Affordable Housing 101

Affordable housing will come up a lot in policy conversations about climate and multifamily housing. This is a primer by Bomee to give you a bare minimum of background.

Article 25 (1) of the Universal Declaration of Human Rights recognizes access to decent housing as a human right. We housers often shorten it to: “housing is a human right.” Housing here doesn’t mean buildings, but rather a bundle of property rights. This might be most easily illustrated by wondering if a homeless shelter might be considered “housing.” Consider that in NYC, by law, everyone has a right to shelter, meaning the City is obligated to provide everyone who needs it an alternative to sleeping rough. So does that mean that in NYC, the law has declared that housing is a human right?

In the shelter system:

• There are shelters for single men, single women, families, and persons suffering from domestic violence, etc. The city agency tells you where there is a bed available to you.

• One may not come and go freely. There are times when you MUST be out of the building as well as times when you MUST be IN the building.

• You do not know when you will be moved from where you are staying to some other location.

• You may not have a secure space for your personal belongings. This is an oft-cited reason why chronically homeless persons refuse to go to shelter.

I think it’s quite clear that the NYC right to shelter is far from equivalent to a human right to housing. Just looking at what you don’t get with temporary shelter, we might say that “housing is a human right” means

1. As a HUMAN RIGHT, it must be universal and unconditional; and

2. Must entail at least

3. Personal choice of the housing situation

4. Security of tenure (i.e. no one can deprive you without some kind of due process)

5. Freedom to enjoy it as you will

It is important to keep in mind that there are many ways to deliver secure housing tenure and universal access, and that the current paradigms and programs are simply the toolkit of today. It is incumbent on advocates, policy makers, and practitioners to continue to improve the tools and to make good on the commitment.

Housing Affordability vs Affordable Housing

• Housing affordability refers to whether households can pay for housing without compromising their ability to pay for other necessities. The most commonly-used measure is “cost burden.”

• Affordable housing usually refers to government-subsidized, privately-built housing for low-income households. Public housing (government-built housing) is often not included in affordable housing.

Housing Affordability

Housing is affordable when the cost (e.g., rent or mortgage payment) is low enough that a household can pay it without compromising its ability to pay other essential costs, like health care, food, transportation, and clothing. The current standard measure of housing affordability, called “cost burden,” represents housing affordability as a ratio of two factors: the cost of housing and household income.[1] This measure originated in the Brooke Amendment of 1969, which set 25% of income as the threshold above which the cost of housing should be considered unaffordable to low-income families living in public housing. This threshold was raised in 1981 to 30%, and today, most housing programs set 30% of income[2] as the limit of affordability. Households are considered “cost burdened” when they pay 30% or more of their income on gross rents (rent plus utilities), and “severely cost-burdened” when they pay more than 50%.

Housing affordability depends on the interaction of many factors, including:

• demographics of the community (in-migration, rate of family formation, etc.)

• the rate of new construction[3]

• occupancy limits[4]

• vacancy rate in the housing market

• cost and availability of construction materials and labor

• wages (i.e., household income)

The US has implemented national affordable housing policies since the 1930s.[5] Even so, the US has experienced an on-going housing affordability crisis for decades. According to the Harvard Joint Center on Housing, “nearly half of all renter households (20.4 million) and a fifth of homeowner households (16.7 million) spent more than 30% of their incomes on housing in 2019. Of these 37.1 million households, 17.6 million spent more than 50% of their incomes on housing.”[6]

“Affordable Housing” = Government-subsidized Housing

Absent policies designed to encourage creation of housing affordable to low-income residents, housing markets do not produce many low-cost homes. The purpose of housing subsidy programs is to fill the gap between what housing costs in the free, unfettered market, and what low-income households are able to pay.

Subsidy programs ensure that the benefits accrue to those who need them by using income tests. The U.S. Housing Act of 1937 established the system of limits for subsidy eligibility based on Area Median Income (AMI).[8] The U.S. Department of Housing and Urban Development (HUD) annually generates tables of geography- and household size-based AMIs, the midpoint in the income range for a housing of a given size in each geographic area. For example, in New York City and its surrounding suburbs (see table below), the 2021 AMI of $119,300 for a 4-person household indicates that half of all 4-person families had incomes higher than $119,300 per year and half made less than that amount. Subsidy programs for rental housing often target households earning 60% AMI or less.

