City Journal

Randall K. Filer
Opening the Door to Low-Cost Housing
How city regulations prevent the homeless from finding housing they can afford
Summer 1992

Consider the dilemma of a homeless man trying to get off the streets of New York. Renting a vacant studio apartment might cost $300 in cash for the first month’s rent. Add a security deposit and an allowance for furniture and equipment, and it would cost nearly $1,000 to move from a city shelter to an apartment. Such a sum is beyond the means of someone with minimal skills and serious personal problems; so too, would be monthly rent payments. Is it surprising, then, that most homeless men opt for drugs or alcohol rather than work? With the chasm separating them from the bottom end of the housing market, they can hardly be blamed for giving up, for resigning themselves to a life of dependency on the street or in a shelter.

The housing market needs to be changed so that its lowest rung is no longer out of reach for the homeless. The existence of a “housing gap”—the failure of the market to provide housing of a type and quality that the very poor can afford—is not a natural or inevitable phenomenon. Indeed, until recently, the private market provided a range of housing options for individuals with very low incomes. But well-intentioned city regulations have made these forms of housing nearly extinct.

In New York City a century ago, even the most tenuous attachment to the labor market enabled a man to secure minimal housing. If he worked harder or acquired more skills, the resulting increase in his wages would immediately enable him to improve the conditions under which he lived. There was no unbridgeable gap between a man’s condition and the next level of comfort to which he could aspire; a man could see a direct link between acting in a socially responsible manner—staying sober and working—and the quality of his life.

In 1893, the U.S. Commissioner of Labor surveyed almost thirty thousand residents of New York’s slums. The median wage of men in these neighborhoods was $9.32 a week, while the wage at the tenth percentile was $5.30 a week (that is, the bottom 10 percent of slum-dwellers earned $5.30 or less). Even this modest income, however, was enough to rent housing.

At the very bottom of the market, as little as a nickel a night (about $1.60 in today’s terms) rented a few square feet of floor “flophouse” (a cavernous room space in a with walls, a ceiling, and with luck, heat). One step up, costing perhaps a dime a night ($3.20), were dormitories. Here a man could rent a cot with bedding in a large open room. Typically, he would also be provided with a locker for his personal belongings and a place to bathe and shave. Physical conditions in these dormitories superficially resembled those in today’s municipal shelters. There were, however, important differences. Because dormitories were privately owned businesses, operators could exclude disruptive individuals who did not conform to the rules governing behavior—in striking contrast with current shelters that have “few rules and almost none that [are] enforced,” in the words of the New York Times. These private dormitories had to attract willing customers in order to make a profit. If any establishment became known as dirty or unsafe, it would rapidly lose clients and be forced to improve. Thus, the quality of the shelter had to be the highest that could be provided for its price, or the establishment would go out of business. Again, this is in sharp contrast with today’s shelter system, in which quality is enforced only by a series of cumbersome and restrictive court suits. (For those who would not conform to the rules in the private dormitories or who could not come up with even 25 cents a week, there was also a “Municipal Lodging House, “which along with an annex on an East River pier, housed about 2,100 men each night in January 1915.)

What the dormitories did not provide was privacy. This was available for slightly more in “cage” hotels costing between 15 and 25 cents a night ($4.80 to $8.00 today). These facilities were large rooms subdivided by partial walls into cubicles that provided each man with his own space. Those with more resources (25 cents or more a night, or $8.00 and up today) could rent rooms in lodging houses. These equivalents to today’s Single Room Occupancy hotels (SROs) provided private rooms with varying amenities, depending on the price paid. As an alternative, those who were willing to give up independence in favor of meals had the option of renting rooms in boarding houses. Here rent might be $3.00 to $5.00 a week. The importance of these forms of housing can be seen in the 1893 survey, which indicated that 11.5 percent of the residents of New York’s slums were either boarders or lodgers.

Those who were ready to rent apartments could also find dwellings within their earning capacity. Remember that a man earning at the tenth percentile of the wage distribution of slum residents had an income of $5.30 a week. These earnings compare with a median rent of $1.40 a week for one-room and $1.85 a week for two-room apartments in these same neighborhoods.

Single men had a strong order of preference among these various alternatives: They preferred lodging and boarding houses to cages, cages to dormitories, dormitories to flops, and flops to the city’s shelters. Men could act on these preferences by moving as their incomes increased.

In today’s New York, however, many of these housing choices are no longer available. City regulations designed to eliminate these classes of housing have left the very poor only the choice between a shelter or the street.

