Housing and Urban Development

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HUD (Housing and urban development) has various programs that are meant to help low income and first time buyers into their own homes. Sounds great, right? Too many people can’t afford a house, so a little wealth redistribution ought to help them out? Yet, in many cases the opposite has happened. Here's my story about some of the negative and unintended consequences of HUD.

The government is here to help

I lived in a small one bedroom Condo that I bought for $83K in 1990 in Southern California (Santa Ana/Tustin). By 1992 the housing market was going up, and the value climbed to about $100K. Woo hoo, Real Estate was a great investment, I was happy and in the black.

Then HUD came in and said, "we’re from the government and we’re here to help". They approved my condo complex for first time buyers and low income.

I figured more buyers would increase demand (and the value). The results were an influx of new neighbors, many I liked, and many I didn’t. Many could not have afforded a place of their own otherwise, but HUD got them in with loan guarantees, 0% down payment, and other things that encouraged them to make the jump and become home owners. But then the obvious consequences of getting too many buyer in "over their heads" happened:

  • Many had nothing invested and were scamming the system – they just got in the condos, and knew that it would take 6 – 18 months to get evicted for non-payment. This was free rent for deadbeats. They would not have done this had they had to put $10,000 of their own dollars in up front. But with only a couple thousand in closing costs, it was profitable to cheat the system, so they did.
  • Some not only scammed the system by not paying, but they even rented their units out (keeping the money) while they were defaulting on their loans, and the system was going through the long process of taking the units back.
  • Of course many HUD owners didn’t have much invested. So while they looked on paper like high "owner occupied" ratio, the caliber of tenant (and investment) made them behave like resters. Why should they care, it wasn’t their money? Their units and the complex quickly went down hill.
  • HUD also appealed to lower class and lower income people. While not all low income people are lazy, non-caring, flakes; there is certainly a trend that in poorer neighborhoods that you get more of them. Also being lower class tends to be louder, less considerate, drink beer on the stoops into the wee hours, and so on. The quiet tone of the complex went down to have a more ghetto tone.
  • Many older and higher caliber neighbors decided to move on, some sold, some had to rent. But the renter to owner ratio kept going up, as did empty units as people moved out or defaulted, and values went down further. Well, at least that meant more first timers could afford to buy. But everyone already in there, got burned.
  • There was a slight market downturn that compounded the bigger complex downturn, so the values started to drop. Once the HUD folks were a bit upside down, they defaulted and fled too (they had nothing to lose). Those of us who had spent far more to get in, couldn’t walk away so easily.
  • Banks didn’t care, they were insured through the Government (they got paid). HUD didn’t care, and sold all the reclaimed units at auction for whatever they could get that day (cash only deals). When Comps were going for $80K, HUD sold some trashed reclaimed condos at auction for $35-45K. Imagine what that does to everyone else’s comps, or salability? HUDs policy to dump reclaimed homes on a cash only auction, only rich landlords could buy. This turned the complex from 80% owner occupied to 20% in 5 years. So much for getting more low income people into first time homes.


Even if HUD had worked as designed, it would have helped the first few get in — but then that would have driven down availability and thus up costs for the rest, who were now more leveraged. So at best, it’s a short term help for a few (the early ins), and for most it just lowered availability, increased costs, and increased their leverage (and got them in before they were as ready/committed).

Of course HUD did help a few people get into properties they shouldn’t have been able to afford (and very few survived the lean times, and rode it out), so it wasn’t all bad. And they meant well. But they hurt far more low income and first time buyers in my complex than they ever helped.

They did help rich(er) people get units at way under fair value (with those cash only auctions on defaults). In fact they helped more "rich" than they helped poorer people get into homes in my complex (since most of the poorer people eventually walked).

The end results was that HUD achieved the exact opposite of what it was supposed to. Instead of artificially raising the purchase power of first time buyers, they slaughtered values in the complex, and lowered the quality of it – which let the slum-lords swoop in and buy for pennies on the dollar, and rent back to the same people.

It took me 10 years to get my money out; and while I finally made a profit, it was actually a loss when adjusted for inflation or opportunity costs of capital. The people who profited were the rich, the politicians, the bureaucrats in Banks and of course HUD. The buyers that got their homes through HUD, or the others in the complex, got screwed.


The reason some people are fans of HUD is they don't know better -- another case of The Broken Window Fallacy visible benefits and hidden costs/consequences. So those that don’t think too much, think it’s a net win. Those with experience can understand the harm being done.

When the housing crisis hit in 2007-2008, it was the same thing all over again, just on a national scale. The CRA and Fanny/Freddy, helped many people get into homes during the good times, it inflated the bubble bigger and faster than it would have naturally. And when it popped, we had many more people into homes that they couldn’t afford, with so little down that there was less consequences for walking: so they did that. Screwing everyone else.

That’s not to say the market wouldn’t have gone up without FHA/Fanny/Freddy/CRA — but there’s no reasonable doubt it would have gone up a little slower (and a little less), and with more people, more invested (higher down payment requirements, etc), that fewer would have walked away at all (or certainly as quickly). Thus a smaller bubble and a smaller correction and everyone would have been better off.

If FHA moves into your neighborhood to help, you might want to consider being the first ones to hit the exits. I’m sure not every neighborhood/area that is approved will be hit with their wrecking ball of financial aid, but do you really want to take that chance?

Unintended Consequences
Every action causes a reaction. Some reactions are pleasant surprises, many are negatives, some are counter productive (perverse) and make the problem worse. Since consequences matter more than intentions, we have a social obligation to plan for them (and avoid them). The phrase "unintended consequences" is used as either a wry warning against the hubristic belief that humans can control the world around them, or more often against a really bad implementation of not-so-smart ideas or implementations. Those that deny unintended consequences are denying science (reality).



📚 References

Written: 1998.09.05 Addendum: 2016.01.01