ECONOMIC ANALYSIS OF THE NEW JERSEY HOUSING & JOBS INITIATIVE

Report to the Affordable Housing Network

Project Community
Center for Urban Policy Research

December 21, 1995

AFFORDABLE HOUSING

This part of the report concerns the first three elements of the Initiative: the Affordable Housing Development Fund, the Project-Based Rental Subsidy Program, and the Homeownership Fund. The need for these three components are described next, followed by a discussion of the impacts expected to be generated by each.

New Jersey has an affordable housing crisis which is characterized by high demand, low production, inability to house people on fixed incomes without subsidies, and barriers to home ownership for low-and moderate-income would-be buyers. The state estimates 85,000 to 100,000 affordable units are needed by 1999 due to high rents, overcrowding, and substandard conditions.⁴ The current supply is threatened by aging and neglect. One out of every two units is over thirty-five years old, and one of every four is more than fifty-five years old.⁵ 60,280 units are listed as substandard.⁶

Affordable housing production is insufficient. Between 1987 and 1992, only 13,281 units were developed, an average of 2,800 units per year.⁷ The successful state-run Neighborhood Preservation Balanced Housing Program (BHP), which provides construction subsidies, is too underfunded to fulfill its mandate.

Low-income levels combined with high housing costs make most housing unaffordable for New Jersey’s working poor and those on public assistance. Over half of these very low-income households (defined as having income below 30 percent of area median income), spend more than 50 percent of their income on rent.⁸ This burden can be illustrated by comparing the incomes of minimum wage workers and area rents. A minimum wage employee earns only $10,500 a year ($5.05 per hour), or 22 percent of the median. The average Fair Market Rent (FMR) established by HUD for a two-bedroom unit in New Jersey is $820 a month,⁹ almost equal to the minimum wage earner’s entire gross income. A full-time worker would need to earn at least $33,072 a year ($15.90 per hour) to afford this rent at 30 percent of income. For poor families on federal public assistance grants, such as Aid to Families with Dependent Children (AFDC), the housing situation is worse. In 1994, New Jersey was rated worst in the nation for "three-person shortfalls," the income gap between the level of AFDC provided to three-member households and the rent needed to afford a two-bedroom unit at FMR.¹⁰ Many minimum wage workers and public assistance recipients are forced to pay very high percentages of their incomes for housing, leaving little money for other necessities.

The availability of subsidized housing, such as federal Section 8 project-based and tenant-based rental assistance, is very limited. Just 13.5 percent of the state’s low- and moderate-income households live in HUD-assisted housing.¹¹ The New Jersey Department of Community Affairs (DCA) waiting list for Section 8 subsidy was 28,000 households as of 1994, a mere fraction of the tens of thousands of families on similar lists maintained by the 106 housing authorities in New Jersey.¹²

Without a project-based subsidy to reduce operating costs, even affordable units developed by community-based organizations cannot lower rents to serve the very poor. Most grants available for affordable housing, such as Balanced Housing, HOME, and CDBG, are used to offset construction costs. Grants to reduce operating expenses are hard to obtain. The experience from units built through the Balanced Housing Program has shown that it costs, on average, $300 a month plus another $100 a month for utilities to operate a unit, assuming there is no debt on the building. This rent is higher than someone on minimum wage or a fixed income can afford. Without some form of operating subsidy, even the lowest level rents are affordable to is only 40 percent of the median, which excludes the very poor.¹³

Ironically, those wait-listed AFDC and SSI cost-burdened households, which do not receive assistance through Section 8 and voucher programs, often wind up in Emergency Assistance placements, at greater public cost. Much money is spent on inadequate placements in hotel/shelters to house very low-income families who have become homeless. An average of 453 homeless families per month were placed in these facilities between October 1993 and September 1994, at a monthly cost of almost $700,000.¹⁴ State and local governments paid half the expense.

The high cost of housing in New Jersey, coupled with lagging incomes, has made the dream of attaining homeownership difficult for the state’s residents.¹⁵ The average price of a home in New Jersey in 1990 was $162,300, more than double the national average of $79,100 and almost three and one-half times the state median income.¹⁶ The "affordability gap" was even wider for Hispanic and Black families, which had incomes in 1990 of only two-thirds of the state median ($30,000 and $29,145 respectively). The median housing price was almost five and one-half times the median income for these minority families.¹⁷

The impacts generated by the $160 million Affordable Housing Development Fund on the state’s economy were calculated using the PC I-O input-output model.¹⁸ Based on 525 industries, this model calculated the economic multiplier effects this fund would have on jobs, state and local revenues, and overall business activity.¹⁹ Several assumptions were made in regards to calculating the fund’s effects and its overall expected impacts.

