Beyond Rent Control: The Opportunities

Proposals to Increase the Supply and Lower the Cost
of Housing in Massachusetts

Prepared by the Small Property Owners Association and presented at a Reception with His Excellency Argeo Paul Cellucci, Governor of Massachusetts, at the Boston Marriott Copley Place Hotel, on July 20, 2000

Small property owners are families who own and manage rental property as a part-time or full-time business without employees. They provide 75% of all rental housing. Three-quarters of all low-income households live unsubsidized in the private rental housing of small property owners.

PURPOSE

Our purpose is to present a broad range of housing proposals. Some proposals are aimed at preserving and maximizing the valuable existing resources we already have in our older, historic rental housing. Other proposals are aimed at encouraging more new multi-family housing construction. But all of these proposals aim to expand the supply of rental housing in the most cost-effective way, with the least government intrusion.

The basic approach behind these proposals is not a “more-money” approach but a rethinking of housing policy over the last 50 years. Government intervention in housing expanded very rapidly between 1950 and 2000. It was, in fact, an era of dramatic promise and then momentous failure in publicly built housing, which became riddled with crime. And subsidized housing of every sort has serious problems with its very high cost and long-term supportability.

When it comes to the private rental housing market, this same era of government intervention has left us with an accumulation of outdated and destructive regulation at many different levels of government – city, state and federal. Overzealous regulation has thrown major roadblocks in the way of preserving our older housing and building new multi-family housing. It is time to rethink housing policy.

The fundamental premise of these proposals is this: by making careful adjustments in policy, by making deliberate, well-guided regulatory changes, housing preservation and growth can be encouraged – and cost little or nothing in tax dollars. Neither harsh nor punitive and involving little public investment, these proposals are positive incentives to build more new housing, to lower construction and maintenance costs, and especially to preserve our existing, historic housing in low- and moderate-income neighborhoods – where a fine heritage of housing, ethnic identities and ownership patterns is currently at risk.

These proposals are based on the firm economic principle that any increase in the housing supply at any income level will reduce housing demand and housing costs all up and down the housing ladder. Even luxury housing increases the housing supply. Why? Because the population is stable (or in fact declining), so as people move into the luxury housing, less valued units become open and available. And as people move into those units, they vacate and make available even less valued units, and so forth down the housing ladder. ANY NEW HOUSING will benefit and reduce upward pressures on costs at all levels of the housing market.

We do not support government manipulation of our communities by imposed income controls and heavy subsidies to build taxpayer-funded housing for selected income groups. We do, however, support government assistance in the form of vouchers to the very poorest and to families in emergency transition.

Despite much talk of “housing crisis,” there is no evidence – except for the very poorest – that there is a housing affordability problem for Greater Bostonians. In a recent report The State of the Nation’s Housing: 2000 from the Joint Center for Housing Studies at Harvard University, the executive summary states: “Housing markets began the twenty-first century on a high note. Buoyed by the longest economic expansion in history, home sales, homeownership rates, and the value of residential construction all set new records in 1999. And thanks to strong income growth, housing affordability remained in check for most Americans, despite rising interest rates, home prices, and rents.”

If indeed housing costs were taking a larger slice out of most incomes, leaving less for other household expenses, Boston would not be having its current economic boom. Nevertheless, housing costs have been driven up unnecessarily by burdensome over-regulation. In this context, these proposals offer numerous ways to improve the housing supply and lower housing costs without subsidies and with very little cost burden on anyone – but only if there is a general will to do so.

And let us, finally, remind all Massachusetts citizens that ownership of property still remains the single most important source of wealth and prosperity for all Americans, more important than wages and salaries, and even more important than stock investments. It is therefore to our personal and collective benefit to preserve and enhance the opportunities for ownership. These proposals do just that and address a variety of concerns about housing.

OVERVIEW

Beyond rent control: the opportunities

After suffering for 25 years under a failed policy, small property owners in 1994 engaged a battle, ignited a spark – the statewide referendum known as Question 9 – and with a blaze of popular opposition brought rent control down in Massachusetts.

The end of rent control in 1994 was the signal of a new era in housing. Through Question 9, property owners and, above all, the people of Massachusetts started to take control of housing away from politicians and bureaucrats.

