What is a government’s role in real estate whether it is mortgages, subsidized housing, flood insurance, etc… Is government really the best equipped to solve various real estate issues or should private enterprise take the lead.  Has the government created a “moral hazard” dilemma with their involvement?  This is an interesting question with many moving parts that various government agencies struggle with.  This was most recently highlighted in Aspen of all places and their affordable/subsidized housing program.

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

Government’s role in housing

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

I’m going to focus on the properties that are sold for “subsidized housing”.  These units have a deed restriction that limits the appreciation per year.  For example, the property can only be initially sold for a price that a certain median income can afford, and the property can only appreciate by 2-5%/year max.

This sounds great, what’s the problem?

Aspen, like many communities, created a posterchild “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 do 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 as there is a waiting list to buy subsidized units.  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.

Governments are great at creating moral hazard in other areas

As the example above shows, in many cases 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 price.  What incentive is there to prevent future 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.”

Why is this important?

As taxpayers we are all on the hook for the moral hazards created by the government.  For example, 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 wasted is staggering.

The government is great at creating moral hazard, but terrible at cleaning up the mess created by it.  For example the flood insurance program hasn’t been significantly reformed in fifty years and as taxpayers we continue to foot the bill to the tune of $120 billion just last year for various disasters (Bloomberg).  Multiple attempts have been made but nothing meaningful has changed.  Both political parties are guilty of perpetuating moral hazard through government programs.

How do you eliminate moral hazard?

There should be more privatization of certain items 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 hazard will continue to balloon.  Although the solution to many moral hazard dilemmas is easy the political will is very difficult.   Will our current politicians have the will to eliminate moral hazard due to government policies?  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 with the upcoming storm season!

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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending.  Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in the Colorado Real Estate Journal, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.


Fairview is a hard money lender specializing in private money loans / non-bank real estate loans in Georgia, Colorado, Illinois, and Florida. They are recognized in the industry as the leader in hard money lending with no upfront fees or any other games. Learn more about Hard Money Lending through our free Hard Money Guide.  To get started on a loan all they need is their simple one page application (no upfront fees or other games).