Since the Wagner and Lindsay administrations of the mid-Sixties, it has been explicit city policy to eliminate SROs, which an aide to the mayor of New York in 1965, quoted in Newsweek, called “a vestigial remnant of a past generation.” SRO accommodations typically consisted of a room with shared toilet facilities, although in some cases the rooms had private sinks and toilets and shared kitchen facilities. All new housing, with the exception of conventional hotels, had to have minimum room sizes and full bath and kitchen facilities for the exclusive use of the unit. Moreover, city policy encouraged the conversion of existing SROs: The J-51 tax abatement program was instigated in 1955 specifically to reward the conversion of SRO units into Class A apartments. As a result of these policies, more than 85 percent of the 142,000 SRO hotel rooms that were available to New Yorkers in 1960 have disappeared.

Even as early as the turn of the century, New York had far more rules and regulations for operators of flophouses, cage hotels, lodging houses, and boarding houses than other cities. City inspectors enforced regulations specifying such things as how many residents there could be per sink, what materials bed linens must be made of, and how many cubic feet of space the room must contain for each resident.

These regulations arose from a noble desire to improve the lot of the poor. They were, however, counterproductive. The market for flophouses and cage hotels was highly competitive, with hundreds of providers. If conditions in any hotel were worse than those in other hotels charging the same price, such a hotel would find it difficult to attract customers. Similarly, any hotel with unusually good conditions would entice customers away from its rivals in the same price range. The reason for poor conditions was not that the providers were unregulated, but rather that it was impossible to improve the facilities without increasing costs beyond what the customers could or would pay. Enforcing regulations that mandate better-quality housing than a group of customers can afford will eliminate that class of housing, leaving consumers with a “choice” between better housing that is beyond their means and no housing at all.

Americans often remark on the apparently low number of homeless in European cities such as London. One reason is that in London several thousand men each night rent beds in “working men’s hostels.” Hostels are congregant, barracks-style housing. But unlike New York’s public shelters, they have far fewer people per room, and because they are privately run, they are able to enforce behavioral rules that make them much safer and more pleasant for their customers. New York City has a host of unused warehouses, industrial facilities, and even piers that could easily be adapted for use as hostels and cage hotels were it legal to do so.

Of course, the attempt to improve quality through regulation is not the only factor inhibiting the ability of the private market to provide a full range of housing options. A host of interest groups serve to prevent creative use of properties. Imagine the gauntlet of community review boards, zoning boards, inspection and licensing agencies, and other administrative bodies that would confront an entrepreneur seeking to open a cage hotel (or even a new SRO) in the city today. Construction codes, heavily influenced by unionized workers’ desire to protect their jobs by limiting technological progress, also take their toll. A series of easy reforms, however, could reinvigorate the lower end of the private housing market.

The most important thing the city can do to revive the low-cost segment of the private housing market is to stop standing in the way of those who would develop such housing. Excessive regulation of the housing market is a primary reason that rent-to-income ratios have risen so drastically in the slums of New York over the past century even though real incomes have risen substantially. A recent report by the City Council’s Legislative Advisory Commission on the Homeless isolated 35 pages of changes that would have to be made in New York City’s codes to allow for construction of SRO-like units for homeless adults. (For example, under current law, new SROs in many areas of the city would be required to provide off-street parking for their homeless tenants’ cars.) It is encouraging that after initial hostility, the Mayor’s office is now engaged in discussions on these suggestions.

But while the changes suggested by the City Council commission provide a good starting point, they do not go far enough in freeing the market. What is needed is an independent commission to perform a thorough audit of the city’s legal housing environment. This audit should focus not on obstacles to building a particular type of unit, but rather on what prevents any type of unit for which there is a demand from being built. Among the areas of interest to such a commission would be zoning regulations, building codes, and housing maintenance codes.

As a first step, the city should eliminate almost all limits on the location of housing. New York is one of the few cities that practices single-use rather than highest-use zoning. That is, a site zoned for one purpose cannot be used for another, even one less disruptive to the surrounding community. While there is an obvious rationale for zoning industry out of residential neighborhoods, there is no reason to question the location of any type of housing. Thus, anyone who wants to open any form of for-profit housing, from flophouse to luxury high-rise, should be able to do so anywhere he thinks he can cover his costs. Being market-driven, these decisions will avoid the politically charged atmosphere surrounding siting of city-built facilities.

In addition, the city should repeal all regulations, aside from minimal health and safety rules, mandating facilities and characteristics required of various types of housing. As we have seen, the effect of such rules is to increase the price of housing until it is out of the reach of the poorest would-be tenants.

One of the success stories among recent attempts to open housing for the poor and homeless was San Diego’s Baltic Inn, a profit-making SRO hotel built by private developers in 1987. The Baltics’ rooms are 10-by-12-feet with private toilet and cooking facilities and shared showers. The project almost wasn’t built because its developers had difficulty obtaining necessary building code waivers. Eventually, they were allowed waivers from rules that prohibit kitchens in small units and require toilet facilities to be in a separate room within the apartment. Additional waivers were granted from other rules such as fire codes that required more doors to the street than were consistent with security needs. Finally, the developers were allowed a greater density (smaller units and more units) than normally permitted.

