Box 22, Folder 17, Document 25

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Factual Background

1. The federal government already provides a very significant subsidy for home owner-
ship among middle-income and upper-income groups through income tax deductions
for interest and property taxes.

a. In 1962, this subsidy amounted to a $2.9 biilion tax saving for middle- and
upper-income groups.

The uppermost 20% of all families (with incomes over $9,000) received a
subsidy of $1.7 billion in 1962 — or double the total 1962 housing subsidy
given to the lowermost 20% in the form of public housing costs, welfare
housing paymenis, and tax deductions combined.

In general, owner-occupied homes in slum areas are in better physical condition
than renter-occupied homes. However, this may result from the fact that owners
generally have higher incomes and more assets than renters, rather than from
ownership per se.

a. The proportion of substandard units among families with incomes below $4,000
in central cities in 1960 was 8% for owner-occupied units and 21% for renter=-
occupied units.

The proportion of unsound dwelling units among all families in central cities
in 1960 was 11% tor owner-occupied units and 33% for renter-occupied units.

There is a strong consensus among housing experts and social workers experienced
in slums that providing families who want to own homes with a chance jo do so
would induce significantly greater responsibility on their part toward maintenance
of both property and general neighborhood conditions.

Low-income residents get less quality per dollar of rent than higher-income residents,
and non-white get less than whites.

a. In Houston, 80% of low-income families paying $40 to $60 per month rent
lived in deteriorating or dilapidated units, as compared to only 21% of
families with incomes of $3,000 to $6,000 paying the same rents. Similar
findings (but less extreme) were made in all cities recently studied.

In Chicago, whites and non=whites both paid a median rent of $88 per month
in 1960, but the median unit for non-whites was smaller and more crowded,
and 30.7% of all non-white occupied units were deteriorating or dilapidated,
as compared with 11.6% of all white-occupied units.


Absentee ownership is higher in slum areas than in non=slum areas for comparable
types of property. However, this could be a result of slum conditions (for example,
many people wealthy enough to be owners may not want to live in slums) rather
than a cause of them. .

Residents of poverty areas and racial ghettos consider obtaining decent housing fo
be one of their most significant problems. Yet they often feel frustrated by their
apparent inability to improve their housing conditions through their own action.

a. Most social workers and other observers of slums believe that many very low-
income families have a strong desire to own their own homes.

Objectives of Programs Encouraging Home Ownership


Providing more persons living in slums with an opportunity of shaping their own
destiny regarding the nature and condition of their housing. This would help them
(a) develop a stake in society, (b) derive significant benefits from governmental
and other institutions they now regard with suspicion or hostility, (c) learn how to
make good use of such institutions, and (d) increase the feelings of self-esteem,
pride, and adequacy which are so batiered by life in slum areas.

Improving the quality of housing occupied by slum dwellers, and the quality they
receive per dollar of expenditure on housing.

Providing a greater incentive for slum dwellers to better maintain the property they
live in, and to generally improve their own lives.

Improving landlord-tenanit relations among slum dwellers by shifting from absentee
to resident landlords.

Providing easier and more widely accessible means for some slum families to “escape"
from slum areas by buying homes in non=slum and non=ghetio areas which are nearer
to new sources of jobs and have betier-quality environments and govemment services.

Constraints Under Which Any Programs Should Operate


Programs encouraging home ownership among persons now living in slums should
involve two major facets: improving housing conditions and household morale in
slum areas, and helping households now living in those areas move to better
neighborhoods. Neither of these facets should be neglected.

a, ‘Those parts of any program concerned with slum areas themselves should be
linked with rehabilitation of housing in such areas.

b. Those parts of any program concerned with helping people move out of slums
need not be linked with rehabilitation.


2. | Home-ownership-encouraging programs should be tried and developed only in three
types of areas:


Slum areas where the entire environment is being upgraded through other
programs, such as improved government services, better schools, intensive
social work, ete. Ownership alone is not a panacea and cannot cope with
all the depressive factors in slums. Hence slum ownership programs should
be tied in with Model Cities Programs.

Older but well-established and stable neighborhoods generally in good
physical condition and supplied with good-quality government services.
In such areas, programs could be both linked with rehabilitation of the
few run-down siructures present, or carried out with housing already in
good condition. The uniis involved would be occupied by either new
owners moving in from slum areas, or present renters in the neighborhood
assuming ownership.

