The Region

When neighborhood housing programs succeed, everyone benefits

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Gary H. Stern - President, 1985-2009

Published June 1, 1997  |  June 1997 issue

The following remarks were made at the kickoff of the Twin Cities Neighborhood Housing Services 21st Century Campaign for Neighborhoods, in Minneapolis last November.

The longer I have been around the Twin Cities, the more I have come to appreciate organizations like Twin Cities Neighborhood Housing Services (TCNHS), its accomplishments and the spirit that underpins its programs. It is in this light that it is a privilege to have this opportunity to address you, and in thinking about what contribution I could make to this event, I decided to try to place the issues of home ownership in our central cities and sustainable community development in a broader context. I favor this approach, in part, because we in the Federal Reserve get "paid" to think in terms of the big picture, and also because intellectually I think it important to understand how and where various programs fit in a world of scarce resources and vigorous competition for those resources.

To start the discussion of where a program like TCNHS fits in the broad scheme of things, it is instructive to review the performance of the U.S. economy over the past several years. The national economy is, at this moment, well into its sixth consecutive year of economic expansion. In general over this period, employment has grown significantly, the unemployment rate has fallen, and economic conditions in most sectors of the economy and most regions of the country have improved demonstrably. Moreover, the period has been characterized by both modest inflation and modest interest rates.

This performance is remarkable from at least two perspectives. First, it comes virtually on the heels of the expansion of 1982-1990, a period of seven plus years of uninterrupted growth. Thus, at the national level, our economy has grown over 13 of the past 14 years, an undeniably positive performance and one unsurpassed in the postwar period, so far as I know.

The second noteworthy aspect of our economic record is that it has been superior to that of the other major industrial economies of Europe, Canada or Japan. You can see this by comparing rates of growth, unemployment rates and so forth. The notion that the U.S. economic system was in some way, shape or form flawed relative to those of Western Europe or elsewhere has been disproved by events, so that concerns that the United States would somehow be left behind by the 21st century seem seriously in error.

I have placed emphasis on economic growth to this point because it is growth that ultimately raises standards of living. The way to think about this issue is to recognize that a country's standard of living is essentially its output of goods and services divided by its population. For a given population, or given path of population over time, the faster output grows the more rapidly living standards rise.

While discussing the national economy, it is also worth emphasizing that there is no doubt that in recent years the persistence of modest inflation and modest long-term interest rates has been positive for home ownership, particularly among low- and moderate-income people. This is because of the prevailing, relatively reasonable magnitude of the carrying costs of a home in comparison with previous, high interest rate periods. There has also been a "democratization" of credit in recent years, which means that credit on reasonable terms is available to a wider range of potential borrowers. The view, held by some, that fighting inflation is somehow bad for low- and moderate-income citizens flies in the face of what it has done for home ownership opportunities, among other things.

These considerations also suggest a cautious response, at most, to the temptation to stimulate economic performance in the short run. Depending upon circumstances, and if not handled with a good deal of care, stimulus may add inadvertently to inflationary pressures and to increases in interest rates, thereby possibly compromising some of the objectives it was ostensibly designed to achieve.

But the relatively favorable long-run economic performance of our economy, accompanied by modest interest rates, nevertheless has revealed another economic truth that some of us on the "macro," big picture side of things originally had difficulty accepting: namely, that a rising tide apparently does not lift all boats, or at least does not lift them all equally. What do I mean by this rather cryptic phrasing? I mean that even a significantly improving national economy—or local economy, for that matter—does not address effectively all of our economic or economic-related problems. To be sure, it is difficult to imagine addressing a host of economic problems without sustained growth in the economy because, as I noted previously, growth is critical to improving standards of living. Without growth, we are reduced to competing for slices of a stagnant, unchanging economic "pie." But it is equally clear that growth in and of itself is not sufficient to solve many problems.

Now, I realize that there remains some controversy about just how well the economy has performed over the past six years or, indeed, over the past 15. Although this is a fascinating as well as a controversial topic, I am not going to try to resolve it this evening. I will say, though, that I think some of the concern about stagnation of living standards is exaggerated in that it squares neither with available data nor with reality. The issue has to do, in part, with how we measure prices, how we measure output and productivity, and the introduction of new and improved products and services over time.

What is clear and, I think, noncontroversial is that even as the national economy has improved and strengthened, some neighborhoods in our central cities have stagnated or deteriorated. These neighborhoods constitute in part the boats the rising tide hasn't lifted, or hasn't lifted sufficiently.

And this is precisely where TCNHS and related programs fit in. They represent a targeted and effective means of addressing some of the problems left unresolved by the favorable performance of the national economy. We are all aware of the ongoing needs in many of our communities, and hence of the need for programs targeted with precision on these needs.

The record of success of TCNHS is impressive and that, of course, is the bottom line. In the 20 years since the program began, $68.5 million of housing unit production has occurred in the Twin Cities as a consequence of TCNHS. This year alone, TCNHS estimates that it will assist in the production of 300 housing units. Further, it is estimated that over the past 31/2 years, under the auspices of the national Campaign for Homeownership, TCNHS organizations have helped 734 new, low- and moderate-income homeowners in our communities.

This record of achievement has and continues to require contributions from a multitude of sources. Thus, we find financial institutions, foundations, local businesses, community groups, local government and neighbors all part of the successful TCNHS strategy. One of the attributes of this partnership arrangement, of course, is that it permits each participant to leverage its contribution. It also means that programs are not overly reliant on just a few sources or institutions for success, an increasingly significant and positive characteristic as the fortunes of various enterprises wax and wane.

As you may know, I am an economist by predilection and training, and one of the things we economists are fond of emphasizing is incentives. A little reflection about incentives highlights the overarching significance of home ownership for the individual home buyer and for the community in which the buyer resides. I suspect that we all have been renters at one time or another, and experience has taught that incentives are substantially different when you are an owner. When you are an owner, you care a lot more about the property and are far more willing to deal with maintenance, repair and other responsibilities that add value. Similarly, I think it true that as an owner, you have the incentive and, therefore, are in fact more concerned about the quality of the neighborhood, the safety and attractiveness of its streets, the availability of services, the health of its schools and so on. I also suspect that the success of programs like those of TCNHS which enhance home ownership have associated positive externalities. What this jargon means, and it is very important, is that there are spillover benefits that transcend the homeowner and flow to the community at large in terms of security, stability and higher property values.

I have in these last few minutes perhaps belabored the obvious, emphasizing as I have incentives and the value and virtues of home ownership. But, of course, this was not my entire theme. What I have also tried to underscore this evening, and what I hope you will bear in mind as we look to the future of our community and of TCNHS and its programs, is that even if we are fortunate enough to enjoy a healthy economy, there are boats left behind that will benefit substantially from targeted TCNHS programs. And ultimately, because of our intimate involvement in the community, we are all beneficiaries of TCNHS' success.

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