The absurdities of Section 8

August 18, 1996|By James R. Barth and Robert E. Litan

Fundamental problems with the two different classes of subsidized units explain why the Section 8 program is in trouble.

First, roughly two-thirds of the properties, almost all constructed after 1974, are oversubsidized - that is, they receive federal subsidies based on rents above those on comparable nonsubsidized units in the same neighborhood.

Indeed, more than 40 percent of the properties have assisted rents exceeding 120 percent of average market rents in their locations.

The General Accounting Office cites examples of Section 8 apartments renting for twice as much as nonsubsidized apartments across the street.

A case in point is an apartment complex in Casper, Wyo., where two-bedroom apartments are subsidized under the HUD contract by $880 a month. In the same city, larger apartments with more amenities rent for as low as $425 a month. The situation is made even more absurd by the fact that some tenants would like to leave the complex - for more satisfactory housing and at a lower cost to the government - but cannot because their rental assistance is tied to staying in their current units.

Even if the original subsidies had been in line with market rents, as additional subsidies were added, the costs became excessive.

Given the competing claims on scarce appropriations, it no longer makes sense to pay these owners more than they would get in a free and competitive market.

The only reason this policy has continued is that, until recently, both the Congress and successive administrations feared that many owners would be forced to default on their mortgages if their subsidies were capped at market-level rents.

Second, owners who signed subsidy contracts with HUD before 1974 often were undersubsidized - the rents and subsidies they collect are below free-market levels (68 percent of these older units compared with 10 percent of the newer units, according to a recent survey by Ernst & Young Kenneth Leventhal).

Owners of the undersubsidized properties accordingly have limited ability and incentive to maintain them in good shape, so many simply let them deteriorate.

Indeed, more than 80 percent of these properties have deferred maintenance and capital needs of more than $5,000 per unit. Yet much of this housing could still serve lower-income families if the incentive structure was changed quickly. But no matter how bad the living conditions, tenants in these projects are effectively trapped by current rules linking rental subsidies to particular buildings.

In 1996, Congress displayed signs of grappling with the first problem - the oversubsidized units - by permitting HUD to renew expiring contracts only for one year at their current rents.

But it has done nothing to address the continued deterioration of the undersubsidized units. Nor has it come close to grappling with overall budgetary constraints that could lead to the collapse of the Section 8 program and a wave of mortgage defaults.

Some have argued that the current system works fairly well and only needs some fine-tuning to lower costs. This optimistic view ignores the system's fundamental flaws.

The interlocking subsidies of mortgage insurance and rental assistance insulate properties from beneficial market forces.

The current system also encourages costs to escalate, because as long as the rental assistance is tied to specific units, HUD cannot walk away from the properties and thus must absorb any cost increases.

In effect, the system creates two hostages: tenants to their units and the federal government to keeping the system afloat.

Efforts to control subsidy costs through better enforcement or -- tighter funding formulas will fail to eliminate all inefficiencies because they require a continued bureaucratic structure to administer the program.

Market rent levels, which send the proper signals to owners and tenants, can only be achieved through competition, not by government fiat.

Pub Date: 8/18/96

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