Newer and outlying and suburban neighborhoods in excellent condition and
supplied with good-quality governmeni services. Here slum dwellers would
assume ownership of housing already in good condition.

3. Programs encouraging home ownership by slum dwellers must not work to their dis-
advantage. These programs should neither cause such households to invest in
property likely to depreciate rapidly in value, nor "lock them into the slums" and
block their chance to move out into better neighborhoods. Therefore:


Such programs should not be undertaken in slum areas where conditions are
so bad that most of the dwellings will eventually be demolished and replaced.

Such programs should not be undertaken in any slum areas unless "all-out"!
environment=improving programs are also currently underway.

Such programs should embody a "take-out" feature. [t would consist of a
guarantee by some public agency to buy the unit back from fis new owners
within a certain time period at no loss to them in case they decide (1) they
would rather move out of the slum area altogether, (2) they cannot handle
the continuing burdens of ownership, or (3) they do not want to own this
property because of continuing decline in the quality of the neighborhood
as a whole. However, owners would be allowed to keep at least a portion
of any capital gains resulting from their selling their property to other
persons likely to maintain the property adequately.

4. | Ownership-encouraging programs linked to the rehabilitation of slum properties
should require it to occur before those properties are transferred to their new
owners. The costs of rehabilitation can then be built into the debt structure of


these properties. Such costs can then be subsidized through (a) elimination of any
required down-payment, (b) use of below-market=inierest-rate loan funds, (c) pro=
vision of rent subsidies to tenants in resident landlord buildings, and (d) provision
of ownership subsidy payments to new owners who are not landlords.

In order to make even the lowest-income groups eligible for these programs, it
would be desirable to change public aid regulations so that welfare payments for
housing could be applied against debi service and other ownership cosis as weil
as against rent.

Such programs should not result in the reaping of large profits by absentee owners
who have refused to keep up their properties, but who are required by these pro-
grams to sell their properties to others.

Ownership-encouraging programs for slum dwellers must embody significant pre-
and post-ownership counseling and financial help administered by organizations
located in the slum areas themselves. These supplementary programs are essential
to help the new owners with the legal, financial, maintenance, and rehabilitation
problems they will encounter after assuming ownership.

Such programs should not require either the new owners or their tenanis to raise
significantly the proportions of their incomes they spend on housing, since that
proportion is already high.

Because of the uncertainty conceming the possible success of ownership=encourag-
ing programs, and the particular forms of them which will be most effective, they
should be started on an experimental basis, This implies that:

a. Several different formats should be started simulianeously, and each should
be tested under a variety of conditions.

b. | Such programs should be started on a relatively small scale, and expanded to
larger-scale operations only after some experience has been gained about
which formats are most effective.

cs Each experiment should be designed so that its effectiveness can be accurately
evaluated within a relatively short time. The objectives which should be
weighted most heavily in such evaluation should be those conceming the pro=
gram's impact upon the individual households and families involved, rather
than its impact upon the physical condition of housing, or the fiscal status
of the cities concemed.

d. The federal agency sponsoring such programs should develop a set of specific
formats which it seeks to test, and should be sure that each of these formats
is given an effective test in one or more cities.


Individual experiments should be incorporated in the Model Cities Program in
many cases, since this program has been created to stimulate and test innova-
tions in coping with slum conditions.

Programs encouraging home ownership among slum dwellers should not be evaluated
in terms of their effectiveness at saving money in relation to other housing programs
(such as urban renewal or public housing). They will probably cosf no less than

such other programs, and perhaps more. -But they can be evaluated in terms of their
effectiveness at saving money in the long run by reducing the costs of other programs
aimed at coping with the impacis of slum areas upon individuals. Examples are wel-
fare programs, police action, and anti-delinquency programs.

Ownership-encouraging programs can be best undertaken when normal market forces
are bringing about a rapid expansion in the fotal supply of housing through extensive
construction of new multi-family and single-family homes. Otherwise the additional
demand for housing generated might simply aggravate any existing shortages and
drive up prices and rents, rather than increasing the supply available to low-income
families. This means such programs will function best when interest rates are rela-
tively low rather than in a "tight money" climate.

