Government Regulation and Changes in the Affordable Housing Stock

1. INTRODUCTION In terms of housing issues, the primary public policy focus of economists has been the affordability of homes, mortgage availability, land-use regulation, and rent control. Studies of land-use regulation focus on the effects of regulation on the price of owner-occupied housing. Work on low-income housing has concerned itself more with issues of measurement and the debate over supply-side versus demand-side subsidies. In this paper, we look at the relationship between these two issues to examine how government regulation affects the dynamics of the low-income housing stock. We find that, consistent with theoretical models of housing, restrictions on the supply of new units lower the supply of affordable units. This occurs because increases in the demand for higher quality units raise the returns to maintenance, repairs, and renovations of lower quality units, as landlords have a stronger incentive to upgrade them to a higher quality, higher return housing submarket. This result is disturbing because it highlights how policies targeted toward new, higher income owner-occupied suburban housing can have unintended negative consequences for lower income renters. Our research differs from most studies of affordable housing in that we are not concerned with identifying the size of the affordable stock or matching it to the number of low-income households. The gap between the housing needs of low-income households and the stock of units deemed affordable has been demonstrated in a considerable amount of other research. (1) Here, we build on the Somerville and Holmes (2001) study of the effects of the unit, neighborhood, and market characteristics on the probability that a unit will stay in the stock of rental units affordable to low-income households; we do so by looking at how government regulations affect this probability. Our approach is to look at individual units in successive waves of the American Housing Survey (AHS) metropolitan area sample. In doing so, we follow Nelson and Vandenbroucke (1996) and Somerville and Holmes (2001), who use the panel nature of the AHS metropolitan area survey data to chart the movements of individual units in and out of the low-income housing stock. The remainder of the paper is structured as follows. First, we lay out the theoretical framework for our analysis. We follow with a discussion of our data. Finally, we present our empirical results, both for measures of constraints on the supply of new residential units and for the pervasiveness of rent control in an area. 2. THEORETICAL FRAMEWORK We model movements of units in and out of the stock of affordable housing as the filtering down of units through successive housing submarkets. The filtering model describes the housing market as a series of submarkets differentiated by unit quality. Rents fall as quality declines, so units that are lower on the quality ladder have lower rents than units of the same size in the same location at the top. Without expenditures on maintenance, renovation, and repairs, units decline in quality as they depreciate physically and technologically. As this occurs, the units move down the quality ladder. The cost to maintain a given level of quality is assumed to increase with unit age. Extra expenditures on maintenance and renovation can move units back up the ladder. Relative rents in the different submarkets vary with the distribution of income across households (demand) and the supply of units in that submarket. When quality is least expensive to provide at the time units are built, new units will be of high quality. The supply of the most affordable, lowest quality units will be those units built in earlier periods that have been allowed to depreciate and more down--to filter down--the quality ladder. Landlords will choose a level of maintenance to maximize profits, and that choice determines into which housing submarket their unit will fall. …