But rent control, we have discovered, was just the tip of the iceberg, one dramatic case of a whole regulatory environment that is deeply flawed. The opportunity now is to go beyond rent control, to deal with years of misregulation in a new way, with new approaches. The opportunity now is to create a new environment for housing.

The bias against private rental housing

Since rent control’s end, the Small Property Owners Association – SPOA – has challenged itself to find new approaches to housing. In the course of this search, we have discovered one major historical factor: a long-standing bias in American thought against private rental housing.

What is that bias? An assumption that landlords are somehow completely different from everyone else: that landlords are greedy, that landlords are cheaters, that landlord-owned housing is “substandard” by some bureaucrat’s decree. A double standard applies to rental housing compared to single-family homes.

And who are these landlords so maligned? Small property owners in most cases. Small property owners own 75% of all rental housing in Massachusetts and, indeed, in the whole country. They include every two- and three-family homeowning family that lives in the same house with their tenants. They include many immigrant and minority families getting ahead and getting into mainstream America. They include modest-income families where rental property investment is a giant stepping-stone to prosperity.

The housing activists would call it “profit” with a snarl. But it is simply prosperity. Owning rental property on a small scale is, for many American families, the wide-open road to prosperity. It fits perfectly with the American dream. Because for all Americans, owning property in some form is their family’s single most valuable source of prosperity and wealth, surpassing owning stocks.

The bias against private rental housing began more than a century ago, when Jacob Riis declared something was terribly wrong with New York City’s dark and densely packed tenements on the Lower East Side, where the latest new immigrants lived (Jacob Riis, How the Other Half Lives, 1887). Yet all the anti-tenement and reform legislation passed more than a century ago in New York City failed to have any noticeable effect – until three decades later when the incomes of tenants rose enough so that they could afford improved housing conditions.

But the bias against private rental housing continued in the early 1900s right here in Greater Boston where triple-deckers were invented. Triple-decker construction boomed so much that rents actually went downward for one whole decade, a testimony to the real power of supply and demand (Howard Husock, “Rediscovering the Three-Decker House The Public Interest, 1990).

But not long after, new municipal zoning laws, inspired purely by prejudice against immigrants, outlawed triple-deckers through brand-new setback requirements and impossible floor-area ratios. We still live with those laws, and they lead to a steady inexorable decline in housing supply at the same time that they condemn our older, historic, moderate-income neighborhoods to the graveyard. We need to reform them. The opportunity is great, the consequences are sad if we do not act.

And the bias continued and surfaced vigorously again in the 1960s and 70s when a whole new host of housing regulations came into effect across the nation in the name of “ending poverty”: ever more costly building standards, higher and higher habitability standards for older housing, eviction controls, rent controls, strict consumer protection laws applied to rental housing, and other anti-landlord laws like Massachusetts’ security deposit law, which is a nightmare to comply with and a nightmare if you fail to comply. The advocates of this regulation had a vision of socialized housing, of turning all private housing into socially owned housing. They even wanted heavy transfer taxes on private single-family homes to “take the profit out” of all housing ownership.

The idea of socializing all housing was a very flawed vision three decades ago, but we are now left with many of its consequences: crime-ridden housing projects and hostile anti-landlord laws that have pushed owner-occupants out of many neighborhoods, encouraged the worst in absentee ownership, destroyed many neighborhoods with abandoned housing and led to a virtual standstill in new multi-family construction. As we hear over and over again: “Who wants to be a landlord in Massachusetts?”

So we offer these proposals in the spirit of correcting and improving decades of over-regulation and in the spirit of returning to community. Ultimately, community is our goal, and our vision of community includes preserving the rights of ownership. For as the nineteenth-century British philosopher Edmund Burke said, the incentive for enterprise grows with the security of ownership. These proposals are offered in respect of ownership and in respect of the fact that, historically, small property owners in a free environment have been and are inherently the most economical providers of housing.

Do Greater Bostonians really want more subsidized housing?

Before we discuss specific proposals, we must deal with one over-arching question: Do most Greater Bostonians really want more housing, and more housing especially for low- and moderate-income residents?

Lip service for this goal is easy and frequent. But when it comes down to action, local residents all too consistently act and vote for lower density, open space, building height limits, and down-zoning – all of which work against increasing the housing supply.

