For affordable housing, should we subsidize rent payments or subsidize the construction of rent restricted units?

Today's Sacramento Bee includes an op-ed touting AB 71, which would end the mortgage interest reduction for second homes and redirect the estimated $300 million towards tax credits that finance construction of rent-restricted affordable housing units.

Of the various funding mechanisms for affordable housing currently proposed in the legislature, I prefer the AB 71 approach to some of the other proposals, such as a transfer tax on real estate transactions.  But given the enormity of California's affordable housing problem, we need to allocate these funds to the most efficient approaches.  I'm not sure tax credits for affordable housing construction are it.

While the op-ed calls this approach "proven," tax credit financed affordable housing actually has a lot of critics in economic and policy research.  The costs of projects financed in this way are high, there is evidence the program "crowds out" other housing invesment and thus does not increase housing units by as much as it appears.  In addition, not all of the benefits are received by low-income households - it creates benefits for high-income households who buy the tax credits and financial professionals who bundle and market them.

Thus, there are many economists who believe subsidizing rent vouchers (section 8) is a more effective approach.  A recent op-ed by Zillow Chief Economist Stan Humphries captures this line of thinking.  He argues that we should eliminate tax credit programs and mortgage interest deductions and redirect those funds to rent vouchers that reach more households and allows them more flexibility about where they live and do not lock them into a specific unit to receive a subsidy.

The summary of the Governor's proposed budget has some interesting data on the cost of building tax-credit subsidized affordable housing in California.  In the housing chapter it states, "Total development costs average $332,000 per unit for the construction of new affordable units, which limits the number of units that can be built with limited resources."

That prompted me to take a quick look at the average cost of providing affordable housing in California's largest county, Los Angeles.  According to the Governor's budget, it cost $372,000 per unit to build affordable housing in LA County between 2011-15.  Typically, the tax credits provide 70% of project financing (the rest private investment), thus $300 million in funding from AB 71 could finance up to $428 mil. in affordable housing construction or about 1,150 units per year at LA Costs.

What are the costs of providing rent vouchers in LA?  Note there are also waiting lists for rent vouchers, just as there are for placement in affordable housing units.   According to the Housing Authority of LA, $465 million in annual funding serves 45,000 families, an annual housing subsidy of about $10,333 per family.  At these costs, directing AB 71's $300 million towards rent subsidies would help 29,000 families per year, about 25 times the number of families that could move into new affordable units each year at the same funding level.  Of course, the tax credit financed units stay in the affordable housing stock year after year and the buildings are required to remain rented as affordable units for 30 years after construction.  So after 25-30 years, there would be a similar amount of low-income families helped each year by the same continuous funding stream - but why wait decades when you can reach more people now with rent subsidies that provide them with more flexibility about where they can live.

Looking at these numbers and the other policy arguments, I would suggest the state look towards increased funding of rent subsidies rather than subsidizing construction of affordable units.  To increase housing supply, we need policies that reduce the cost of constructing all types of housing, both market rate and affordable.