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Abstract

The United States’ current system of low-income housing assistance is biased against homeownership. This paper documents the bias and suggests reforms to eliminate it. The new policies would allow more low-income families to become homeowners by providing similar subsidies for renters and owners under the two largest programs for low-income housing, Section 8 and the Low-Income Housing Tax Credit. The reforms would not require additional spending, would improve the cost-effectiveness of the system of low-income housing assistance, and would avoid the two biggest mistakes in past attempts to subsidize homeownership: subsidizing the construction of new units and requiring intended beneficiaries to buy from selected sellers.

Introduction

The current system of housing assistance differs enormously from an ideal system based on compelling arguments for government action. The bulk of housing subsidies is provided to middle- and upper-income households through the favorable tax treatment of homeownership under the federal individual income tax (Carasso et al. 2005; Ling and McGill 1992). These tax provisions induce more middle- and upper-income households to be homeowners than if the homeownership preferences were eliminated and tax rates were reduced proportionally to raise the same tax revenue, and they induce homeowners in these income categories to occupy better housing than under this alternative tax system (Rosen 1979). These distortions in individual choice serve no compelling social purpose.

In contrast to the housing subsidies provided under the tax code to middle- and upper-income households, the current system of low-income housing assistance is strongly biased against homeownership. Programs that subsidize homeownership account for only 10 percent of total spending on income-tested housing programs and for even less spending on programs that help the poorest households¹. Calculations from the 2003 National American Housing Survey show that the average per capita income of the households served by low-income homeownership programs is about three times as large as the average for households served by low-income rental programs.

This paper takes no position on whether governments should encourage low-income households to become homeowners but does assume that governments should not actively discourage it. To neutralize the current bias in government programs against homeownership, the paper suggests reforms that do not require additional spending. The appropriate level of spending is a separable question not addressed here.

One reform involves converting the U.S. Department of Housing and Urban Development’s (HUD) Section 8 housing voucher program to one neutral with respect to homeownership. Two variations on that theme are to provide a down-payment subsidy for first-time homebuyers under the voucher program and to expand voucher opportunities for those in subsidized housing projects. Shifting public funds from programs that subsidize rental housing projects to the revised voucher program would increase homeownership among low-income households. A second possible reform would allow the Low-Income Housing Tax Credit to be used for homeownership as well as for rental housing projects. One way to achieve this second reform without spending more money would be to devote the annual increase in the tax credit allocation to a refundable tax credit for homeownership for low-income households. Such reforms would improve the current system’s effectiveness in achieving its primary goal of helping people obtain good-quality housing.

¹This result is based on outlays for the U.S. Department of Housing and Urban Development’s tenant-based voucher program, public housing program, and programs of private subsidized projects, and its major block grants that provide housing assistance (HOME, CDBG, and Native American); U.S. Department of Agriculture’s programs that subsidize privately owned rental projects and its single family direct loan program for homeowners; and the tax expenditures under the low-income housing tax credit, mortgage revenue bonds, and multifamily housing bonds.

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The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

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