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Faculty OpinionsRelease Date: April 28, 2004

Edgar O. Olsen
Professor of Economics
College of Arts And Sciences

The Solution to this Nation's Housing Problem Is Simple: Stop Subsidizing Builders and Give Families Housing Vouchers

With federal, state and municipal budgets tighter than ever, what can this country do to increase the supply of affordable housing and help our poorest families?

In 2002, the Millennial Housing Commission argued that affordability was the single greatest housing challenge facing the nation.  The basis for the commission's conclusion that there was a shortage of affordable housing was that it would be impossible to rearrange families among the existing housing units so that each spent no more than 30 percent of its income on housing.  Unfortunately, there are too few inexpensive dwellings in the country's existing housing stock to do that.

The commission's solution to this alleged problem was to recommend the construction of new units, charging occupants 30 percent of their incomes to live in them and have taxpayers pick up the tab for the rest of the cost.  The commission argued that only subsidizing the construction of 250,000 new units each year for the next 20 years could solve the affordability problem of extremely low-income families.  The commission was correct that, with the existing housing stock and without additional assistance, not all families could spend less than 30 percent of their income on housing.  However, the commission's assumption that all families want to spend less than 30 percent is incorrect.  Except for a small minority of the very poorest families, any family could reduce its expenditure on housing by moving to a unit that is smaller, in worse condition, with fewer amenities, or in a less desirable neighborhood.  Only the families who occupy the very worst units do not have this choice.  Millions of families choose to spend more than 30 percent of their income on housing to live in a nicer place.

The simple fact that 28 million families spend more than 30 percent of their income on housing is not relevant for government policy unless taxpayers want to help these families and believe they have unwisely chosen to spend too much on housing.  However, since the consequence of spending a high fraction of income on housing is that too little is left for other goods, this is not an argument for housing assistance.  It is an argument for subsidies for other goods, such as food and medical care.

The nation's most pressing housing problem is not affordability, but the more than 2 million families who live in housing that HUD characterizes as severely inadequate and thousands of other families who have no housing at all.  These are among the poorest families in the country.

How can this problem best be solved?  Research on the cost-effectiveness of housing programs shows that giving families housing vouchers and allowing them to find existing units meeting minimum housing standards will get them into adequate housing in any market faster and more cheaply than any type of subsidy tied to building projects.

Given the current economic slowdown and the added expense of fighting international terrorism, little additional money will be available for housing assistance over the next few years.  The question is:  How can we continue to serve current recipients while reaching out to some of the country's poorest families who have not yet been offered help, all without spending more money?

Research on the effects of housing programs provides clear guidance.  It shows that we can provide current recipients with equally good housing without increasing their housing expenditure and serve many additional families without any increase in the budget by shifting resources from project-based to choice-based assistance.

If the Millennial Housing Commission had acted in good faith on its congressional mandate "to conduct a study that examines, analyzes, and explores … the various possible methods for increasing the role of the private sector in providing affordable housing in the United States, including the effectiveness and efficiency of such methods," it would have recommended a reallocation of the budget for housing assistance.  Instead, it proposed expanding existing, inefficient programs and creating new ones.  These recommendations would condemn millions of this country's poorest families to continue living in deplorable housing.

Edgar O. Olsen is a professor of economics at the University of Virginia who specializes in U.S. housing policy.

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Last Modified: Thursday July 01, 2004