2021 AMI Table for the New York City Region[7]

Annual gross income by family size and percentage of area median income

Family Size	30% AMI	50% AMI	60% AMI	80% AMI	100% AMI
1	$25,080	$41,800	$50,160	$66,880	$83,600
2	$28,650	$47,750	$57,300	$76,400	$95,500
3	$32,220	$53,700	$64,440	$85,920	$107,400
4	$35,790	$59,650	$71,580	$95,440	$119,300
5	$38,670	$64,450	$77,340	$103,120	$128,900
6	$41,520	$69,200	$83,040	$110,720	$138,400
7	$44,400	$74,000	$88,800	$118,400	$148,000
8	$47,250	$78,750	$94,500	$126,000	$157,500

Because lower-income people and members of racialized communities are overrepresented among renters (vs. homeowners)[9] [10], discussions of housing for low-income people centers primarily on rental housing. Although many factors[11] influence the cost of rental housing, a fundamental reality that for any housing operator—governmental, non-profit, or for-profit—income received (whether rents paid by residents or subsidies) must be sufficient to pay for the on-going costs of building operation, maintenance, repair, and where applicable, the debt payments related to the financing of the building’s construction or rehabilitation.

Housing Subsidy Types

Various public policy strategies bridge the gap between prevailing rents and what low-income residents can afford to pay:

1. Capital subsidies,

2. Rent subsidies,

3. Local tax and zoning incentives,

4. Public ownership, and

5. Unsubsidized caps on rent increases.

Developers of privately-owned affordable housing, particularly in high-cost cities, use several programs together to meet their capital needs.

Capital subsidies

Capital subsidies are public funds for the cost of initial construction or rehabilitation, [12] lower the rent by lowering debt payments that must carried by the rental income, either by reducing the amount of loans that a developer must take on, or by providing debt with terms (rate, duration, etc.) unavailable from commercial lenders.

Currently, the most consequential federal capital subsidy is the Low-Income Housing Tax Credit (LIHTC) program, which was established in 1986.[13] A LIHTC award reduces the amount of debt that a developer must take on, by trading the federal tax credits for up-front equity capital. LIHTC-financed rental housing is affordable to families earning no more than 60% AMI[14] for a minimum of 15 years.[15] With 3.34 million privately-owned housing units placed in service between 1987 and 2019,[16] at an annual cost of about $11 billion (about $34 per person in the US), LIHTC is so heavily relied-upon to create low-cost housing that the term “affordable housing” typically refers to LIHTC housing.

The federal Weatherization Assistance Program (WAP) is also a targeted, income-qualified capital subsidy for low-income housing, despite being administered by the US Department of Energy. WAP funds may be used for energy-saving improvements to benefit residents at or below 200% poverty guidelines or 60% state median income.

Rental subsidies

Rental subsidies (vouchers) are annual payments funded by states or the federal government that directly fill the gap between market rent and 30% of household income. Rental subsidies are paid directly to a property owner and may be associated with a housing development (“project-based”) or awarded to a household (“portable” or “tenant-based”).

The largest voucher program, HUD’s Housing Choice Voucher (HCV) program, requires local administering agencies (typically public housing authorities) to determine the reasonable rents (“payment standards”) required in the local market for housing that meets HUD guidelines for quality housing. The amount of the voucher is the lesser of the payment standard minus 30% of household income, or the gross rent (rent plus utilities) minus 30% of household income. A portable voucher-holding household may rent a new unit with a rent higher than the payment standard if it does not pay more than 40% of its income on gross rent. HUD allows housing authorities to allocate up to 20% of its authorized HCV units to specific housing developments, and project-based voucher contracts are usually 20 years.[17]

Project-based vouchers may be combined with other types of housing subsidies to enable financing of privately-owned affordable housing. Project-based vouchers are considered desirable because lenders consider the income to be more secure and project-based rents are often higher than LIHTC rents, increasing the income available for underwriting bank financing.

Publicly-owned low-income housing

Public housing consists of rental homes owned by local governmental entities, public housing authorities (PHAs), under the rules of Section 9 of the Housing Act. According to HUD, currently some 3,300 public housing authorities across the nation own 1.2 million public housing units. Public housing, in theory if not in reality, is affordable to low-income people because the government pays a public housing operating subsidy (a rental subsidy unique to PHAs) to bridge the gap between the cost of operating public housing and the rents that residents can afford to pay, as well as annual capital grants to enable rehabilitation (a capital subsidy). Public housing unique in that it may not be sold or mortgaged without federal approval, and public housing residents enjoy tenancy rights specific to public housing. Obsolescence and disposition aside, public housing is affordable to low-income tenants in perpetuity.