Since the fund would be administered in a way similar to the BHP, a survey was conducted with thirty-two developers who used BHP funding to determine how this fund would operate. It was assumed, based on the survey results, that 71% of the construction funding would be used for new construction and the remainder for rehabilitation of existing housing.

In addition, it was assumed that the fund’s expenditure would leverage a range of capital from outside sources depending upon whether the leveraging level, based on previous BHP experience, held or was reduced. If the fund’s usage follows the historical leveraging pattern of the BHP, the rate would be higher. In the past, the BHPs construction subsidies have averaged about $14,000 per unit for new construction and $23,000 for substantial rehabilitation. This generated about four dollars from other funding sources for each one dollar of BHP capital (1:4 ratio). Changes in regulations will allow the average BHP grant to rise to an average of $35,000 per unit.²⁰ The leveraging rate may not keep pace under the increased subsidy because of the finite nature of outside funding sources, such as foundations. It was assumed, then, that the leveraging rate could be reduced to $2.50 from other sources for every $1 of AHDF expenditure (1:2.5 ratio). The fund’s impacts therefore were calculated using both the lower ratio of 1:2.5 (assuming leveraging may fall) and at the higher rate of 1:4 (if the previous pattern is matched).

Lastly, an assumption was made regarding the production period to complete the first 4,500 housing units. Allowing for some normal lag time between issuance of the bond and start-up, it is expected that the units will be completed over a five year period, beginning with Year 3 of the fund. From Years 3 to 7 of the fund, 900 units are expected to be finished annually.

The Affordable Housing Development Fund’s impacts will be substantial: new jobs, new revenues to local and state government, and overall increased economic activity. Highlights of these impacts (assuming leveraging) are as follows and are further described in Table 1.²¹

• Between 6,000 and 9,500 jobs will be created.
• Personal income will increase by a range of $240 million to $390 million.
• The state will receive between $19.6 million and $31.4 million in one-time tax revenues.
• Localities will get between $20.4 million and $32.7 million in one-time tax revenues.
• Annual property tax revenues to the municipalities where the housing is constructed will be from $8 million to $12.8 million.
• The value-added impact to the state’s economy will be between nearly one-third and one-half billion dollars.

Table 1: Economic Impacts of the Affordable Housing Development Fund

Employment

The employment expected to be created by the AHDF will range from 5,955 jobs²³ at the lower leveraging ratio to 9,528 jobs if the leveraging follows its higher historical rate. The jobs created will last for the duration of the housing production period. The actual number of workers hired to fill these positions will depend upon how many contractors are used. The maximum employment period should occur in Years 3 - 5 of the fund when all phases of housing production are fully underway. Based on the historical pattern of projects receiving BHP funding, ninety-five percent of the workers on the construction projects are expected to be state residents. Higher percentages of state residents increase aggregate personal income and tax revenues generated.

Impacts from the employment will be felt across several industries and among various skill levels of the workforce. Construction will be the most affected industry, with an employment gain ranging from 2,413 to 3,861 jobs²⁴ (e.g., specialized construction trades positions, laborers and administrative support). From 2,800 to 4,440 other positions will be divided among three industries (employment ranges in parentheses): retail trade (974 to 1,558), services (917 to 1,468), and manufacturing (884 to 1,414). Other industries will gain a combined total ranging from 766 to 1,226 jobs.²⁵

Several occupations will particularly benefit from this fund, encompassing a scope of job skill levels (see Table 2). From 4,419 to 7,068 jobs, or more than two-thirds of the positions created, will be in four occupational categories. High-skilled positions in the precision production category (including the construction trades and other specialized mechanical work) will gain the most. Management positions will also be created. Following the precision production category will be medium- and low-skilled jobs among the operators, fabricators and laborers category, and administrative support and service areas. Some of the kinds of jobs to be created in these categories include:

• Over 1,700 to nearly 2,800 precision production, craft and repair workers, such as construction trades people, blue collar work supervisors, blasters, and mechanics, will be employed through projects financed by the Affordable Housing Development Fund.
• Nearly 1,200 to over 1,900 operators, fabricators, and laborers, such as vehicle operators, assemblers, material movers, and hand laborers, will be employed.
• Over 850 to almost 1,400 administrative support positions will be created for secretaries, general clerical workers, financial records processors and scheduling dispatchers and distribution workers, and the like.
• From 640 to over 1,000 executive, administrative and management positions will be created.