At the same time, strong opposition remains to easing the regulatory burdens on private multi-family housing, the most economical form of housing available. Massachusetts easily ranks as one of the hardest states in which to be a landlord. And we are now reaping the results of this long trend that constricts multi-family housing in every direction.

It should be clear that preserving our stock of existing multi-family housing and increasing the supply of new multi-family housing will bring down housing costs. The following proposals, many of which will cost nothing at all except changes in state and local laws, will do just that – preserve or increase the housing supply. As it is said, “if there is a will, there is a way.” We provide some of the ways. It remains for Massachusetts citizens to decide if they have the will.

Proposals:

Regulatory
Zoning
Funding

 

Regulatory Proposals

to preserve our historic housing & neighborhoods

Mandatory rent escrowing

Rent withholding is a strong tenant right that has been allowed to go unchecked, leading to a paradox. We are in an economic boom, activists create headlines claiming there is a housing shortage, and yet we still have boarded-up housing in most cities and towns in Massachusetts, many units are kept off the market by fearful owners (especially elderly owners), and no new multi-family housing is being built except high-rise buildings. We need to reaffirm the role of small property owners and encourage ownership of multi-family housing. That can only be done by placing reasonable limits on currently uncontrolled rent withholding that can strike any owner at any time, but most devastatingly in the case of small owners.

What role do small property owners play in rental housing? “Mom and pop” landlords own virtually all the housing in moderate-income neighborhoods – about 75 percent of all rental housing in Massachusetts. Their management style keeps rents down. Usually just a step or two above their tenants on the income scale, most small owners do their own repairs and delay costly capital improvements as long as they can.

Yet this management style, while it keeps rents lower, puts the housing at risk. Several state laws require “code-perfect” apartments. Tenants in code-imperfect apartments have the right to withhold their entire rent. Facing eviction, a non-paying tenant’s first response – always recommended by lawyers – is to call the health inspector and report code violations. Until repaired, minor defects in an apartment will stop an eviction cold. Tenants quickly learn to block repairs or do damage in order to live rent-free for months and sometimes years.

The combination of no rent and costly repairs can result in bankruptcy for small owners . This “free rent” game can break any small owner. SPOA has many stories of financially stressed owners. These horror stories help drive more owners out of business and keep others from becoming rental owners.

One simple requirement would make a world of difference: mandatory rent escrowing. Instead of pocketing the rent, tenants would have to put rent withheld for code violations in a special account to be distributed upon settlement of the dispute. Rent escrowing is in effect in 35 other states, and people are often shocked that it is not already required here. The U.S. Supreme Court sanctioned escrowing. Escrowing would eliminate the obvious incentive for abuse in the current law.

This proposal for mandatory rent escrowing and the following proposal for a multi-tiered state sanitary code were presented in an award-winning paper in the Pioneer Institute’s 1999 Better Government Competition. The paper was entitled “The Road Home: Working with small property owners to preserve and create affordable housing,” written by Lenore Schloming and Skip Schloming of the Small Property Owners Association.

A multi-tiered state sanitary code

Another change would also help preserve older housing: prioritizing the state sanitary code. The state sanitary code is a list of so-called “habitability” standards defining in detail the conditions and standards that – theoretically – every apartment must meet. At present, the code is enforced solely by tenant complaints, and almost always by tenant complaints designed to delay eviction. These tenant complaints can be extremely nit-picking, side-tracking the owner’s attention and money, with the potential that real structural and preservation problems will get totally ignored.

Simple changes like mandatory rent escrowing and a prioritized housing code alone would end the hostile regulatory environment that has driven many small owners out and discouraged others from even entering the small landlord business. We need these small owners to preserve our older, lower-cost, multi-family housing and to continue to provide rental housing that lower-income families can afford without government subsidies.

A new rehabilitation subcode

Massachusetts has a lesson to learn from New Jersey where a new rehabilitation subcode has stimulated millions of dollars of new investment in dilapidated and abandoned inner-city housing in New Jersey cities in little more than a year after the subcode’s adoption. Each project is costing less. Planning uncertainty has been reduced. Owners and developers are responding, including smaller ones.

