The National Association of Home Builders
The Commission on Affordable Housing and Health Facility Needs
for Seniors in the 21st Century
L. Earl Armiger
President, Orchard Development Corporation
On behalf of the 205,000 members of the National Association of Home Builders, thank you for this opportunity to testify before the Commission on Affordable Housing and Health Facility Needs for Seniors in the 21st Century.
My name is Earl Armiger and I am President of the Orchard Development Corporation. My company has developed over 4,500 residential units throughout the Southeast. In recent years, the company has development nearly 500 units of affordable apartment and active adult communities. I am the immediate past National Association of Home Builders (NAHB) area vice president for this area of the country and currently the Chairman of NAHB's Housing Credit Group and Vice Chairman of NAHB's Seniors Housing Council. I come before you today to talk about NAHB's recommendations to the Commission.
The Need for Affordable Seniors Housing is Apparent.
I am particularly pleased that the Commission is directly addressing the need for affordable seniors housing. Although America's seniors may on average be better off today than in the past, they are not a homogeneous group, and there is a substantial number at the bottom of the income scale in need of housing assistance. Even within the relatively well-off 55-to-64 age bracket, nearly 30 percent of the households have incomes under $20,000, and over one-third of the renters in this age group are spending 40 percent or more of their incomes on housing.1 Moreover, the situation becomes worse with advancing age. A 1996 study published by the U.S. Census Bureau showed that that the poverty rate climbs steadily after age 55, so that households over age 75 have higher poverty rates than all households except those under age 25, and higher near-poverty rates (incomes below 150 percent of the poverty threshold) than even the under 25 group.2 Also with advancing age comes higher health-care costs, further straining limited budgets. It's evident that many cost-burdened and impoverished adults are in need of living arrangements that put less strain on their limited resources.
Government Seniors Housing Programs Should be Strengthened.
The home building industry's capacity to meet the special needs of seniors is constrained by several weaknesses in government programs. Many seniors are forced to live in nursing homes because these are the only facilities mostly or fully covered by Medicaid. Under current rules, Medicare cannot be used to pay rent for congregate or assisted living communities and Medicaid can only be used to cover assisted living housing under a waiver program. Recipients of federal long-term care insurance (Medicare and Medicaid) should be allowed to use it to cover care provided in congregate and assisted living homes.
There also is difficulty in obtaining production and mortgage financing for projects intended for elderly residents. The secondary market has been slow to develop workable standards and forward-commitment features for assisted and congregate housing mortgage products. Although FHA has some products specifically intended for seniors housing, others have been eliminated or reduced. Funding for new construction of seniors housing has been slashed and existing programs bar the participation of for-profit firms.
Congress has approved the use of HUD's Section 8 rental assistance vouchers in assisted living facilities, but HUD has not taken action to set appropriate FMRs to support the additional costs associated with assisted living communities. In order to meet aging in place needs of residents, assisted living communities require additional common areas (e.g., lounges, activity areas, dining areas, communal kitchens). Providing these extra facilities significantly increases the construction and operating costs for this type of housing. The Fair Market Rents (FMR's) now issued by HUD, which are used to establish the maximum subsidy in Section 8 programs, do not accurately reflect the costs of assisted living facilities and, as a result, it is difficult or impossible for low-income elderly households to use Section 8 vouchers to obtain housing in assisted living communities.
The Commission should therefore seriously consider changes in the law that would permit HUD to raise Fair Market Rents for assisted living residents using Section 8 vouchers to reflect the additional building requirements and operating expenses associated with assisted living facilities.
The Low-Income Housing Tax Credit Should be Further Improved.
At present, the primary vehicle for producing affordable rental housing for seniors (as well as for other low-income households) in the U.S. is the Low Income Housing Tax Credit (LIHTC), often combined with other forms of subsidy such tax-exempt bond financing or the HOME Investment Partnership Program. Hence, making sure that the LIHTC program is working as efficiently as possible-by itself and in conjunction with other federal programs-should be a priority for any strategy that seeks to increase investment in affordable seniors housing.
