Give US Public Housing Residents the Right to Buy Their Flat

I wrote a policy memo for the Federation of American Scientists’ call for federal policy ideas for increasing housing supply.

Photo by Sigmund on Unsplash

Summary

This recommendation advocates for a Tenant Purchase Option for all public housing units in the US. Under this policy, HUD will permit state and local housing agencies (HAs) to sell a public housing unit to its existing tenant at a below fair-market price, subject to minimal qualifying criteria. By selling public housing units, HAs can unlock currently non-transferrable land value, increase homeownership, create new wealth that accrues to the poor, improve state and local public finances, free up units under the Faircloth Limit, and most of all, increase housing supply.

Currently, residents face steep opportunity costs as a result of rent subsidies, i.e., they may find themselves rejecting higher-paying jobs in other cities or states in order to remain in subsidized housing . A non-means-tested purchase option would unlock several options: tenants could purchase and lease their flat and use the additional income to seek a more suitably located unit. They could also sell the unit and ‘trade up’, which would free up an affordable starter unit. Finally, they could use their right as an owner to sublet the unit, immediately creating new dwelling units for low-income renters.

Tenant purchase options have had immense success in the UK, Singapore, and Hong Kong, for example, with 77 percent of available flats having been purchased in the latter case. The purchase transforms an otherwise burdensome asset into properly-priced wealth, increasing homeownership and boosting local budgets in the process.

As public housing tenants face income limits, the foremost question is whether tenants could even afford a subsidized unit. But consider that HUD-assisted renters are predominantly older, which makes them more likely to have accrued savings. And not to mention, income verification is never foolproof. Even if only one-fourth of units (a conservative estimate) end up being purchased, outcomes would still be substantial (see ‘Outcome’). Another benefit is that the policy will eliminate any labor substitution effects caused by income limits—essentially allowing residents with higher-than-reported income to exchange amnesty with a payment to their HA.

Plan of Action

• First, HUD’s Office of Public and Indian Housing will amend Form HUD-53012, otherwise known as the Annual Contributions Contract (ACC), which sets out the basic terms and conditions for the HA’s public housing program. More specifically, the Office will expand Section 6, ‘Disposition and Encumbrances’, which currently prohibits any transfer or conveyance of the project in receipt of funding unless otherwise consented to by HUD. The amendment will state that the consent of HUD will not be required for the transfer or conveyance of any dwelling unit to its existing tenant. (It is within HUD’s authority to propose an ACC Amendment with a notice period. The amendment document will be included with the ACC as part of the Consolidated Annual Contributions Contract, which constitutes the full annual grant agreement.)
• Second, the sale price will be fixed according to a formula, which can range from a fixed percentage of the fair market value of comparable units (in size, age, location, and quality). Alternatively, the property could be valued as the qualifying income, multiplied by 30 years or so (see YCR Wong).
• Third, the Office will require HAs to add restrictive covenants in their transfer agreements, such as, that (i) the tenant can only sell their newly purchased unit after a given number of years of residency; that (ii) the unit must be their first and main home as of time of purchase; and that (iii) they must be financially suitable.
• Finally, HUD will likely need to specify the co-governance and cost-sharing mechanism in a housing project where ownership is both public and private. Such a mechanism will likely be a homeowner association to which the private owners would contribute and where their voting share would be equal to one over the total number of units.

Ideal Outcomes

• Tenants who exercise the option would realize currently untapped housing wealth, particularly for units situated in highly dense cities (New York, for example, is the city with the most public housing units). Given that the buyers are public housing residents who are (or were) low-income, the subsidized purchase would also be somewhat progressive.
• Furthermore, purchasing tenants would be free to efficiently allocate the use of their unit, whether to sell, lease, or sublet. They would be free to move (to retirement or to opportunity) while capitalizing on their subsidized unit—essentially having their cake and eating it.
• Private renters would see lower housing costs. If even 25 percent of the existing 958,000 public housing units are sold (CBPP), this would amount 239,500 units nationwide. They would constitute 5.6 percent of the housing supply gap of 4.3 million units (Zillow), or 18.1 percent increase over annualized housing completions (census.gov).
• Contrary to concerns about distributive fairness, a Tenant Purchase Option would achieve second-best distributive efficiency. Insofar as there are well-off public housing tenants, they currently benefit from subsidized rent, while private renters who are not allocated public housing pay high rents, which is not ideal. But evicting well-off tenants in order to most equitably distribute subsidized units would be cruel and unfeasible. The second-best arrangement, then, is one where they would provide public revenue and lower the rent that private renters pay by putting their unit on the market.
• There would be bipartisan appeal for state or local agencies to participate in sale. Not only would they see a unprecedented sum of positive cash flow (whose exact value would, again, require better data), they would also see a dramatic reduction in ongoing operating expenditures. Such a policy could enable the full-fledged privatization of public housing.
• Also, note that even though the purchase price would be subsidized, there is no financial cost as the properties would otherwise be sitting idle on government books. The next-best method of privatization, which involves selling to a private developer who would receive project-based rental assistance under Section 8, resulted in a measly 2,000 sold units as of late-2022 (Metcalf et al.).
• And insofar as some projects see low take-up, this provides governments with the signal as to which projects should be demolished or redeveloped from the ground up. Even if take-up is low across the board, there is, once again, no financial cost to any government agency.
• Meanwhile, the policy evokes D.C.’s Tenant Opportunity to Purchase Act, which gives tenants of private flats the first option to buy a flat in the case where the landlord intends to sell, as an effort to prevent displacement. On top of the Tenant Purchase Option’s likely redistributive effects, improving mobility across neighborhoods would reduce road demand and emissions.
• By privatizing public housing units, the policy would also reduce the number of flats which count toward the Faircloth Limit, which caps the number of units administered by a housing agency at October 1999 levels. Doing so, the policy also would free state and local governments to experiment in the role of a public developer, à la Singapore. The goal would be to build upscale but mixed-income units—such as the Laureate in Montgomery County MD—that can motivate purchase and cultivate ownership.

I owe the inspiration for this idea to William Wai Him Tsang and Professor Yue Chim Richard Wong for their decades-long work advocating for a subsidized homeownership scheme in Hong Kong.