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What's the Government's Role in Housing?

$120 billion says the government shouldn't be involved


What is the government's role in real estate, whether we're talking about mortgages, subsidized housing, flood insurance, etc.? Are elected officials properly equipped to solve real estate troubles, or should private enterprise take the lead? Has the government developed a "moral hazard" dilemma with its involvement? 

These questions most recently came to a head in Aspen and the town's affordable housing program. 

Aspen, like many high-cost areas, has developed extensive subsidized housing to enable workers in the area to live. As most would agree, it is important to have an affordable housing option available within any given community; but is the government's approach the best?


In many high-cost communities, the planning codes state that for any new development, there either needs to be some number of affordable units, or the developer can pay into a fund that will buy affordable units. These could be rentals, that are capped on the monthly rent, or properties that are sold below market-rate with a deed restriction.

I'm going to focus on the properties that are sold as "subsidized." These units have deed restrictions that limit the application per year. For instance, the property can only be initially sold for a price that a certain median income could afford, and the property can only appreciate by 2 percent to 5 percent annually.


Aspen created a poster child "moral hazard" problem. If you bought one of the properties and  you are capped on your appreciation, what incentive do you have to improve the property or even keep up basic maintenance. When you sell the property, your price is set, whether the property looks like a gem or garbage. Whether you did a kitchen remodel or have 1980s green appliances, you get the same price thanks to a waiting list for subsidized housing. As you can suspect, problems have arisen:

From the Aspen times: “She explained that she won the lottery for a deed-restricted unit at 150 Woody Creek but would have had to invest several hundred thousand dollars to make it habitable.”

APCHA Executive Director Mike Kosdrosky told the board that the system doesn't have any teeth when it comes to requiring homeowners to maintain their units.



As the example above illustrates, some government policies create and/or perpetuate "moral hazard." Another great example of this conundrum is flood insurance. The federal government subsidizes flood insurance. Whether your house has flooded five times or never, you pay the same amount. What incentive is there to prevent further flood damage?

 According to the Wall Street Journal: Brian Harmon had just finished spending over $300,000 to fix his home in Kingwood, Texas, when Hurricane Harvey sent floodwaters “completely over the roof.”

The six-bedroom house, which has an indoor swimming pool, sits along the San Jacinto River. It has flooded 22 times since 1979, making it one of the most flood-damaged properties in the country.

Between 1979 and 2015, government records show the federal flood insurance program paid out more than $1.8 million to rebuild the house—a property that Mr. Harmon figured was worth $600,000 to $800,000 before Harvey hit late last month.”


As taxpayers, we are all on the hook for the moral hazards created by the government. For instance, in the flood insurance case above, an extra $1.2 million was spent on a property that should have been bought and razed or at a minimum dropped from the program after 22 floods. Extrapolate this over thousands of similar properties and the amount of waste is staggering.

The government is great at creating moral hazard, but not so great at cleaning the mess created by it. 

For example, the flood insurance program hasn't been significantly reformed in 50 years, and as taxpayers, we continue to foot the bill to the tune of $120 billion just last year for various disasters. Multiple attempts have been made, but nothing meaningful has changed. Both political parties are guilty of perpetuating moral hazard through government programs.


There should be more privatization of programs, like flood insurance. The insurance industry already covers fires, earthquakes, tornadoes, etc., so they are already well-equipped to handle floods/hurricanes and various other hazards as well. Why does the federal government and taxpayers continue to subsidize moral hazard?

Until taxpayers wake up and demand change, the costs of moral hazards will continue to balloon. Although the solution to many moral hazard dilemmas is easy, the politics will be very difficult. Will our current elected officials have the will to eliminate moral hazard? I wouldn't hold your breath. When you get your tax bill, you can rest assured that a nice chunk of it is going to subsidize the homeowner who has flooded 22 times and will likely flood again in the upcoming storm season.

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Glen Weinberg

Glen Weinberg is and owner and the chief operating officer of Fairview Commercial Lending, a privately funded hard money lender based in Evergreen.  Fairview has been lending since 1975 He is recognized throughout the industry as a leader in hard money/non-traditional real estate financing on both residential and commercial transactions throughout Colorado. More information on Colorado hard money loans can be found at www.fairviewlending.com  Reach him at 303.459.6061 or glen@fairviewlending.com

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