The LIHTC is specifically designed to encourage participation of the private sector, and to provide states with flexibility in targeting special needs populations. Virtually all of the 50 states use the LIHTC to address elderly housing needs, although the share of tax credit apartments reserved for the elderly population varies widely. In 2000, three states (New Hampshire, Iowa, and Alaska) targeted more than two-thirds of their LIHTC to the elderly.3
The LIHTC is widely regarded as a successful program. In 14 years, it has created over a million housing units and received positive reviews by the GAO regarding program compliance. Nevertheless, a variety of additional measures could be taken that would further improve it. These fall into three categories: leveling the playing field for credit applications, reducing administrative complexity and facilitating the combination of the LIHTC with other programs, and changes in other federal tax policies.
Leveling the playing field: When the goal is to encourage private sector investment in seniors housing, it's important to encourage substantial participation from both the nonprofit and for-profit segments of the private sector. In 2000, state agencies allocated 32 percent of all credits to nonprofits. The average masks considerable differences among the states, however-14 allocated more than half of their credits to nonprofits.4 Anecdotal evidence suggests that housing officials in some states believe that they are only allowed to allocate credits to projects if a nonprofit organization is involved to some degree. Tax-credit allocation decisions should be made on the basis of how well the project satisfies the objectives of the state allocation agency regardless of the official tax status of the applicant. Nonprofits should compete on a level playing field for the credit allocation with tax-paying sponsors. It may even be advisable for the federal government to prohibit states from giving bonus points merely because a tax credit application involves a nonprofit organization.
Facilitating Joint Use of Federal Subsidies: At times, the LIHTC program does not provide a deep enough subsidy to effectively target seniors with low incomes. Even when it does, state HFAs and developers may desire to spread tax credit allocation dollars further by combining the LIHTC with other federal subsidies. The most common is tax-exempt bond financing, but Rural Housing Service loans, FHA insurance, project-based Section 8, Community Development Block Grants, HOPE VI, HOME, and the Federal Home Loan Bank system's Affordable Housing Program, among others, are also used. When projects must obtain funding from multiple sources they incur additional and unnecessary costs from timing delays to additional professional fees. The process can become so complicated that this in itself becomes a barrier to producing affordable seniors housing. A simple provision that would help would be to allow developers of affordable seniors housing to combine the 70 percent present value credit, rather than only the 30 percent, with certain other forms of federally-subsidized financing, such as tax-exempt bonds.
Related Federal Tax Policy: The LIHTCs effectiveness as a way to encourage construction of affordable seniors housing is limited because of the alternative minimum tax (AMT). Individuals and corporations who use LIHTCs to reduce their tax liability may be less willing to do so out of fear of becoming subject to the AMT. Some Wall Street firms, such as Dean Witter and Merrill Lynch, already have stopped providing investment opportunities for individuals because of the AMT issue. To maintain the investor appeal of LIHTCs, the law should be changed so that LIHTCs do not increase a taxpayer's AMT liability. This would keep the value of the credit the same to all taxpayers, making it saleable and worth more money to potential investors.
Better Data on Supply is Needed.
Although the demand for affordable seniors housing can be quantified through measures such as the ones cited above, investigating imbalances between the supply and demand has been difficult due to a lack of information about the supply of seniors housing.
Although some information about skilled nursing facilities has been available, that is only one part of what has been a rapidly evolving part of the housing industry. Most types of seniors housing have not been recognized or classified as such by the federal government. As a result, information on them has not been produced as part of the government's standard data collection procedures.
This has begun to change. The U.S. Census Bureau and the Department of Housing and Urban Development (HUD) are planning to include a sample of assisted living units in the American Housing Survey and have included seniors housing questions in the 2001 Residential Finance Survey. They have also introduced questions about seniors housing into the Survey of Market Absorption of New Apartments.
HUD and the Census Bureau should be applauded for being sensitive to the needs of the seniors housing industry and making these changes. But even after they are implemented, they will leave a gap in our knowledge about the construction of certain types of seniors housing units, especially those that are not in large (five or more unit) apartment buildings.
An ideal place to collect such information would be the Census Bureau's Survey of Construction (SOC), the instrument used to generate the government's official estimates of housing starts. The SOC could be modified to provide a measure of seniors housing starts. The Census Bureau's Manufacturing and Construction Division has said that seniors housing questions on the SOC are impractical, because the SOC is a survey of builders and builders may not know if a particular unit they are building is in a project intended for seniors or not. However, a builder needs to know if there is a legal restriction on whom the unit can be sold to. Therefore, at a minimum, a question about whether or not the housing unit is being built in an age-restricted community could be added to the single family SOC.
