A Closer Look at Affordable Housing

Last Updated: March 5, 2023By

By Marc Frenkiel

Affordable housing refers to housing that costs less than 30% of a household’s income. Harvard University and Habitat for Humanity’s 2022 State of the Nation’s Housing report shows 30% of all U.S. households in 2020 had rent or mortgage payments exceeding 30% of their household income —a 1.5% increase from the year prior. The research also shows that more than 1 in 7 households paid over half of their income on housing in 2020. With home prices and rents rising even more significantly from 2021 to 2022, housing unaffordability has undoubtedly worsened in the past two years since the report was written.

Why is housing affordability important?

It may seem obvious why housing affordability is important on an individual level. Paying 30% or more of one’s income on housing doesn’t leave much left over to pay for additional expenses, which are growing costlier. The U.S Department of Health and Human Services Social Determinants of Health (SDOH) Literature Summaries include a section on housing quality that cites research drawing the connection between housing affordability and both psychological and physical health. For example, low-income families may be more likely to live in older homes that may be under-insulated, lack air conditioning, and cost more to heat, leaving homes too hot or too cold, which has negative health consequences.

But going beyond the individual, a lack of affordable housing has ramifications for entire communities. Unaffordable housing pushes away vital members of the community like teachers, police officers, and social workers, as well as tradespeople — the backbone of society. Businesses located in these high cost of living areas may find themselves at a competitive disadvantage due to the higher wages required to attract and retain team members. 

Why is there an affordability crisis?

Years of underbuilding following the Great Financial Crisis of 2008 have led to a shortage of affordable homes for sale or rent. This shortage was worsened by the pandemic, as more millennials than expected formed new households, baby boomers stayed put and did not downsize as previous generations have, and new construction failed to keep up with housing demand. According to a New York Times report citing U.S. Census and Department of Housing and Urban Development (HUD) data, the U.S. now has a deficit of 3.8 million homes. Part of the challenge lies in the fact that most new homes and rentals are being priced at the upper end of the market due to the current economics of construction. A different New York Times article explains:

“The affordable end of the market has been squeezed from every side. Land costs have risen steeply in booming parts of the country. Construction materials and government fees have become more expensive. And communities nationwide are far more prescriptive today than decades ago about what housing should look like and how big it must be. Some ban vinyl siding. Others require two-car garages. Nearly all make it difficult to build the kind of home that could sell for $200,000 today.”

The solution: Affordable Housing Programs

Housing affordability has been an issue for a very long time, and was first addressed by the government with the Housing Act of 1937. Since then, several important programs have emerged. Today, Affordable Housing programs administered by government agencies are an important part of the solution to the nation’s affordable housing challenges. 

Low Income Housing Tax Credits (LIHTC)

Created with the Tax Reform Act of 1986, the LIHTC program may be the most important resource for creating affordable housing in the United States. Low Income Housing Tax Credits come in two forms:  a 9% tax credit to incentivize new development and a 4% tax credit for the rehabilitation and preservation of existing properties. According to the National Housing Preservation Database, LIHTCs have helped create about 2.5 million rental units.

Section 8

Commonly known as Section 8, after the Section 8 amendment to the Housing Act of 1937, this HUD program is “the federal government’s major program for assisting very low-income families, the elderly, and persons with disabilities to afford decent, safe, and sanitary housing in the private market.” There are two types of section 8 assistance programs:

Housing Choice Vouchers (HCV)

The HCV program began in 1974 and provides targeted assistance to very low-income households. Renters spend 30% of their adjusted monthly income on rent, and the balance is covered through a subsidy attached to the renter, not the unit. This means that a renter who has a Housing Choice Voucher may move to another location and still receive assistance. Vouchers are awarded by local housing authorities to qualified applicants and can be used at any rental property that accepts Section 8 Vouchers.

Project-Based Rental Assistance (PBRA)

In the Project-Based Rental Assistance (PBRA) program, the subsidy is attached to the property, not the person. If the recipient of PBRA moves, the voucher can’t be transferred. Similar to the HCV program, the resident pays 30% of their income and HUD will pay the difference between what the renter pays and the market rent on the unit directly to the property owner. 

Affordable housing trends 

While the December 2022 CPI report shows that housing costs rose .8% percent in December, Apartment List data shows that property owners charged .8% less on new leases signed in December than the preceding month.  According to Igor Popov, Chief Economist at Apartment List, new lease prices have been falling for the past four months, but that data will take a while to show up in the CPI estimates:

“They’re meant to represent what average Americans are paying for their rent, and average Americans don’t renew their leases every single month.” 

While falling shelter costs may be welcome news for American renters, they may not be falling enough to make a meaningful difference in overall affordability, the crux of which boils down to a supply and demand imbalance, and higher construction costs that make financing affordable housing more difficult, including properties leveraging LIHTCs.

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