  Table 2: Jobs Created by Occupational Category

  Category	Leveraging1:2.5	Leveraging1:4	Public Expenditure
  Precision Production, Craft & Repair26	1723	2756	689
  Operators, Fabricators & Laborers	1198	1916	479
  Administrative Support	858	1372	343
  Executive, Administrative & Management	640	1024	256
  Service	563	900	225
  Marketing and Sales	553	884	221
  Professional Specialty	245	392	98
  Technicians and Related Support	140	224	56
  Agriculture, Forestry & Fishery	38	60	15
  Total (all occupations)	5955	9528	2382

  State and Local Tax Revenues

  The fund will generate new revenues for the state and affected municipalities. Some of the estimated tax revenue will accrue one-time and others will recur. The state will receive between $19.6 million and $31.4 million in total revenue over the duration of the housing production (one-time), mainly from personal and corporate income taxes on the job wages and company sales generated, respectively, and sales taxes on the goods that will be purchased (e.g. construction materials).

  Revenue will also flow to the municipalities. Over the housing construction period, between $20.4 million and $32.7 million in (one-time) local property tax revenues will result through increased personal income and company revenues from the jobs created by the construction activity.²⁷ The state and local revenues estimated above are related to the employment from the construction activity and will occur in proportion to the phasing-in of the jobs. For example, if 20 percent of the jobs are created by Year 3, then close to 20 percent of the revenues will be realized.

  The localities where the units are built will also benefit through new annual property tax revenues as a result of the increased ratables created by the value of the new and rehabbed housing units. Applying a 2% statewide equalization property tax rate on the $160 million fund and accounting for leveraging, produces between $8 million and $12.8 million in annual property tax revenues when all of the housing production is completed. The phase-in of these recurring taxes will be in proportion to the value of the housing built to date. For example, if as anticipated by Year 4, 40 percent of the housing is completed, then 40 percent of the expected annual property tax revenues will be generated.

  The effects of the Affordable Housing Development Fund per million dollars of public expenditure, assuming leveraging, are substantial (Table 3). A million dollars of investment with leveraging will create a range of thirty-seven to almost sixty new jobs, add between $122,600 and almost $200,000 in total state tax revenue, generate from $127,700 to over $200,000 in one-time local tax revenues, and add $50,000 to $80,000 annually in property taxes for municipalities where the units are built.

  Table 3: AHDF Effects Per Million Dollars of Expenditure

  Impacts	Leveraging 1:2.5	Leveraging 1:4	Public Expenditure
  Employment (jobs)	37.25	59.6	14.9
  Personal Income	$1,523,725	$2,437,960	$609,490
  State Taxes (one-time)	$122,609	$196,176	$49,044
  Local Taxes (one-time)	$127,723	$204,356	$51,089
  Local Taxes (annual)	$50,000	$80,000	$20,000
  Value-added to State Economy	$1,978,457	$3,165,532	$791,383

  The Affordable Housing Development Fund is needed to address the increasing demand for low-cost housing, step up and expand the state’s current production capacity, and make real gains in the existing supply. Failure to produce more affordable units will result in a shrinking of the affordable housing supply and a rise in the number of state residents who cannot afford safe and permanent shelter.

  Project-Based Rental Assistance Program

  The Project-Based Rental Assistance Program will address a second aspect of the affordable housing demand—the need to provide operating subsidy to house the state’s poorest families. It will supplement the housing production capacity developed by the Affordable Housing Development Fund. This program proposes to allocate $50 million to fund project-based subsidies for 900, or one-fifth, of the units to be developed by this initiative. The subsidies would last for 30 years and make the units affordable to households with incomes below 30 percent of the state median.

  Impacts

  This element of the initiative will have three important impacts: it will make housing affordable to the very poor, provide savings for the state and county governments, and result in additional social impacts. The program will enable the state’s very low-income people—those on minimum-wage incomes and lower to obtain housing which is affordable, safe, and decent. This will make the Housing and Jobs Initiative inclusive and reach the poorest of the state’s residents.