Also, the current process for determining which building permits are eligible for the SOC filters out facilities that include 24 hour skilled nursing care. In addition to screening out nursing homes, this procedure seems very likely to exclude assisted living facilities that offer the 24 hour availability of a skilled nurse. It also seems likely to exclude Continuing Care Retirement Communities (CCRCs) that provide nursing home services and other types of living arrangements under the same permit (i.e., separate wings of the same building), as is often the case. The screening criteria should be changed so that the universe of housing units eligible for the SOC includes facilities that only have a nurse on call for emergencies, while excluding facilities that provide full-time nursing care to all residents.
Meeting Demand: Barriers Should be Eliminated.
Demographics indicate the demand for seniors housing is increasing. Census Bureau projections show that more than 37 million Americans will pass their 55th birthday over the next decade. The private sector is capable of building a sufficient amount of housing to meet this demand, provided regulatory procedures do not create insurmountable barriers.
Governments regulate residential development and home building through a myriad of rules and regulations. Regulations, fees and pre-development requirements have been imposed that restrict the kinds of homes that can be built or the people destine to live in them. Procedures and processes have been complicated in order to reduce the number of homes that can be built or eliminate development by all but the deepest pockets who can endure the delays.
NAHB recognizes that some regulation is necessary to protect the environment and the safety and health of the home buyers. However, in many cases, the purposes of the regulations and procedures have either been lost or superceded by other concerns. Unnecessary restrictions on land development and other regulatory requirements and procedures can make it especially difficult to build housing for seniors who may have limited incomes or other requirements, such the need to be located within a reasonable distance from health care facilities.
Although many of the regulatory barriers to building affordable housing are imposed at the state and local level, these barriers will adversely impact current or future federal government programs intended to help the elderly meet their housing needs. Limited federal government resources will be able to help fewer elderly citizens when unnecessary restrictions, fees and delays drive up the cost of housing. Any proposal to increase the supply of affordable housing for seniors will be more effective if it provides incentives to local and state governments to remove regulations and procedures that unnecessarily increase the cost of housing.
Limiting the Mortgage Interest Deduction Would Be a Mistake.
It's important that new seniors housing programs, or the expansion of existing programs, be funded in ways that do not drive up the cost of housing or impose other burdens on seniors. In particular, such programs should not be funded by curtailment of the Mortgage Interest Deduction (MID).
Ever since the Internal Revenue Code was first introduced in 1913, it has given preferences to certain types of taxpayers and been used to encourage certain activities that were considered good public policy. Encouraging homeownership is almost universally considered good public policy. Several recent academic articles have verified the social benefits of homeownership-including children performing better in school, lower teen pregnancy rates, and greater participation in politics and elections.
Plans to eliminate or restrict the deduction have been studied in the past and many misconceptions and weaknesses in them have been identified. Although in dollar terms, the MID appears to go to the households with the highest incomes, this is primarily a result of the large share of tax revenue those households account for. Of the $947 billion in 2001 individual income tax liability estimated by the Joint Committee on Taxation, more than 70 percent is paid by households earning more than $100,000,5 yet these households receive only 63 percent of the MID benefit. Conversely, tax payers with incomes between $50,000 and $100,000 receive nearly a third of the benefit from the MID but pay about one-fifth of the taxes. In other words, the middle class is the greatest beneficiary of the MID because their share of the tax reduction is significantly more than their share of total individual income taxes.
As a fraction of the taxes paid, the MID is most important to households earning only $20,000 to $30,000 per year, and therefore seems most likely to be encouraging home ownership among households in that income bracket. The value (in terms of a reduction in taxes paid) of the MID for those households is nearly 13 percent of their tax liability, compared to only 3.5 percent for households with incomes over $200,000. This occurs primarily because housing costs in general represent a larger share of the budget for households with modest incomes.
