The Housing Squeeze

US REPRESENTATIVE Barney Frank of Newton , chairman of the House Financial Services Committee, was in town this week to hold a hearing on the squeeze on household incomes and housing costs. In city after city, costs of both rentals and owner-occupied homes have been outstripping paychecks.Northeastern University economist Barry Bluestone testified that median housing prices increased by about 50 percent in Greater Boston between 1999 and 2006, while real household incomes were basically flat. In 1998, Bluestone calculated, the median-income family could afford the median-priced home in 148 of 161 Greater Boston communities; by 2006, in just 12 communities.

The cost of rentals has been rising just as fast. All this, of course, represents a real hit to family incomes. If you have to spend half of your income to get a roof over your head, you are that much poorer. If you have to double up to get a decent place to live, that's a decline in your standard of living.

The housing squeeze also hurts the Commonwealth's economy. As Charles Baker, CEO of Harvard Pilgrim Health Care, testified, his employees have difficulty finding affordable places to live. The housing crisis is driving Massachusetts employers to expand in New Hampshire rather than here.

Add to this the latest financial scandal, the meltdown in sub prime mortgages. This is the private sector's "solution" to high-priced housing. Offer loans to borrowers who would not ordinarily qualify, based on their incomes and credit histories. Make the mortgages seem affordable by giving low, temporary "teaser" terms -- very low interest for the first two years and much higher costs afterward .

Not surprisingly, as the teaser period expires and people face the real costs, defaults increase -- about 15 percent of all sub prime mortgages at latest count, and rising. Many lenders and borrowers gambled that housing prices would keep rising, allowing borrowers to refinance. But with housing values now in a temporary pause, upwards of a million sub-prime borrowers are likely to lose their homes before this latest financial debacle unwinds.

Frank says he wants to tighten regulation of bait-and-switch mortgages, but he knows that the deeper problem is housing demand outstripping housing supply. Housing is just plain expensive, especially because metro areas have run out of cheap land.

There was a time when government subsidized both rental housing and home mortgages for moderate income buyers. Today, however, after three national Republican administrations and one penny-pinching Democrat since 1980, federal housing subsidies have been cut to the bone.

There's no real money to subsidize new construction, either of rental housing or owner housing. Nor is there federal money to underwrite low-interest mortgages for first-time home buyers, leaving them to the tender mercies of the sub prime loan sharks.

What's mainly left of federal policy for new construction of affordable housing is tax credits, where a lot of the money leaks out to middlemen and wealthy investors looking for tax shelter, and too little is left for the housing. The under funded Section 8 rental voucher program, which gives a small fraction of low-income families money to find rental apartments, adds little if anything to housing supply, and mainly bids up rental costs.

And, as Amy Anthony, former Massachusetts secretary of communities and development, testified, upwards of $60 billion of federal money spent between 1965 and 1990 to subsidize private developers to build affordable housing for the elderly, the poor, and the disabled, is now being squandered. Thanks to a loophole in these programs demanded by for-profit developers as a condition of participating, once the initial loan is paid off, they are free to sell or rent the housing to the highest bidder. An entire sector of affordable housing built at taxpayer expense served only one generation of renters and is now being irrevocably lost.

There is a common thread here. Affordable housing requires social investment, plus public-minded regulation. The profit motive can sometimes serve public purposes, but most mortgage bankers and most developers are in it to make a buck and will achieve social goals only with careful government rules and monitoring. In many cases, it's more efficient for government to provide subsidies directly, not through tax gimmicks, not through bribing private developers or expecting private bankers to be do-gooders.

This is not just about housing "the poor." The default of housing and mortgage lending policy makes life harder for much of the working middle class and for the economy. Kudos to Frank for connecting the dots.

Robert Kuttner is co-editor of The American Prospect and a senior fellow at Demos. His column appears regularly in the Globe.

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