May 31, 2021
Rehabilitation of existing housing, or rehab for short, is the silver bullet that could make a huge dent in decent and affordable housing for low-and-moderate income families, and dramatically alter entire neighborhoods if such programs could be ratcheted up to scale. Single-family homes are not the answer to the affordable housing crisis in the future, but extensive rehab of existing homes could make a difference in what is estimated to be a 1.1-million-unit deficit in such homes now.
There are challenges aplenty on this road. ACORN found this in New Orleans after Katrina. Housing experts, architects and planners, led by Cornell’s Regional and Local Planning Department, then led by Professor Ken Reardon, now at the University of Massachusetts in Boston, found that even after the flooding more than 80% of the housing stock was sufficiently sturdy to warrant rebuilding, rather than demolition.
So, why didn’t that happen, and when it did, why has it taken so long? First, as our housing development people constantly reminded us, it’s often cheaper to build from scratch than to upgrade and rehab an existing structure. Secondly, and closely aligned with that, big housing developers are new home builders, employing the economies of scale in huge developments; think suburbs and much of what many of us abhor. Thirdly, and probably not finally, as we have found in countless lower income neighborhood around the country, often the cost of the rehab exceeds the market value of the home, when, or if, it might be offered for sale. Whether Detroit, New Orleans, Memphis, or countless other cities, it the cost to rehab a house is $80,000, but the market-value of the house is still going to be $50,000, it is virtually impossible to get financing from traditional lenders to do the work. Rebuilding and rehab happen, but it is done as people beg and scrimp the money, do it themselves, or recruit various ad hoc jackleg crews to do the work. The current cost of materials and scarcity of labor now adds what some estimate may be as high as 30% to the cost of home construction.
Embedded in President Biden’s infrastructure proposal is a small ray of hope in this area, though I’m not sure how real even the hope is. The proposal aims to renovate 500,000 homes in a decade by offering $20 billion worth of tax credits to developers to shrink the gap between traditional lending and actual costs. 50,000 rehabs are hardly a dent in the bucket. Additionally, few sentient US citizens don’t know at this point how difficulty it continues to be to pass the infrastructure bill given the partisan divide, even though tax-credit proposals for developers tend to be popular on a bipartisan basis.
Even if passed, I would worry. Tax-credit financing for rehab might be popular and an opportunity for nonprofit housing development operations on a city-by-city basis, but it is an uneven picture and it is unlikely that any real big time housing developer is likely to jump into the rough waters of rehab work in lower income areas. Direct subsidies might get the job done. HUD could jawbone much more of the CDBG money going to rehab than the 11% now spent on single-family rehab, and given the way many mayors squander CDBG money on castles in the sky, that’s money on the table now that just needs some muscle to make this happen.