Also, the amount of additional tax revenue that could be generated has been overestimated in the past, usually by a substantial amount. For instance, home buyers could react to a ceiling on the deduction by providing larger down payments or buying less expensive homes that would keep them under the ceiling. If the MID were limited in size, higher income home owners, who have other assets, can reduce their mortgage amounts and avoid the impact of the ceiling. Middle income home owners do not have sufficient assets to reduce borrowing and could be affected by the ceiling. In an article by a former and current HUD official, "Goring the Wrong Ox"6 , two researchers show that most higher income borrowers can avoid the effects of a ceiling on the MID by using other assets to pay down the mortgage to the deductible amount. Compounding the issue, the assets that are used to reduce mortgage debt would no longer earn interest and the owners of those assets would no longer pay taxes. Hence, expected tax revenues fall for this group rather than rise.
Another policy that was studied several years ago was whether or not to restrict the MID on to second homes. In 2001, citing the Joint Committee on Taxation, the Congressional Budget Office reported that eliminating the MID for second homes would increase tax revenue by $0.5 billion in 2002, and by a total of $7.8 billion over the 2002-2011 period.7
An NAHB study calls this into question, however.8 Using data from the Consumer Expenditure Survey (the survey conducted by the Bureau of Statistics and used primarily to determine the weights for the Consumer Price Index), NAHB showed that approximately 412,000 of the 2.8 million families owning vacation homes at that time were currently receiving a tax advantage for owning them. At first, eliminating the MID on second homes would appear to increase the taxes they pay by $0.58 billion. However, the average family benefiting from the MID on second homes owed only $44,000 of principal on the second home. That family also owned a first home valued at $222,000 with only $36,000 of principal still owed on its first mortgage-along with a balance of over $3,000 in checking accounts, over $10,000 in savings accounts, over $12,000 in other financial assets, and less than $2,000 in other outstanding debt. Obviously, a family with these assets could eliminate the debt on its vacation home if it wishes to do so. It could, in fact, avoid the effect of losing its second home deduction by transferring debt from its second home to its first. The study showed that nearly 95 percent of the expected increase in tax revenues could be lost this way.
Also, removing a tax advantage for homeownership disrupts housing markets and puts downward pressure on prices. Using its macroeconomic model, DRI estimated that housing prices would fall by 15 percent if the mortgage interest deduction were eliminated.9
The fact that changes in tax laws that drive up the cost of acquiring and maintaining property can have a very powerful depressing effect on real estate values is well established by the 1986 changes to the tax code. Falling real estate prices also effect financial institutions and investors. The savings and loan crisis of the late 1980s-which was clearly exacerbated by a reduction in the value of commercial real estate assets held by thrift institutions-is evidence of the chaos that can arise in financial markets when real estate prices fall.
Falling property values also adversely affect local governments, particularly those whose main source of revenue is the property tax. Some local jurisdictions could perhaps compensate for this by raising tax rates, but raising property tax rates can be difficult, and laws that prohibit local governments from raising rates above a certain threshold have become increasingly common. Falling tax revenue puts pressure on local governments to provide services. Among the items competing for a share of the shrinking budget would be supportive services for low-income and elderly citizens.
In terms of households, falling house prices particularly hurt those with high homeownership rates, who tend to have a substantial amount of wealth tied up in home equity, and who rely on their wealth more than earned income to support their daily lifestyles. In all three cases, that means older Americans would be hurt the worst.
Tabulation of the Census Bureau's American Housing Survey shows that the homeownership rate for households over age 55 is roughly 80 percent. Moreover, equity in the home tends to be high for these households-over 80 percent of homeowners age 65 or older have no mortgage. In 1997, these percentages translated into over 26 million senior (age 55 or older) homeowners, nearly 19 million of whom owned their home free and clear of debt.10
Evidence for the importance of home equity in senior household lifestyle comes from a 1996 study published by the U.S. Census Bureau.11 That study showed first of all, that the poverty rate-which is based only on a household's money income-is lowest for the 45-54 age bracket, after which it climbs steadily. Households over age 75 have higher poverty rates than all households except those under age 25, and higher near-poverty rates (incomes below 150 percent of the poverty threshold) than even the under 25 group.
Compared to the very young households, however, those over age 75 have substantially more wealth, and this is true regardless of income. If we look at the lowest income group in the figure (the first quintile), for example, we see that in 1991 median net worth for the over-75 was about $76,500, compared to only $5,500 for households under age 35. Home equity is an important source of wealth for the more elderly households, especially for those without much income. The $76,500 for the lowest-income 75-plus households is reduced to under $23,000 if home equity is excluded.