What was the trick? Revising New Jersey’s building code so that older buildings, during rehabilitation, don’t have to twist and turn unpredictably to meet all the requirements in a building code designed to regulate brand-new construction.
New Jersey’s new rehab subcode was a very-low-cost regulatory change that produced powerful, broad incentives to invest in older buildings, both commercial and residential, especially in urban areas. Officials attribute most of the recent new inner city investment to the new subcode.

The key principle governing the new rehab subcode is that, after rehab, a building can be no less safe than it was before rehab. Costly new requirements in the affected area of rehab work are dropped if the existing features are reasonably safe and little safety improvement would result. Extensive improvements beyond the affected work area are also not required just because rehab work is taking place.

What are some of the obstacles in New Jersey’s old code and in Massachusetts’ current code?
Having to “fire-sprinkler” an entire building when it would be cheaper to sprinkler the affected work area only. Currently, the whole-building sprinkler requirement stops rehab work, so buildings remain unimproved altogether.
Having to extend other building code requirements beyond the work area, pushing rehab costs up and stopping some projects entirely.

Giving local inspectors wide discretion on what will be required. Requirements are not clear; planning is difficult. Project costs become unpredictable and can escalate dramatically. Costly appeals may be necessary. Under these conditions, projects are sometimes just not done.

The extra costs and the uncertainty built into the present code just runs up everyone’s costs, both for-profit and non-profit builders. The result, after many years, is disinvestment in older structures even when they have historic character, as they almost always do. These older buildings, of course, are located in every inner-city neighborhood. And let’s face it, almost every city and town, however big or small, has its “inner-city” neighborhood.

The solution is to scale back the forced modernization that the current code requires, thus making rehab less expensive, thus stimulating more of it. At the same time, the code needs to be re-written and requirements stated clearly for each kind of building and rehab project, so that ambiguity and local discretion are removed. Under a better rehab code, as buildings get improved, neighborhoods get stimulated, and an upward cycle begins. Much of the dilapidation in older buildings, even in small towns, can be traced to code barriers to rehab.

Resurrect rooming houses, the lowest cost form of housing

The lowest-cost housing of all is rooming houses. In rooming houses we have the potential to harbor many of the homeless, the mentally ill, and the struggling, who now live in high-cost homeless shelters or on the streets. But let’s not paint a picture of rooming houses just for the downtrodden. They have always served people in transition, young artists, newcomers to town. And rooming houses have the potential to house our increasing elderly population in what could be one of the nicest, cheapest, most communal forms of private elderly housing.

But rooming houses have been made de facto illegal and driven out of town. They have nearly disappeared. In Massachusetts as a whole, we have lost 96% of our rooming house units since 1960, exactly the same period over which homelessness has grown. A local homelessness advocate agrees that that loss accounts for about 80% of the homeless, those who are simply in transition (job change, divorce, etc.) and those who may have personal limitations of one sort or another but can live successfully on their own.

What is the critical problem? A rooming house unit has become defined legally just like an apartment, and the same protracted eviction process applies to them. So owners cannot get rid of troublesome residents engaging in illegal activity or not paying their rent. Control of residents has been lost. So neighborhood hostility to rooming houses is often very justified because rooming house residents are out of control.

To remedy this problem, rooming houses could be more carefully defined in the law and given a special status that allows quick evictions. Quick eviction, a threat used occasionally, would give troublesome rooming-house residents a strong incentive to shape up fast and would give clout to any neighbor complaints. Rooming houses can work and regain acceptability.

Under our zoning proposals, we also recommend re-zoning for rooming houses.

Guard against laws that restrict the housing supply

Rent control. A recent study of 22 cities found that rent control drove UP the price of housing in the non-controlled sector of the housing market, where rents were driven up by 13-15%. This result could be predicted because rent control restricts the supply of housing in the free market. Here is just one more well-founded reason why rent control does not work. For years, economists have almost unanimously considered rent control to be counterproductive and unworkable. Study after study has also shown that rent control does not deliver housing to those who need it.

Meanwhile, rent control destroys any incentive to build new housing. Instead, it leads to deteriorated and abandoned housing. The people of Massachusetts spoke loudly and clearly against this approach to housing. It was a disaster seen far and wide. The people of Massachusetts should be respected.