Once the authorities allowed the Baltic to be built, it provided clear evidence that it is possible for the private market to respond to the housing needs of today’s poor. Even without changes in the materials provisions of the building codes (to enable more economical construction techniques), design and density code waivers enabled the operators of the Baltic to build 206 rooms for less than $15,000 each, including land costs, and then rent them for between $200 and $285 per month.

Could a similar facility succeed in New York? Although construction costs in the city today are about 30 percent higher than they were in San Diego in 1987, interest rates have fallen by between three and four percentage points. Thus, the cost of an SRO identical to the Baltic in New York today would be almost the same as what the Baltic actually cost. With conventional assumptions about operating costs and equity share in financing, and allowing $500,000 to buy the land, rental of the Baltic’s 206 units at the $240 a month welfare shelter allowance available to all impoverished, resourceless single men in New York would provide the owners a return on their investment of more than 10 percent. Thus, no public subsidy should be required to induce developers to undertake Baltic-like projects in New York.

If the city wanted to make such projects even more attractive, it could provide vacant land for a nominal price and lower real estate taxes through programs similar to the J-51 abatement that was responsible for the destruction of much of the city’s SRO stock in the first place. Further relaxation of building codes would not only lower the costs of new construction, but might also allow the renovation of existing structures for SRO use at even lower costs per unit.

As part of a streamlined regulatory environment, the city could speed up the license and permit process for those who want to build or operate various forms of housing. The fact that builders now have to pay “expediters” to walk paperwork through multiple city bureaucracies is unconscionable when the city is facing a housing shortage.

New York City and State need to revise their liability rules. Since SROs and cage hotels would generally be treated as temporary residences, they fall under the severe liability requirements of various innkeepers’ laws. In many instances, for example, these laws hold operators liable for injuries inflicted by guests on other guests. In today’s litigious environment, what rational person would want to run even the slightest risk that he would be held liable for the actions of an indigent, possibly disturbed, near-homeless man? An easy solution would be to exempt such establishments from civil liability, compensating victims for actual losses (but not punitive damages) from a public fund. Of course, innkeepers could still be held accountable for criminal negligence if they did not take reasonable security measures.

Finally, the city and state should recognize that measures designed to preserve certain housing options may actually reduce their availability. Although the city’s blanket prohibition on the conversion of SRO rooms to other uses was struck down by the U.S. Supreme Court in 1989, current regulations still pose obstacles to SRO conversion. While these laws may for a time slow down the rate of conversion, their principal effect is to discourage people from opening new SROs, lest they, too, be frozen in this use. What is needed is an explicit city policy that conversion—both to and from SRO status—will be allowed whenever it makes economic sense. It is important to realize that gentrification is not the cause of the decline in SRO rooms in the past thirty years. In a free market, replacement units for the poor would be built (or converted from other uses) in different neighborhoods. The problem in New York is that regulatory and other conditions prevent the creation of this replacement low-cost housing.

SRO rooms should, moreover, be eliminated from the city’s hotel rent control laws, which are even more stringent than those governing apartments. Such laws cannot significantly reduce rents charged for rooms. They can, however, make developers less likely to build them, since they would be unable to profit from changing market conditions.

Taken together, these and similar reforms would reinvigorate the supply of low-cost housing. Other steps can help ensure that demand matches this newly liberated supply side of the housing market. The Home Relief shelter allowance can be freed up to allow its use for alternative housing through direct-payment vouchers that do not require leases. Welfare recipients could also be permitted to use their rental allowances to sublet rooms in private dwellings.

Not only the desperately poor stand to benefit from the expansion of low-cost housing in New York City. Young adults just starting out would no longer be forced to live at home until they could afford traditional apartments. Students would no longer be deterred from attending college in New York by the prohibitive task of finding affordable housing. Thus, the city should resist the temptation to limit access to SROs and other forms of low-cost housing to the homeless or any other particular subpopulation.

If opening up the low end of the housing market would benefit the poorest New Yorkers, so would a similar expansion of the labor market. Given their personal histories, which often include drug abuse or mental illness, it is difficult to believe that a substantial number of the homeless lack only a job offer to make them productive, tax-paying citizens. Yet it is also clear that many are capable of and interested in certain types of work—witness the ease with which the Daily News was able to find street vendors during the recent strike at that paper. A major contributor to homelessness among single men is a significant reduction in the availability of casual day-labor jobs. Gone are the shape-up gangs on the docks and in the rail yards. Although the evidence strongly suggests that today’s homeless men will respond to day-labor jobs when they are available, most jobs require employees to commit to a long-term employment relationship. Many men with drug, alcohol, or mental problems may be able to show up for work most days, while finding it impossible to do so every day. With an opportunity for day work, such men would be able to earn most of their own keep. Faced with an insistence on “perfect” behavior, however, they may not be able to enter the labor market at all. Casual labor would have an even more important effect: These men would learn from experience that if they stay sober and work on a given day, they live better that night. They would finally have an incentive to behave in a more responsible manner and to take control of their own destiny.

