- The Washington Times - Friday, October 4, 2002

Rising home values are a boon to current homeowners in the Washington area, but these values represent high prices that are a barrier to potential buyers. Across the United States, initiatives have been introduced to increase homeownership and to create affordable housing for low-income and moderate-income families, as well as middle-class families that have been priced out of the market.

In the Washington area, local and regional solutions to the housing crunch are being supported by nonprofit and for-profit builders.

"Washington is a victim of its own success," says John Spencer, vice president of Victory Housing Inc. and founder and president of the Housing Association of Non-Profit Developers (HAND).

"The economy has been churning along and acting as a magnet to bring more people into the region, but now low-wage workers cannot afford to live here," he says. "While the hot real estate market is great in some ways, it has also caused a situation where less expensive close-in apartments have been converted into expensive homes."

Market forces are only part of the puzzle, however.

"Zoning laws are not conducive to building affordable housing, and land is prohibitively expensive," Mr. Spencer says. "Basically, the federal government has been out of the housing production business for 25 years and has relied on handing out Section 8 housing vouchers for low-income families and expecting the private market to provide housing for them. The problem is that rents in our area are too high for these vouchers and there's not a lot of supply available, particularly with the two or three bedrooms these families often need."

According to Jeff Gelman, attorney and chairman of the Housing Committee of the District of Columbia Building Industry Association (DCBIA), "There's no ultimate solution to this. There will always be a shortage of an adequate supply of affordable housing. All we can do is try to improve the situation."

Besides the DCBIA, another group actively seeking to improve the affordability of housing in this area and nationally is the National Association of Home Builders (NAHB).

"We're trying to raise the flag that middle-income people, the heroes on the front page like schoolteachers, policemen and firefighters, cannot afford to buy a house in our area," says Gary Garczynski, NAHB president. "The issue that's most disturbing is that municipal workers cannot afford to buy homes in the county for which they work. People go farther and farther out to find affordable housing, trading dollars for distance."

Kerry J. Donley, mayor of Alexandria, agrees.

"As affordable housing becomes located farther and farther from the core, this puts a strain on transportation. The housing problem is also a land-use and transportation problem. What's terrible is that there's a large percentage of our population spending more than one-third of their income for shelter, and some are even paying more than one-half their income," he says.

Different approaches are needed for resolving affordable housing issues for various income levels.

"There's a difference between very low-income families and moderate-income families, although both groups have need of housing assistance," says Richard Knapp, senior vice president of KSI Services Inc. "For very low-income families, the emphasis has been on providing more Section 8 vouchers, which is a more cost-effective policy than producing more housing. For moderate-income families, the emphasis is on building more affordable housing."

"The recent increase in real estate prices has created real pressure on affordable housing issues, which affect people with little income, the working class, and even middle-class families," says Steve Green of the District's Office of Planning and Community Development. "Part of our housing policy is to provide a balanced approach in making housing available to people of all income levels. We've seen a significant increase in the production of affordable housing, along with financing programs to help people get into homes starting in 1999.

"Last year alone," he says, "over 3,000 new affordable housing units were created in the District. At the same time, we're spending time and investing money to preserve existing housing, including over 1,500 units last year in the Columbia Heights neighborhood. About 40 percent of the projects in the pipeline will be available to people earning less than 30 percent of the median [per capita] income." In 2000, the median per capita income in the District was $38,838, according to the Economic Research Service of the U.S. Department of Agriculture.

Housing assistance is needed, as well, by families earning from 80 percent to 100 percent of the median income, industry observers say.

"When I was a child, a house used to cost the equivalent of a year's salary," Mr. Gelman says. "While salaries have definitely gone up since then, they certainly have not gone up as much as housing costs have. To put it bluntly, the economics of housing stink."

Solving the affordable housing crisis requires providing a larger supply of both rental and for-sale property, but for builders and developers, it is impractical to buy land and build inexpensive homes rather than the more costly homes that the market will bear.

This is where governments step in to provide the incentives for building less-profitable rental developments or less-expensive homes to sell.

"There's not one simple answer for the provision of affordable housing," says Mr. Knapp of KSI Services. "You need a strong private sector to produce and manage the housing, but nonprofit builders are also effective in building specific projects in niches that may be difficult to do.

"But perhaps most important," he says, "you need jurisdictions that are not afraid of affordable housing and are not afraid of combating the fear within a community about the impact of low-income housing and the fear of development in general and its impact on schools [and] traffic. Affordable housing must compete for space with profitable construction of private sector housing, so the government needs to continue to provide incentives so that the affordable housing sector can compete."

"The major market demand is the price of land, so if the government doesn't do anything, the builder will undertake a project which is financially feasible," Mr. Donley says. "The way to make housing more affordable is to reduce those initial costs."

