology or pharmaceuticals, that may offer higher paying jobs.

If young or median-income earning people continue to move out of state, it will only make the fiscal problems--both in RI government and for average RIers--worse. Of course, that may be exactly what is needed before RI politicians and the voters who continue to enable them wake up to the fiscal reality that the current high tax burden is untenable. In short, this bond question asks that RI taxpayers subsidize a problem that was caused because of a bad tax policy.

The politicians are asking us--the taxpayers--to bail them out for their fiscal mistakes instead of getting to the root cause of the problem: they have to lower the tax burden in the state and make it more attractive to businesses. More businesses will make a more competitive job market with higher wages resulting. Subsidizing affordable housing is a case of treating a symptom and not the actual illness. It would be nice to do what we can to alleviate the symptom, but I fear that doing so will allow our politicians to get away with not treating the illness that caused it.

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You asked the right question, but didn't get to the full answer. Why did housing prices rise so much in RI over the past few years? Falling interest rates had something to do with it, as did constrained supply. But the real story is on the demand side. While incomes in RI stagnated, they rose elsewhere, like New York and Boston. People in the former found second house prices in RI quite cheap relative to their rising incomes. And people in Boston found Rhode Island's lower housing prices attractive relative to other locations with equivalent commuting time to Boston. So we had increased demand from people with rising incomes confronting constrained supply and falling interest rates. Voila: a housing price boom, and a "crisis" for people whose incomes didn't keep up with those of other people who participate in the RI housing market. On the other hand, a lot of the people screaming "crisis" have probably done quite well thanks to RI's extremely generous social welfare programs, and/or its extremely generous public sector wage/benefit packages. Or they just may not understand the connection between whom they elect to the General Assembly, the policies that are enacted, the resulting impact on the RI economy, and their ability to compete for local housing against people who earn their income elsewhere.

But don't let that stand in the way of this taxpayer financed giveaway to the poverty crowd and the building trades unions...

Posted by: John at October 20, 2006 2:54 PM

Thanks for taking it a bit further John. I agree with what you said and probably should have fleshed out the out-of-state real estate buyers angle a bit more. As for the rest, truth be told, I've banged that drum so much that I'd hoped it was obvious. Thanks.

Posted by: Marc Comtois at October 20, 2006 3:18 PM

Yes, over-taxation may have contributed somewhat to the problem of affordable housing.

But as to the larger question. This is basically a market condition. Demand has driven up real estate values in RI. And I do not feel it is the taxpayers' responsibility to attempt to compensate for this.

If it were done "right"; i.e., supplying affordable housing for everyone who qualified, the tab would be astronomical - simply not feasible. And when you do less, you must choose between who does and who does not get to take advantage of a limited supply of affordable housing, while still adding yet another burden to the sixth highest taxed citizens in the country.

I know this makes me cold. But in my opinion, taxpayers do not have an obligation to supply affordable housing.

Posted by: SusanD at October 20, 2006 9:53 PM

Down my way (Aquidneck Island) it's begun to look like we're the northern tip of Long Island. On my four-way intersection my wife and I are the only people that live and work here - the other three houses are second homes (2 NY, 1 CT). And yes, they've driven prices through the stratosphere, because on a relative basis our realty looks cheap.

Interestingly, one of those "second" homes is owned by a retired NY cop / teacher, and another by a couple that are (not yet retired) Hartford teachers. Still think that we who labor in the private sector aren't the Serfs funding a better lifestyle for our publlic-sector Lords?

It should not be a taxpayer responsibility to fund "affordable housing."

After all, where in the RI or US Constitution does it say it should be? And since they don't, under what authority is government meddling in this arena?

Also, as a practical matter, look at the mess that WWII-era "rent control" - still in effect - has made of "affordable housing" in NYC!

Posted by: Tom W at October 21, 2006 9:42 AM

I bought my 2 bedroom home in 2001 for $60k. It was assessed at $68k. The first revaluation brought the assessed value to $128k. The second revaluation (2005)brought the assessed value to $210k.

John - are you asserting that demand is in control of revaluation? I was under the, perhaps mistaken, impression that the revaluation process was a calculation that updated house value based on # bedrooms, improvements, lot size, etc.

Posted by: taxpayer at October 22, 2006 10:55 AM

Revaluation is always a tricky subject. However, assuming you made no major improvements to your house that would have affected its valuation, then what factors drove the increase you described? Broadly, there are four. (1) Changes in the supply of similar homes. In RI, supply is constrained by geography and regulation. As the housingworksri people never cease to point out, our rate of new home starts has been among the lowest in the country. However, no change in supply would not have mattered to valuations but for three other factors. (2) Falling interest rates. This means that at the same level of income, buyers could afford larger mortgages, which led them to bid up prices in a supply constrained market. (3) Rising net demand. There were two trends at work here. First, the outflow of people from Rhode Island, as rising property taxes drove retirees from their homes, and local employers left RI, and weren't replaced. Second, the inflow of people who were either buying second homes in RI, or coming here because houses in RI were in some way more attractive than other houses with similar commuting time to Massachusetts or Connecticut (e.g., Pfizer in New London). On balance, the inflow was greater than the outflow, leading to upward pressure on prices. And (4) rising earnings on the part of many people who were looking for houses in RI. These people worked in economies that were much healthier than Rhode Island's (e.g., Massachusetts) and experienced rising real incomes from their jobs. That enabled them to pay more for houses than could people already living in RI and working in jobs where wages were not rising.

In sum, the increase you saw in the value of your home was due to four factors: constrained supply, falling interest rates, rising demand and rising incomes among house buyers.

Hope that clarifies matters.

Posted by: John at October 22, 2006 9:36 PM

I think the state has some obligation and self-interest to help promote affordable housing but would like to know more about this bond issue for housing: in light of past scandals at RISDIC and RI Housing where insiders got the good deals, are there safeguards that this time the money will be spent honestly and effectively? Can we have some assurance the hosuing will be built in "grow-smart" areas where there already is infrastructure? Are there efforts by the state to find ways NOT to lose existing housing (as for Parking lots for Miriam Hospital or badly planned airport expansion)?

Posted by: Barry Schiller at October 29, 2006 5:27 PM