Time to Demolish HUD?

by Patrick Brennan

Another one of the potential policy proposals overheard from Mitt Romney at a fundraiser this weekend was abolishing the Department of Housing and Urban Development. While the Romney campaign has denied that any of these were real proposals, and claimed that he was just discussing possible ideas, it’s worth considering the merits of Romney’s proposal. What would it mean to eliminate HUD?

HUD essentially has two key purposes: creating affordable-housing policies and providing subsidies (such as Section 8), and overseeing the federal mortgage-insurance business (through the Federal Housing Administration and Fannie and Freddie). But despite the fact that both of these functions are intended to make housing more affordable and more accessible, they actually distort the market, having the opposite effect, and, worse, as Josh Barro argues at Forbes, encourage more distortionary policies at the local level. He explains, “Withdrawing federal housing subsidies would force states and localities to cough up the money needed to offset their costly housing policies—or to relax housing regulations so that the market could drive home prices and rents down.”

Sometimes HUD just perpetuates or supports bad local policies, but it also attaches coercive powers to the billions in subsidies that it provides to local governments — it’s tough for local governments to say no to, say, a $20 million grant to build an affordable-housing project, but HUD often provides a range of pointless or downright harmful requirements for such projects. One of the nastier disputes was recently resolved in New York’s Westchester County, where HUD suggested that the county government wasn’t doing enough in its housing project to further the proper goals of affordable housing — their definition of which involves much more than, well, providing housing that’s affordable. #more#As I reported over the winter, HUD forced a number of ridiculous requests on Westchester:

. . . insisting that Westchester go “beyond the four corners of the settlement” in a few ways. Obama’s HUD seemed to be unhappy for two reasons: not enough spending, and not enough government control. First, HUD insisted that more than 50 percent of all homes constructed have three bedrooms, which would more than double the county’s costs from $51.6 million to about $100 million, a price unreasonable for a county with strained finances. Secondly, HUD has requested that the county sue towns to dismantle their zoning laws on, among other things, multifamily housing, despite the fact that the settlement doesn’t require it, and towns have been able to cooperate in the housing settlement without demolishing their own local laws.

The local government triumphed in court, but it’s a good example of how problematic it is to have the federal government involved in such a fundamentally local issue. Barro also explains that some of the social-services functions of HUD could easily be simplified or transferred:

Abolishing HUD need not mean abolishing every program within HUD. We would still need an Office of Fair Housing and Equal Opportunity; that could go to the Department of Justice. Housing support programs that are heavy on service delivery should go to HHS.

But housing programs that are basically just income support for the poor, particularly Section 8, should be abolished in favor of an expanded EITC. And housing subsidy programs for people with higher incomes should be abolished without substitution.

Thus, eliminating HUD could certainly save some of the department’s current $43.7 billion budget, and start withdrawing federal-government interference from one place where it’s done some good, but also lots of harm. As Barro puts it, “It’s good to hear that Romney is privately thinking along those lines.”

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