IV. Suggested Programs


A program to locate slum dwellers now renting in absentee-owned buildings who
might become successful resident landlords, to find buildings appropriate for con-
version from absentee= to resident-landlordship, and to assist the persons found to
assume ownership of those buildings.

a. The program would involve full subsidies for down payments where required,
and would finance on-going operating expenses and debi amortization out
of rents.

Costs of any rehabilitation necessary to bring the buildings up to conformity
with relevant codes would be capitalized into the debt structure.

Below=markei-interest-rate loans would be used to finance purchase.

It would concentrate upon buildings now in poor condition, but still capable
of satisfactory rehabilitation without enormous costs. These buildings could
be acquired from their absentee owners through a "squeeze-out" process of
code enforcement with minimum public investmeni.

This program would be applied only in "minimum-sized pieces." Each
would involve a certain minimum number of buildings located close
together in a single block or a few adjacent blocks. The number of units
would be of sufficient "critical mass" to affect the entire environment of


the block or blocks involved. Moreover, each such "critical-mass-sized
piece" would be processed simultaneously and as a whole by the govern-
ment agency handling the program, rather than one building at a time.

The families seeking to become resident landlords under this program would
not have io remain in the specific buildings they now occupy, but should be
allowed to assume ownership in the neighborhoods where they now reside.

In cases where recovering the cost of rehabilitation required rents in excess
of the ability to pay of local low-income households, rent subsidies would be
linked into the ownership-encouragement program. The combined effect
would (1) provide rehabilitated units for low-income renters and (2) allow
some low-income families to become resident landlords in these rehabilitated

The program should be run by new, locally-officed organizations operating
under the jurisdiction of the Assistant Secretary of Housing and Urban Develop-
ment for Demonstrations and Research.

(i) | Because the basic objective of this program would be a change in the
social conditions and menial attitudes of slum dwellers, it would be
desirable for primary responsibility to rest in some agency other than
FHA. This would allow FHA jo retain its basic "prudent investment"
orientation without conflicting with the objectives of this program,
which vary from "prudent investment." As long as this program is
much smaller than FHA's other activities (and it must be at least to
start), it would be difficult for FHA to generate the necessary
enthusiasm and outlook to encourage the high-risk and frankly
experimental operations essential to success.

The Assistant Secretary should set general standards of performance
and evaluation for the program. However, he should be free to
create a variety of specific organizational arrangements with local
groups to operate the program in different metropolitan areas.
Examples are non-profit corporations, church groups, unions, or
city departments.

Each such organization should operate local neighborhood offices to
assist new owners with (a) pre-ownership training in housekeeping,
making minor repairs, and legal responsibilities, (b) counseling on
maintenance and financing during the initial ownership period,

and (c) follow-on counseling as necessary.

2. Asimilar program to help renters in slum areas take over ownership of individual
units in multi-family buildings on a condominium basis (but not on a cooperative
ownership basis).


a. This program would have all of the attributes of the first program described
above except the use of rent subsidies (part g),

b. lf the incomes of the potential owners were noi sufficient to pay the carrying
costs of ownership, then an additional continuing subsidy could be used. This
subsidy would be considered the equivalent of the interest and property-tax
deduction subsidy enjoyed by middle-income and upper-income households.
Since low-income households do not have enough income to benefit from
such deductions, they would be given direct cash equivalents. The higher
the income, the lower the equivalent; the larger the household, the higher
the equivalent -- other things being equal.

Another program fo help renters of single-family dwellings in slum areas (like Wats)
take over ownership of their dwellings or of other similar single-family dwellings
nearby. This program would also have all of the attributes of the first program des-
cribed above excepi the use of rent subsidies. It would make use of income-tax-
deduction-equivalenis, as described under the second program set forth above.

A fourth program designed to encourage slum dwellers to move into non=slum areas
by buying single-family or two-family buildings, or individual units in condominium
buildings, in such areas.

a. This program would involve full subsidies for downpayments where required.

b, lt would be focussed upon buildings already in standard condition and there=-
fore needing very little rehabilitation.

ts lt would involve individual buildings scattered throughout neighborhoods con=
taining socio-economic levels above the slum areas, but not as high as upper=
middle-income areas. However, the condominium parts of the program would
involve entire buildings operated under the program.

d. lt would incorporate the aspects of the first program described above sei forth
in paragraphs IV, 1, feg-h. [i would also incorporate the continuing subsidy
based upon income-tax-deduction equivalents described in paragraph IV, 2, b


e. The organization operating this program should have a mefropolitan-area-
wide jurisdiction rather than covering only the central city therein. In
fact, it should emphasize placement of former slum dwellers in suburban
areas where possible. Yet this organization should be the same as, or
closely linked to, whatever organization administers the other programs
described above.

f, The exact locations of the housing selected for use in this program should be
based upon the following considerations;







The housing units selected should be in sound neighborhoods but should
not be far beyond the economic capabilities of the households moving
out of the slums. Hence these households might be expected to assume
full ownership without a continuing subsidy after a certain period.