Condo conversion restrictions. Both state law and a number of local laws and local proposals aim to restrict conversion of rental units into condominiums. Condo conversion does nothing to reduce the housing supply. The supply remains exactly the same; only the legal status of ownership changes. Condominiums are in fact the cheapest form of homeownership. They should be encouraged. Once again we repeat an important point: ownership of property is the single most important source of wealth and prosperity for all Americans. Condominiums are an excellent first-time homebuyer option and their growth should not be artificially limited.

Zoning Proposals

to preserve our historic neighborhoods & allow housing growth

Re-legalize triple-deckers; end non-historical down-zoning

Zoning laws first came into effect in the 1920s and 30s, decades after Greater Boston’s traditional multi-family housing was built. Greater Boston is credited with inventing the famous triple-decker house as an efficient, economical way to house families, both for owners and for tenants. And then Greater Boston outlawed them.

With a vision of single-family suburbia in mind and a desire to halt immigrant mobility, the setback requirements imposed by municipal zoning laws on probably 75% or more of multi-family housing lots stopped triple-deckers and now make it impossible to reconstruct the same historic structures currently built on them. If a house burns down, if a house gets abandoned and bulldozed by the city, or if someone decides to tear a house down and rebuild, what was originally located on the lot cannot be rebuilt in the same size or style, no matter how beautiful or historic or efficient the original housing was.

There are two serious consequences to this early form of down-zoning:

  • Inevitably over time, as older housing gets lost, it cannot be replaced with the same number of units. A continuing decline in the housing supply is built right into our zoning laws. Over time, then, Greater Boston is destined to steadily lose its supply of rental housing simply because of zoning requirements that do not respect the existing housing and neighborhood character.
  • New housing built on these down-zoned lots – if it is even possible to build it at all – inevitably will not match the historic neighborhood character. This mismatch is a deterrent to building the new housing and, if it is built, destroys the architectural “feel” of the neighborhood. Our historic housing can be seriously devalued by mismatched new construction intruding into a neighborhood. Meanwhile, of course, the housing supply gets smaller.

Zoning should be revised in multi-family neighborhoods so that existing housing sizes, scales and styles can be permanently maintained.

Zone for housing in the least hostile areas:

commercial & industrial zones

One assumption that governed zoning laws when they were first imposed was the segregation of all urban living functions into their separate territories: housing in one zone, manufacturing in another zone, shopping in still another zone, and so forth. It was an idea, considered “modern” at the time, that violated the natural diverse mixture of uses all in the same place that characterizes older cities everywhere: housing above storefronts, housing next to workshops, offices in homes, etc.

Today, thankfully, many inspiring ideas are beginning to circulate that attempt to recreate the old, mixed diversity of the world’s great cities:

  • Allow new housing above single-story commercial structures.
  • Allow new housing in industrial zones.
  • Allow use of former commercial or industrial buildings as housing.
  • Allow housing in as many commercial and industrial zones as possible, because neighborhood opposition will be the least.

Adjust zoning to today’s smaller households

One major contributor to a squeeze on the housing supply is the ongoing trend toward smaller household sizes: single-person households, single-parent families, smaller family size. Most of our existing housing, however, was built on the assumption of larger household sizes.

As a result, these smaller households are living in larger spaces than they really need, given the cost of housing. When each smaller households takes up more space, the housing supply is effectively reduced.

New zoning laws need to take these social and demographic trends into account.

  • Given the predominance of smaller households and especially single-person households, owners need to be allowed to subdivide larger apartments.
  • Smaller households also increase the importance of allowing owners to bring so-called “accessory” apartments into service – attics and basements (“garden” apartments) that usually make little or no change to the physical and historic appearance of buildings, but allow smaller households to reside in them.
  • It should not be illegal for two or more smaller households or families to live in the same single larger unit, so long as crowding limitations are respected.
  • Rooming house units need to be zoned as legal in every multi-family neighborhood.
  • It should be possible to “mix and match” different rental options in the same structure without a so-called “change of use.”

The market, in other words, should be allowed to adjust apartment size to the household size and financial demands of housing seekers.

One of the most serious demographic changes of the future will be the growth of our elderly population. All sorts of mutual help and exchange can be worked out in housing situations with the elderly, but only if our zoning and regulatory laws allow it.