Local property tax incentives inclusionary zoning

These fiscal and land-use tools serve to bridge the gap between the operating expenses of housing and low rent receipts by reducing the portion of the operating expense associated with property taxes, or, in the case of inclusionary zoning, by increasing the number of high revenue-generating units to offset the “lost” revenue associated with the low-income units.

Unsubsidized limits on rent increases

Also called rent stabilization and rent control, rent increase limits are typically established through state or municipal ordinances that set maximum allowable increases in rent for apartments in buildings meeting certain criteria. Currently, only 5 states (California, Maryland, New Jersey, New York, and Oregon) plus and Washington, DC have jurisdiction-wide or municipal rent caps.[18] Although rent controls may have started as rent ceilings, current programs typically seek to maintain affordability by limiting how fast rents can increase rather than by imposing rent caps per se. Because rent stabilization laws take away from property owners’ bundle of property rights, they are, unsurprisingly, unpopular, and industry groups like the National Multifamily Housing Council oppose them on the basis that they “exacerbate shortages, cause existing buildings to deteriorate and disproportionately benefit higher-income households.”[19] Evidence from empirical studies, however, paint a much more nuanced picture of benefits and costs. For example, numerous studies have found that rent stabilization meets its intent of keeping rents low for the stabilized units, and that residents of stabilized units extended housing stability through long tenure. Studies on the impact of rent stabilization on non-stabilized units is mixed.[20]

Subsidies to homeowners

Although the term “affordable housing” is most often associated with subsidized rental housing, various housing affordability programs exist for home ownership. These include 1. Mortgage subsidies to owners, 2. Mortgage market supports, 3. Capital grants for low-income ownership, and 4. Limited equity cooperatives.

1. Mortgage subsidies to homeowners directly or indirectly lower the cost of financing home purchases. The federal mortgage interest tax deduction is the nation’s single largest housing subsidy program, with a post-2017 annual cost of $30 billion (about $92 per person in the US). Available to households who itemize deductions, it is a regressive subsidy that overwhelmingly benefits high-income taxpayers.

2. Other mortage subsidies include interest rate buy-downs and down payment assistance programs—typically zero- or no-interest, sometimes forgivable, second mortgages—that reduce the amount that must be borrowed from the bank or helps meet the bank’s loan-to-value requirement. These programs are often targeted to first-time, low-income, and/or veteran homebuyers.

3. Mortgage market supports are credit enhancements provided to lenders to encourage them to lend. The US Government’s home mortgage securitizations, and federal mortgage insurance are two examples.

4. Capital grants for low-income home ownership enable local governments and non-profit organizations to acquire, renovate, and sell distressed single-family homes and small multifamily buildings to low-income homebuyers.

5. Limited equity cooperatives are a form of corporate ownership of multifamily developments that either limit the sale price or limit the amount of profit an owner can retain on a sale.

Glossary

Affordable housing: Government-subsidized, privately-built housing for low-income households. Often refers specifically to housing financed through the Low Income Housing Tax Credit (LIHTC) program.

Area Median Income (AMI): The midpoint of a region’s income distribution for families of different sizes. Used to determine eligibility for income-restricted affordable housing programs.

Capital subsidy: Public funds provided for the initial construction or rehabilitation costs of affordable housing. Lowers rents by reducing debt payments. Key examples are the Low Income Housing Tax Credit (LIHTC) and Weatherization Assistance Program (WAP).

Cost burdened: Paying over 30% of income on housing costs. Indicates unaffordable housing.

Extended use period: For LIHTC, years 15-30 of affordability requirements. Properties may exit affordability in this period by demonstrating hardship.

Housing affordability: Whether households can pay for housing without compromising ability to pay for other necessities. Key factors include household income, market rents, and rate of new construction.

Housing Choice Voucher (HCV): Rental subsidy program that pays landlords the difference between 30% of tenant income and market rent. Can be project-based or portable.

Inclusionary zoning: Land use policy that requires or incentives new developments to make a portion of units affordable to low-income residents. Helps offset revenue loss from below-market affordable units.

Low Income Housing Tax Credit (LIHTC): Federal tax credit program that trades credits for equity investment in affordable rental housing. Largest driver of affordable housing construction.

Public housing: Government-owned, operated, and subsidized rental housing for low-income tenants. Provides long-term affordability and tenancy rights.

Rent control/stabilization: Local policies that limit allowable rent increases on certain apartments, typically in older buildings. Seeks to maintain affordability over time rather than impose strict caps.