There should be a mixiure of Negro and white households involved.
Some of the slum move-outs should result in relocation of Negro
families in previously all-white or predominanitly-white areas, and
some should result in placement of Negroes in previously Negro areas
and whites in previously white areas.

In no cases should the households moved out of slums under this program
be concentrated together in the receiving neighborhoods to such an
extent as io become a dominant group in any given block or elementary
school district.

If possible, the neighborhoods chosen should be close to the type of
jobs possessed by the families moving oui of the slums, and to sources
of new employment opporiunities being created in the metropolitan area.

If possible, the neighborhoods chosen should be paris of cities benefit-
ing from other federal programs (such as urban renewal, the Interstate
Highway Program, or federal aid to education) the continuance of
which might be linked at least informally with willingness to co-
operate with this program. Similarly, this program might be linked
with defense procurement activities in communities benefiting from
defense production coniracis.

g. This program would not involve the creation of resident landlords (except in
two-unit buildings) by elimination of absentee landlordship.

h. |i might be desirable to link this program with the other programs encouraging
ownership of buildings in slums by slum=-dwellers. This could be done through
some type of formula which would require provision of a certain number of
“slum=escape" units for each set of "slum=renovation" units involved.

All of the above programs should be linked to a number of other federal programs or
policies aimed at reducing the impact of ethnic discrimination upon housing markets.
Discrimination creates a “back-pressure" in areas readily available to minority groups
which tends to raise prices therein. This makes it harder for residents to own their
own homes, and reduces the incentive of absentee landlords to improve deteriorated
slum properties. Among the possible ways to counteract these forces might be;

a. Requirement that any dwelling units financed with mortgages fumished by
institutions supported by federal agencies (such as banks and savings and
loan associations) be sold or rented on a non=discriminatory basis.


b, Creation of public housing on vacant land, particularly fn suburban areas,
preferably on scattered sites in relatively small, low-rise projects. This
assumes that the housing so created would be integrated, preferably with
a Negro minority, rather than 100 percent Negro.

c. Subsidization of private groups designed to help Negro households move
into previously all-white neighborhoods in suburbs and peripheral neighbor-
hoods in central cities. (An example is the group of this type in Hartford,
Connecticut), Such subsidy could consist of granting of tax exemptions, or
allowing the sale of tax-exempi securities, as wel! as provision of grants fo
cover capital or operating cosis.

V. Estimated Costs of Ownership-Encouragement Programs Undertaken at Various Scales

l, Basic assumptions underlying these cost estimates are derived from FHA experience
and census data. They are as follows:

a. The total cost of acquiring and rehabilitating either single-family or mulii=
family housing will be $12,500 per unit.

b. Total per-unit monthly operating expenses are $48.46 for single-family
houses, and $49.42 for multi-family buildings (including a $9 allowance
for vacancy and contingencies but no allowance for managemeni fees),

Cs Household incomes have risen about 25% since 1959, when the income dis-
tribution among occupants of substandard housing units who earned less than
$6,000 per year was as follows:

Under $2,000 51.9%
$2,000 - $2,999 17.2%
$3,000 - $3,999 13.5%
$4,000 = $4,999 9.3%
$5,000 - $5,999 6.4%
Total 100.0%
d. The proposed programs wil! extend assistance to members of all these income

groups proportionately. Hence calculations about the total subsidy required
can be based upon the weighted average 1965 income of the entire group,
which is $2,840 per year,




Households can devote 25% of their incomes to housing. This amounts to a
weighted average of $59.16 per month for the entire group involved.

Al! costs of acquisition and rehabilitation will be incorporated into the jota!
initial loan and amorstized over a 30-year period on a no-down=payment basis.

