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Editorial

Fixing up L.A.'s rental market

Affordable housing is in short supply, but Congress can help by remodeling a tax-credit program.

November 27, 2009

Lawmakers agreed this month to spend an additional $11 billion on federal tax credits for home buyers, hoping to shore up a housing market that's awash in unsold properties. By contrast, affordable rental units remain in short supply, with the recession and tight credit markets putting a crimp in efforts to build apartments reserved for people with modest incomes. There are simple things Congress can do to ameliorate this situation, however, without borrowing billions more or increasing the government's involvement in the housing sector.

The need for affordable housing is particularly great in Los Angeles because too many renters are chasing too few units near the areas where jobs are concentrated. The excess demand pushes prices out of the reach of many working families -- the average monthly rent for a one-bedroom apartment in Los Angeles was $1,397 at the end of last year, a USC study found. Another factor, according to Paul Zimmerman of the Southern California Assn. of Nonprofit Housing, is that private developers can't make the return that their investors demand unless they set rents at the market rate. During the recent boom, Zimmerman estimates, 90% of the units built were affordable only to families with incomes above $135,000 a year.

A low-income-housing tax program that Congress created in 1986 already provides each state with at least $2.7 million in tax subsidies (California's share was $80 million) to allocate to developers through competitive bidding. To raise money to build their projects, developers sell the rights to 10 years of tax credits to banks and other investors. They also put up money of their own and take out loans, multiplying the taxpayers' contribution with private dollars. The resulting projects must keep rents for at least 20% of their units well below the median cost of housing in the area for a minimum of 30 years.

The program has been quite successful, attracting about $9 billion a year in private investment before the downturn. Since then, however, that investment has dropped by half, even as rising unemployment and underemployment have caused the demand for affordable housing to soar. Developers have been struggling to find buyers for the tax credits, even at steep discounts. That's why Congress should extend for one more year a temporary change that allowed states to give developers cash in exchange for a portion of the credits they'd received but could not sell. The cost is so low -- about $70 million -- that it could easily be covered by money not yet spent in the stimulus package. At the same time, to make the credits more attractive to investors, Congress should let them apply half the credits against profits in previous years, rather than having to use them all against future earnings. The more valuable the credits, the more investors will pay for them, and the more affordable housing that taxpayers will gain.

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