In summary, elderly households tend to have low incomes but substantial wealth. Moreover, home equity is an important component of wealth for elderly households, and becomes a very large share of wealth for low-income elderly households.
Hence, the negative impact of falling home prices and lost equity will fall disproportionately on seniors, particularly those with low incomes. Many of these households would likely have to finance moves to housing with assisted/supportive services through the sale of an existing home. The ability to make such a move would be limited if housing equity is reduced.
Simply stated, curtailment of the current MID would threaten the accumulated wealth of older Americans and their ability to finance their lives after retirement. Certainly, a proposal with such adverse consequences for America's seniors should be rejected by a commission charged with recommending ways to enhance that population's welfare.
Private Sector Activity is Important and Should be Voluntary.
It's important to establish an adequate supply of housing with features that accommodate seniors and their desires to age in place. The for-profit private sector needs to be an important part of this. However, private sector participation should be voluntary.
Changes to buildings codes or other mandates that drive up the cost of producing housing should be avoided, as they will be counterproductive. Such mandates reduce housing affordability, preventing people from moving into newer homes-homes that tend to be safer, healthier, and more accessible.
The home building industry has a track record of positive participation with seniors organizations to produce housing designed for use by people of all ages. For example, the Home Builders Association has worked with AARP Georgia and other organizations to develop a program that encourages the construction of homes with features such as zero-step entrances, ample passage through main floor doorways, and bedrooms and full bathrooms with sufficient maneuvering space located on the main floor. This is achieved through voluntary participation and small construction changes that don't adversely impact housing affordability. Moreover, the program is advertised as benefiting not only seniors, but also people pushing baby carriages or carrying in heavy packages, and adding to the overall comfort of the home and its potential resale value.
One of the hurdles to overcome is lack of information. Seniors housing is a rapidly evolving segment of the industry, where innovations occur faster than many can keep up with them. Hence, education is very important.
This is another area where the private sector is taking the lead. An Aging in Place Designation program has been initiated by the NAHB Remodelors Council, AARP, and NAHB Research Center in cooperation with NAHB's Seniors Housing Council.
The program has been tentatively named Certified Aging in Place Specialists (CAPS).
The NAHB-Research Center, with a grant from the Administration's Office on Aging, is writing the program's educational modules. They are being developed with the assistance of NAHB's Seniors Housing Council and Remodelors Council acting as content experts. The three one-day modules will cover the following areas: Working with Older Adults; Marketing Home Modifications to Older Adults; and Typical Home Modifications for Older Adults. The NAHB Research Center is currently piloting the first version of the modules.
Current estimates are that there will be about 150 people in the program by the end of the first year, and by the third year there will be near 1,000 graduates and participants in the program. These may be conservative estimates, because unlike other certification programs, there is already a demand for the program and it will be promoted by AARP.
This is another area where the home building industry is working successfully on a voluntary basis to meet the growing needs of the aging population.
Again, thank you for this opportunity to express the views of NAHB.
1 NAHB, Profile of the Active Adult Housing Market: Making Sense Out of the Census Bureau's 1997 American Housing Survey.
2 U.S. Bureau of the Census. Current Population Reports, Special Studies, P23-190, 65+ in the United States. U.S. Government Printing Office, Washington, DC, 1996.
3 National Council of State Housing Agencies, State HFA Factbook: 2000 NCSHA Annual Survey Results.
5 Estimates of Federal Tax Expenditures for Fiscal Years 2002-2006, Joint Committee on Taxation, January 2002.
6 Woodward, Susan E. and John C. Weicher, "Goring the Wrong Ox: A Defense of the Mortgage Interest Deduction", paper presented at the Spring Symposium of the National Tax Association, May 1989.
7 U.S. Congressional Budget Office, "Budget Options," http://www.cbo.gov/showdoc.cfm?index=2731&sequence=0&from=7, February 2001.
8 Emrath, Paul, "Vacation Homes" Housing Economics, March 1993: 9-12.
9 Brinner, Roger E., Mark Lasky and David Wyss, "Residential Construction Impacts of Flat Tax Legislation," DRI Analysis Prepared for the National Association of Realtors, May 1995.
10 NAHB, Profile of the Active Adult Housing Market.
11 U.S. Bureau of the Census. Current Population Reports, Special Studies, P23-190, 65+ in the United States. U.S. Government Printing Office, Washington, DC, 1996.