Multi-family programs will utilize 12-unit buildings and provide no explicit
allowance for owner profits.

assumptions lead to the following conclusions:

The annual rate of direct subsidy per unit, not counting administrative costs or
losses of interest fromm below-market rates, would be $504 for a single-family
program and $516 for a multi-family program at a 3% interest rate. Hence
direct subsidies per unit are very similar for the two programs.

Direct subsidy costs are very sensitive to changes in interest rate. Fora single-
family program, the variation is from $772 per unit per year at 6% to $504 at
3% and $288 at zero interest. However, If losses in interest are counted as
costs, this sensitivity drops to zero.

Direct subsidy cosis are also very sensitive to changes in the income-composi-
tion of the groups served. Excluding families with incomes below $2,000 raises
the weighted average amount available per month for housing from $59.16 to
$94.88. This reduces the annual single-family subsidy at 3% interest from
$504 per unit to $75 -- a drop of 85%. However, it also excludes 52% of

the households with incomes under $6,000 living in substandard housing.

Total costs at various scales of operation (excluding administration) are similar
for both single-family and multi-family programs. Hence they can both be
illustrated by the following table for single-family programs, assuming a 3%
interest rate:

Annual Direct Required Initial Loan
Subsidy Charges Fund Allocations
Number of Housing Units ($ millions) ($ mil }ions)
5,000 $ 2.520 § 62.5
10,000 5.040 125.0
25,000 12.600 312.5
50,000 25.200 625.0

100,000 50.400 1,250.0


e. The above table is based upon proportional participation by all income groups
under $6,000 per year. Variations in total costs at these scales resulting from
changes in interest rates or income-group composition can be roughly estimated
from points (b) and (c) above.

The significance of the scale of home-ownership programs depends upon the foial
number of slum families living in substandard housing who would like fo become

a. In 1960, there were 6.9 million renter households living in central cities.
About 818,000 (12%) lived in substandard units; 508,000 of these had incomes
under $4,000. Another 992,000 (14%) lived in standard but crowded units;
390,000 of these had incomes under $4,000. Hence the potential central-
city "universe" consists of 1.8 million renters in substandard or crowded units,
of whom 898,000 had incomes under $4,000 in 1960. Of course, nowhere
near all of these households wish to become owners.

b. There were actually more renter households in substandard units outside central
cities than inside them in 1960: 1,923,000 vs. 818,000. However, except
for 205,000 located in the urban fringes of metropolitan areas, these house-
holds should perhaps not be considered as "slum residents."

The cost of home-ownership programs is similar to that of rent supplement programs,
counting only direct subsidy payments. The direct rent supplement subsidy averages
about $600 per unit per year, as compared to $504 per unit per year for sing!e-
family home ownership at 3% interest. However, if interest losses due to below-
market rates are counted, then another $268 per unit per year must be added (if

the market rate is considered to be 6%), This increases the per unit per year cost
of the home-ownership program to about 29% above that for the rent supplement
program, excluding administrative costs from both.

VI, Recommended Additional Research


Some of the concepts and quantified estimates set forth above have been based
upon admittedly inadequate or unreliable data. Therefore, we recommend that
additional research be undertaken before the programs described herein are given
final approval in concept or designed in detail.

Consequenily, reliable information about the following should be obtained:

a. Accurate estimates of total operating costs for multi-family housing to be
developed under any ownership program. The operating cost estimates and
contingency allowances used in the above calculations were supplied by
FHA. However, we believe they may be low, because operating costs
normally run 60% of total gross revenue, and not all funds available for
debt service are actually applied to debt service.

=| P=

The required attributes of home owners in s!ums. Probably they revolve around
steady employment, the availability of multiple family members some of whom
are home and can keep track of the property, reasonably good character record,

The specific urban areas classified as slum areas for purposes of these programs,
and certain data about them.

(1) | Number of dwelling uniis by type of structure; small multi-family, large
multi-family, and single family.

(2) | Number of households living therein and their major income, ethnic,
and family size characterisfics.

(3) Condition of structures.

The number of persons or households in these areas who have the required
characteristics for ownership, absolutely and as a percentage of the fotal.

Ways in which ownership programs can be tied into over-all strategies con-
ceming low-income housing and the amelioration of ghettos so that they do
not merely perpetuate slums by "locking in" the new owners of old buildings.

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