Rental subsidy: Direct government payments to landlords to cover the gap between market rents and what low-income tenants can afford (30% of income). Key examples are Housing Choice Vouchers and public housing operating funds.

Notes

1

It is important to note that this simple and arbitrary metric is limited in several aspects. It does not account for housing quality or location, for the variation in the cost of essential needs by household size or make-up, local cost of living, or the need for household savings. Scholars have proposed alternative measures for housing affordability. See, for example, Ben-Shahar, Danny and Gabriel, Stuart A. and Golan, Roni, Housing Affordability and Inequality: A Consumption-Adjusted Approach (October 6, 2017). Available at SSRN: https://ssrn.com/abstract=3050162 or http://dx.doi.org/10.2139/ssrn.3050162.

2

The income used, so called “adjusted income,” is the gross income with certain adjustments, including deductions for elderly and disabled families, medical costs exceeding 3% of income, and childcare costs.

3

According to the principle called “filtering,” as higher-income residents move to newly constructed buildings, the older, less desirable buildings become available to lower-income residents. This trend is complicated by the recent movement of higher income residents into the rental market.

4

Crowding is an effective, though potentially dangerous, strategy for lowering the cost of housing. Federal guidelines recommend 2 occupants per bedroom.

5

US Department of Housing and Urban Development, 2014. “Major Legislation on Housing and Urban Development Enacted Since 1932.” https://www.hud.gov/sites/documents/LEGS_CHRON_JUNE2014.PDF

6

Joint Center for Housing Studies of Harvard University, 2021. “The State of the nation’s housing 2021,” https://www.jchs.harvard.edu/sites/default/files/reports/files/Harvard_JCHS_State_Nations_Housing_2021.pdf

7

New York City Department of Housing Preservation and Development. “Affordable Housing: Area Median Income,” https://www1.nyc.gov/site/hpd/services-and-information/area-median-income.page.

8

Most other federal poverty programs use multiples of federal poverty guidelines instead. See https://aspe.hhs.gov/topics/poverty-economic-mobility/poverty-guidelines

9

Half of US households make less than $50,000 per year, but this group makes up 70% of renters.

10

Wendy Edelberg, Sara Estep, Stephanie Lu, and Emily Moss, 2021. “A Comparison of Renters and Homeowners in Recent Decades.” Brookings Institute. https://www.hamiltonproject.org/assets/files/A_Comparison_of_Renters_and_Homeowners.pdf

11

These include zoning and land use restrictions or lack of capital for building new housing; high cost of construction materials or construction labor; and local developer capacity and know-how.

12

Public housing capital funds can be thought of as paying 100% of these costs, thereby leaving zero debt. In this light, the modern-day problem is simply that the capital subsidy is inadequate, yet housing authorities are prohibited from taking on the private debt that would pay for the gap. The RAD program “fixes” this by allowing (formerly) public housing developments to take on private financing, by converting the Section 9 public housing contract to a Section 8 project-based voucher contract.

13

Created via the Tax Reform Act of 1986 and made permanent in the Omnibus Budget Reconciliation Act of 1993

14

A LIHTC project must provide 20% of units at or below 50% AMI, or 40% of units at or below 60% AMI. As of 2018, households up to 80% AMI can qualify for subsidized units if the average income of all subsidized units in the project is below 60% AMI.

15

LIHTC requires properties to remain affordable for 30 years, but tax credits may be “recaptured” if the property fails to meet its affordability requirements only during the first 15 years (the “compliance period”). During the second 15 years (the “extended use period”), states may stop monitoring for compliance, and developers are allowed to exit the program by demonstrating hardship. A 2012 HUD study found, however, that the vast majority of LIHTC properties remain affordable during the extended use period.

16

US Department of Housing and Urban Development, 2021 “Low-Income Housing Tax Credit (LIHTC): Property Level Data,” https://www.huduser.gov/portal/datasets/lihtc/property.html

17

US Department of Housing and Urban Development. “Project Based Vouchers,” https://www.hud.gov/program_offices/public_indian_housing/programs/hcv/project.

18

In contrast, 30 states have banned local governments from enacting rent control.

19

National Multifamily Housing Council. https://www.nmhc.org/industry-topics/affordable-housing/rent-control/

20

Prasanna Rajasekaran, Mark Treskon, and Solomon Greene, 2019. “Rent Control: What Does the Research Tell Us about the Effectiveness of Local Action?,” The Urban Institute. https://www.urban.org/sites/default/files/publication/99646/rent_control._what_does_the_research_tell_us_about_the_effectiveness_of_local_action_1.pdf