  Many of the very low-income people this program will reach are on public assistance and living in temporary housing paid for through tax dollars. The average expense in 1994 of placing a homeless family in a hotel/motel was $17,292 a year,²⁸ with half of this cost or $8,646 paid for by the state and county governments.²⁹ By comparison, the cost for the Project-Based Rental Assistance Program (excluding interest on bond financing) is only $1,852 per unit/per year.³⁰

  Reducing these emergency housing expenses by providing cost-effective permanent housing, can bring about considerable savings for the state and county governments. For each homeless, very low-income family, now in a hotel/motel placement, which will be housed through the Project-Based Rental Assistance Program, the state and county governments will save $6,794 per year in emergency assistance payments (after subtracting the bond costs).³¹ Targeting a portion of the units receiving subsidy for homeless public assistance recipients will multiply these savings. If 15% (135) of the subsidized units become occupied by homeless families now in motels, the savings to the state and municipal governments would be $917,190 a year.

  In addition to financial impacts, social impacts will be generated by the Project-Based Rental Assistance Program due to the locational stability the program encourages. Financial solvency will permit families to stay in their homes and stabilize their environment. Families can remain intact along with their social and care-giving networks, which are necessary for economic and emotional survival and which are so often broken by family separations in the shelter system. Housing security will also bring consistency to children’s schooling. In addition, employment success and career advancement can become a possibility for adults when housing cost is made bearable and long-term residency is assured.

  Homeownership Fund

  The Homeownership Fund will address a third component of the affordable housing need—removing financial barriers to homeownership for low, moderate and middle income would-be buyers. Through a combination of grants, loans, and other sources totaling $30 million, assistance would be given to help families pay for closing costs and/or downpayments. The Fund expects to serve nearly 4,300 households at an average of $7,000 in assistance.

  Impacts

  Several economic and social impacts will be created by the Homeownership Fund to benefit the state’s residents. Most significantly, this fund will coordinate with New Jersey's efforts to raise homeownership rates through the state's H-EASY 2000 housing plan objectives. This fund will complement existing and proposed state housing programs by giving financial assistance to help families which cannot afford to roll the cost of a downpayment and/or closing costs into a mortgage. More families will be able to qualify for mortgages which will widen the pool of prospective homebuyers. Through the Homeownership Fund, 4,300 homebuyers will receive downpayment and closing-cost assistance, placing these households in a position to take advantage of the state’s low-interest mortgages and other affordable mortgage products offered by banks through community reinvestment agreements. In addition, the Homeownership Fund does not have geographic limits and is open to all communities across the state. It will supplement the state’s proposed "Urban Homeownership Recovery Program" which will provide mortgage assistance to urban areas and the "Too-Good, But-It’s-True Mortgage Loan Program"³² which will target four cities in its initial phase.

  The Homeownership Fund’s impacts have the potential of aiding neighborhood regeneration. Property tax revenues will likely increase, as ratables and property values rise due to the investment and stability generated from homeownership. The specific dollar value of the Homeownership Fund’s impact is difficult to determine since the location and amount of mortgage dollars will vary as the fund is invested. The Homeownership Fund would bolster efforts to revitalize neighborhoods in distressed urban areas by making housing units in these communities more affordable. For example, tenants who live in substandard housing or pay rent in excess of the value of their housing may still wish to remain in the neighborhood because of family support structures and access to employment in the area. The Homeownership Fund could assist these local residents who want to buy a home but cannot afford it because they lack the money for the downpayment or closing costs. The fund would assist the marketing efforts of DCA and community-based organizations to find families who could take advantage of affordable housing units developed in their communities.

  Assistance from the Homeownership Fund would provide loans and grants making prospective homebuyers eligible by accessing the downpayment to take advantage of mortgage programs and reduced housing costs. The Homeownership Fund will increase the marketability of low-interest mortgage programs offered by DCA and private banks and at the same time, through its grants, will reduce the amount of downpayment and closing costs that might otherwise have to be financed by raising the amount of the mortgage.

  For each thousand dollars in grant assistance from the Homeownership Fund, the net savings in foregoing additional mortgage financing per household are considerable. Table 4 describes the level of savings achieved at two repayment interest rates: 5 percent, the mortgage rate proposed for DCA’s pilot "Too-Good-But-Its-True Mortgage Loan" Program, and 8 percent, an assumed rate in the private sector. Over a thirty-year period, the net savings to each household per one thousand dollars of assistance ranges from nearly one to over one-and-a-half times the original amount of the grant, depending on the interest rate. For each thousand dollars of grant assistance extended under the Homeownership Fund, a household would save from $933 at 5 percent interest to $1,642 at 8 percent interest in repayment financing costs. For example, if the Homeownership Fund provided a grant of $3,000 toward the downpayment, a household would save $2,800 at 5 percent interest in additional financing costs—an amount almost equal to the grant, and over $4,900 at 8 percent interest, or over one and a half times the grant. If the Homeownership Fund meets its goal of assisting 4,300 households, the savings in financing costs per thousand dollars of assistance would range from over $4 million at 5 percent interest to over $7 million at 8 percent interest.