According to Mr. Gelman, "The government needs to allow the market to work where it can work and step in where it doesn't work by providing incentives and regulatory assistance. Even just streamlining the zoning process can save builders money, which can also keep prices down. Tax credits and tax abatements are politically and economically feasible and can be successful."

Besides providing building services, nonprofit and for-profit builders can assist the affordable housing situation in other ways.

"Builders are making a contribution either in terms of a direct subsidy to the local government through a contribution to a local housing fund at a set amount per square foot, or by setting aside units within a development to be rented or sold at a reduced rate," Mr. Donley says.

Local housing trust funds provide a revenue stream to be used to help finance affordable housing. For example, the District recently put $25 million into its housing trust fund, and Montgomery County has put more than $15 million into its Housing Initiative Fund for each of the past two years. While local governments and resources are the primary source of incentives for builders of affordable housing, the Washington Area Housing Partnership, created in 1991 with the support of the Washington Area Council of Governments, established a regional affordable housing initiative.

Mr. Donley is chairman of the Washington Area Housing Partnership.

"We're now advocating a regional housing trust fund, to be known as the Washington Area Housing Trust Fund, which can supplement not replace local housing efforts," Mr. Donley says.

"The Washington area's congressional delegation will request a one-time federal appropriation of $5 million to seed the fund, with the goal being up to a $20 million capitalization administered by local governments to preserve existing affordable housing and build more," he says. "In other areas where this has worked, local employers have contributed to the fund. As the major employer in this area, the federal government clearly has a significant role to play. If the federal government makes a contribution to this fund, then it will enable us to legitimately go to other major employers in the region to ask for their financial support."

The Washington Area Housing Trust Fund would provide gap financing to complete locally supported affordable-housing transactions. A matching arrangement is anticipated whereby the fund would provide grants or low-cost loans in an amount commensurate with the funds provided at the local level. Local housing trust funds currently provide gap financing to builders in the form of low-interest loans available when they are building affordable housing.

Another potential source of revenue is the Single Family Affordable Housing Tax Credit, a Bush administration proposal to Congress.

"The NAHB is pushing for the adoption of President Bush's housing tax credit for single family homes," says Mr. Garczynski, a Northern Virginia builder. "This tax credit will bridge the gap between development costs and below-market prices. It might be the impetus for more for-profit builders to get into this issue."

Nonprofit builders, many of whom are involved with HAND, often build low and moderately priced housing.

"HAND is a trade association for nonprofit groups, which serves as a support group for training and technical assistance," Mr. Spencer says. "We're trying to raise the profile of the issue of affordable housing and erase the negative connotations people have of this type of housing. Some for-profit builders have also joined our board and are involved with our advocacy projects. Nonprofits can't do it all; we don't have as much capital to work with as the for-profit builders."

According to Mr. Knapp, "The affordable housing crisis cannot be solved by the nonprofit sector. They are effective in specific niches, for certain target areas or projects which are difficult to do for one reason or another.

"The private sector has the capital and the experience to do this, especially to reach high production goals," he says. "We need both the nonprofit and the for-profit builders to be involved, along with the government, to provide affordable housing."

KSI Services has developed and built both affordable and luxury homes in the Washington region, sometimes within the same neighborhood.

"We're one of the largest producers of affordable housing in the D.C. region, producing about 600 units of below-market housing in addition to market-rate housing in the past year," Mr. Knapp says. "The two sectors of our business mutually reinforce each other. The affordable housing creates good will and an entree into districts and areas which have needs for both types of housing. The programs which are made available through local jurisdictions for the construction of affordable housing include tax-exempt financing and low-income housing credits, but the products are built primarily by private capital with a relatively shallow subsidy from the government.

"What's been instrumental to our success is the ability to develop a project, construct it, and then provide the long-term management services," he says.

In addition to constructing new affordable housing, government agencies and builders advocate preserving or renovating existing buildings for inexpensive housing.

"There's a limit of available land for building housing, so one answer comes in funding the restoration of vacant or dilapidated buildings," Mr. Gelman says. "Often, there are problems with building codes which need to be addressed, and that's another area in which local governments need to be involved."

Mr. Donley agrees. "A premium should be placed on restoration projects which can provide improved housing rather than simply leaving or tearing down dilapidated buildings," he says. "Supporting these types of projects could be another role for the regional trust fund."

While, universally, consumers, builders and politicians agree that affordable housing is a problem in our area, not everyone is ready to accept new construction as the solution to the problem.

"There's actually less of the animosity and fear you would expect about who the low- or moderate-income renters or owners might be, but more of a focus on traffic issues, green space and schools," Mr. Knapp says. "We're not facing low-income housing opposition, just housing opposition, in general."

Traffic woes may seem more immediate to Washingtonians who already own their homes, but the lack of affordable housing clearly has a broader impact. The long-term negative effects could include discouraging employers from moving to the area and exacerbating existing transportation problems.

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