It is unlikely that the private sector will recreate large numbers of casual employment opportunities in New York. Hence, this is an area where public action may be beneficial. The city currently spends about $40 a night to house and feed each homeless man in a congregate barracks shelter, plus expenses for medical, training, and counseling services. While the consent decrees agreed to by the city currently make it impossible to require work in return for shelter, there is nothing preventing the city from offering work to those who want it. What is needed is an incentive to accept such an offer.

One possibility is for the city to implement a multilevel shelter program. It could continue to provide shelters in which any man or woman could sleep with no conditions. These shelters would resemble the current barracks, with facilities as minimal as is required by common decency. Residents could then, however, be given the opportunity to “earn” an improvement in their conditions. If the private market (perhaps in combination with city construction or subsidies) had in place a system of cage and SRO hotels, the city could take the $40 it would spend anyway and make a proposition to each homeless man every morning in its shelters “You can stay here again tonight, just like last night—but if you stay sober today and work at whatever you are asked to do (perhaps a combination of several hours of labor and an additional few hours of literacy or job-training classes), at the end of the day we will give you $5 in cash, a chit worth $10 at any restaurant in the city (so that you can choose what and where you want to eat), and a housing chit sufficient to purchase private space in a cage-type hotel. You can make this choice again tomorrow. If you show up for work and classes every day for a week, we will give you a voucher to cover the following full week in an SRO where you can obtain a private room. Find a job and work at it for a set number of months (while paying for your SRO room out of your earnings) and complete an agreed-on educational program, and we will stake you to the security deposit and first month’s rent for a low-cost studio apartment as well as giving you an allowance to furnish that apartment.”

Thus, the city would provide a carefully constructed set of steps that a man could follow to work his way back into “normal” living. Since the hotels would be able to enforce strict behavioral rules (there would always be the city shelter for those who chose not to comply), men who took advantage of the offer would immediately begin to live better, both in physical and emotional terms. The plan would reinforce the idea that actions have consequences and that responsible actions can improve one’s life.

For the programs to work, the hotels used must be available to both participants in the program and the general public, so that a man does not lose his shelter if he finds a private-sector job. In addition, the jobs must be less desirable than those at the lowest rung of the private market, ensuring that participants have an incentive to leave them and search for employment, and so that those in the private sector do not have an incentive to become “homeless” in order to take advantage of the job opportunities. Thus, it is important that the job pay in chits rather than in cash and that the total value of a day’s work be less than a man could earn (after Social Security taxes) at a minimum-wage job. Many nonprofit shelters currently have a “ work for shelter” requirement without paying cash incomes or running afoul of minimum wage jobs. Surely such an idea could be extended to a voluntary city program.

It matters little what work is assigned to those accepting this offer. What matters is that a direct, immediate link exists between a man’s actions and the quality of his life—that he has an opportunity to better his condition. Repeated over and over, one day at a time, perhaps this lesson will be learned. Of course, if the work also produces visible results, it can improve the self-image of the programs participants while altering the attitude of the city’s taxpayers toward the homeless and programs designed to help them.

In one recent month, almost 7,900 homeless single individuals received emergency shelter from New York City and various nonprofit groups each night. Allowing for those who sleep in the streets, parks, subway stations, and other public places, somewhere between ten thousand and twenty thousand single individuals are homeless each night in the city.

Suppose that half these men accept the conditions of this work-for-shelter program. If the city administration were willing to stand up to the municipal unions—or if these unions would put the interest of the community above a selfish demand for more workers the city cannot afford—a work force of five thousand to ten thousand men could make a substantial contribution to public life, especially in these times of service cuts. Imagine crews of potential shelter residents voluntarily setting forth every morning to sweep, paint, and plant New York, guard its subway turnstiles against fare evaders, separate its garbage for recycling, and generally minister to its neglected public spaces. Imagine these men coming home every night knowing that they could sleep and eat, for that night at least, in places far better than a shelter, and knowing that they had made this possible by their own choices and actions. All this at no additional cost to the city.

It is clear that most homeless men are not “just like the rest of us except for some bad breaks.” Many have drug or alcohol problems or are mentally ill. Even so, the severity of the homeless crisis in New York has been exacerbated by the city’s policies. The striking fact is that a few simple changes in public policy would improve the living conditions of many homeless, giving them an opportunity to assume control of their destinies and permanently escape homelessness.

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