  Table 4: Financing Savings per $1,000 of Homeownership Fund Assistance

  (a)Interest Rate	(b)Monthly repayment per $1,000 of a thirty-year loan33	(c)Total repayment costs over the life of the loan	(d)Net savings per $1,000 of grant assistance = (c) - $1,000	(e)Total savings for 4,300 households per $1,000 of grant assistance = (d) x 4,300
  5%	$5.37	$1,933	$933	$4,011,900
  8%	$7.34	$2,642	$1,642	$7,060,600

  
  

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  ⁴     New Jersey Department of Community Affairs. 1994. Comprehensive Housing Affordability Strategy (CHAS) for Fiscal Year 1994. pp. 1, 6.
  ⁵     Ibid, p.25.
  ⁶     Ibid, p. 34.
  ⁷     Burchell, et. al. 1992. COAH-Produced or COAH/Courts Influenced Affordable Housing Zoning, Construction and Rehabilitation 1987-1992. New Brunswick, NJ: Center for Urban Policy Research (August), p.8. In that same period, another 40,000 units were zoned or planned for rehabilitation in the future.
  ⁸     1994 CHAS, p. 61.
  ⁹     Federal Register Vol. 59, No. 187, September 28, 1994.
  ¹⁰     Low-Income Housing Information Service. 1995. Out of Reach.
  ¹¹     HUD User. 1993. Geographic Distribution of Federally Assisted Housing. As of 1993, only 147,668 assisted units existed in the state.
  ¹²     New Jersey Department of Community Affairs. 1994. Affordable Housing in New Jersey.
  ¹³     Rick Sauer, Affordable Housing Network. Spring 1995. personal interview.
  ¹⁴     LSNJ Report. January, 1995. pp. 5-8.
  ¹⁵     CHAS 1994. p.6.
  ¹⁶     Ibid. p. 14.
  ¹⁷     Ibid. p. 14.
  ¹⁸     Developed by the Regional Science Research Corporation.
  ¹⁹     The estimates generated by the model are derived from several data sources that are periodically updated. Employment data comes from the Census County Business Patterns; wage estimates come from the Bureau of Economic Analysis Regional Economic Information System; tax information comes from the state of New Jersey; and the technology matrix is based on data from the Census.
  ²⁰     27 N.J.R. 1509. Based on previous patterns of BHP allocations, it is estimated that new usage will result in an average of $29,000 for new construction and $41,000 for substantial rehabilitation.
  ²¹     Detailed results of the fund’s impact on industry are in Appendix A and on occupational categories in Appendix B.
  ²²     Public Expenditure is the fund’s allocation without leveraging.
  ²³     Jobs are defined as person-years of employment, i.e., one person employed for one year.
  ²⁴     Job ranges are assuming low and high leveraging levels.
  ²⁵     For a listing of other industries, see Appendix A.
  ²⁶     This category includes a portion of the construction related positions.
  ²⁷     The PC-IO model assumes that as workers' incomes increase they will trade-up to higher-value housing. This, in turn, will result in higher property tax ratables.
  ²⁸     New Jersey Department of Human Services. 1994. Analysis of Cases/Expenditures for Emergency Assistance, State Fiscal Year 1994.
  ²⁹     The other half of the expense was paid by the federal government.
  ³⁰     The per unit/per year cost is calculated as follows. $50 million of the Project-Based Rental Assistance Program divided by 900 units. This amount was then divided by the proposed duration of the subsidy of thirty years. (Does not include interest costs incurred from bond financing.)
  ³¹     Excludes interest on bond.
  ³²     The "Urban Homeownership Recovery Program" will target urban areas to increase homeownership by offering several financing incentives including low downpayments of as little as 3 percent and 100 percent financing. The “Too-Good-But-Its-True’ Mortgage Program” will provide thirty-year mortgages at 5 percent interest. The program will initially focus on Trenton, Camden, Elizabeth, and Asbury Park. (For more information, see H-EASY 2000, p. 7-8.)
  ³³     Monthly Interest Amortization Tables. 1984. Contemporary Books: Chicago.
  
  

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