Repeal inclusionary zoning

Inclusionary zoning is the practice of permitting housing to be constructed only when owners provide a specified percentage of units at below-market rents for low- and moderate-income tenants. Such zoning is a strong barrier to building any housing at all. Inclusionary zoning restricts construction (what little occurs) to very large developers who can afford the extra, upfront costs. It increases the cost of the market-rate units. It also often increases density, which neighbors will oppose, thus ending construction that might have occurred in many cases.

All inclusionary zoning laws should be repealed. Instead, Greater Boston should commit to building any new housing that it possibly can, even luxury housing. The point is that even luxury housing increases the housing supply and impacts the cost of housing all down the housing ladder. ANY NEW HOUSING will benefit and reduce upward pressures on costs at all levels of the housing market. By imposing restrictions, like inclusionary zoning, that slow or stop construction, the housing supply is constricted at all levels.

Funding Proposals

that restructure existing public funds

No more subsidized housing

About 22% of all Massachusetts rental housing is already subsidized. How much do we really need? There will never be enough subsidized housing for housing activists who make their living planning it, building it and administering it. There will always be way more than enough people to take a tax-funded cut in rent.

It’s time to make a decision: We have enough government money going into subsidized housing. Let’s focus on using it better.

More housing assistance for the same tax dollars

Building subsidized new housing for low- and moderate-income families to live in is very, very expensive. A major rehab or brand-new construction of a subsidized housing unit costs about $200,000 per unit in the Greater Boston area. This heavy subsidy is needed to build each unit, and then an ongoing subsidy is still needed to help the lower-income household pay the rent. Tax-built housing is a double-subsidy system.

We recommend a much lower cost option for helping needy tenants – giving them rent supplement vouchers to enable them to live wherever they choose in private housing. While this approach is shunned by most housing advocates because they will lose their jobs, mobile tenant vouchers, as they are called, are administratively much simpler and much, much cheaper. Why? Because these tenant-based vouchers use older, existing, private rental housing – housing that is assessed at a market value between $30,000 and $65,000 per unit in the Greater Boston area. This much-lower-cost housing keeps the subsidy costs down when tenant-based vouchers are used.

In addition, the freedom that vouchers give tenants to live where they choose has immeasurable positive impact on them. Preliminary results have just been released from a major long-term study, called “Moving to Opportunity,” conducted by the U.S. Department of Housing and Urban Development (HUD), and covering several major U.S. cities including a specific study of Boston itself. The preliminary results from the study are so strong that, if it were a study of medical treatment, the study would be stopped and every patient given the new medication available.

What the study shows is what we have long suspected: that mobile tenant-based vouchers are far more beneficial to the residents than keeping them trapped in publicly built housing projects. The benefits, in fact, are overwhelmingly positive. When tenants chose where they lived, the study found that they experienced less crime, less stress, better health, and less depression. The effects were beneficial both on household heads and on children. The study is being continued to see even longer-term effects.

Vouchers, not units: voucher out’ the projects

We propose, therefore, that all housing assistance be done in the form of mobile tenant-based vouchers. To do so with no increase in public expenditure, we recommend that all current subsidized housing projects, large or small, be gradually sold off at full market value without restriction. The sale proceeds, combined with current ongoing funding, should be devoted to funding mobile tenant vouchers. The same dollar amount of public funds currently devoted to subsidized units will help subsidize far more households than were previously assisted.

A decade ago, the federal government came to exactly the same conclusion we have: constructing and maintaining housing projects is very expensive – vouchers are much more cost-effective. They began their own federal program to “voucher out the projects” as subsidized mortgage contracts expired. Thus was born the “expiring-use” issue where (though it is often not mentioned at all even to the affected tenants) tenants are given special or “enhanced” mobile vouchers when owners end their federal subsidy contracts or prepay their federally subsidized mortgages.

Advocates have vigorously opposed this new federal policy because they lose control over the physical housing structures that create little kingdoms for them. But the hard crunch of money and the social limitations on residents of “permanent” housing dictates that mobile vouchers are the best way to assist needy tenant households.

It should be noted that vouchering out projects is not an idea limited just to large “expiring-use” buildings; it applies to any housing where the physical unit is subsidized, not the tenant household. All subsidized housing units face exactly the same long-term problems of financing; they are all “expiring-use” projects.