Affordable Housing or housing that’s just affordable?

With the introduction of the $2 trillion American Jobs Plan this spring, including $213 billion to “produce, preserve, and retrofit more than 2 million affordable and sustainable places to live”, the topic of Affordable Housing has once again come to the forefront of the American discourse. Underlying what many in the industry have known for years, including “housing” in the largest infrastructure package in generations drives home the truth of “Housing as Infrastructure”. Just as we must provide safe and efficient ways to travel our country, we must also provide safe and abundant places for them to live, raise families, make memories, and grow old together.

Of course, while nearly everyone can agree on this basic premise, once we dig deeper into the details, questions start to arise. First and foremost, what does “Affordable Housing” mean anyway?

As a baseline, Affordable Housing (with a capital “A”) refers to housing with a rent (or sales price) capped at a number related to the expected income of the target residents. In the United States, the Department of Housing and Urban Development (HUD) establishes Area Median Incomes (or AMI), which determine the Affordable rent in any given market. For example, in NYC in 2021 HUD has set the AMI for a family of four at $119,300/year, and they expect this family to spend 30% of that income on their cost of housing. A three-bedroom at 100% AMI (i.e. market rent) rents for $2,987/month, while the same three-bedroom at 80% AMI ($95,440/year for the same family) rents at $2,273/month, and at 30% AMI ($35,790/year) rents for $722/month.

The gap between market rent and Affordable rent (ranging from about $700/month at 80% AMI to about $2,200/month at 30% AM), represents the ‘cost’ for Affordability that the government must somehow ‘buy back’ from the market. Whether discussing Public Housing, built, owned, and operated by federal, state, or local governments, housing vouchers, tax incentives, or any other number of tools used to close the gap, the basic equation does not change.

But before we get too lost in the weeds, let’s take a step back.

At a more basic level, I propose that affordable housing (or housing that’s just affordable) includes any unit that a tenant can afford to occupy, regardless of how that rent (or purchase price) gets paid. Under this metric, we could also consider $90m penthouses on Billionaire’s Row in 2016 as affordable, because the developers found a market and buyers who could shoulder the cost. On the flip side, when the housing bubble burst in 2008, we saw in a very graphic way that simply because you can occupy a home does not mean you can afford it. In fact, simply ‘leaving it up to the market’ brings with it significant risk which seems to undermine the Housing as Infrastructure argument.

At the end of the day, we have to produce units and get Americans into those units at a price they can carry, and the solution has to come from every bucket we can fill. This month we focus on some of the "supply-side" mechanisms that the government has at its disposal to promote housing production, while future articles look at "demand-side" and, what I like to call, "design-side" solutions that we use in the sector.

Public Housing

The most obvious, although perhaps outdated, model to provide Affordable Housing, has its roots in the New Deal and the Depression of the 1930s. Acting as the de facto developer, under this model the government acquires the land, builds the property, then owns and manages the units. While efficient at producing large numbers of units at scale, because the model inherently operates at a deficit (remember the affordability gap we discussed before?), the high cost drags on each step of the process.

Land on the market costs too much, so acquisition must come through other means, such as tax lien foreclosures or eminent domain. Community land banks or trusts, which typically rely on the former, have seen success around the country at producing scatter site housing, but the opportunistic nature of the transaction inherently limits the scalability of this model. On the other hand, large scale re-possession and razing of derelict inner-city neighborhoods gave birth to the largest of America’s public housing “projects”, but also left a legacy of racial displacement and segregation that we hope to have left in our past.

Construction, the most capital-intensive phase of these projects, requires tremendous political will and planning to raise enough revenue over many years and administer government contracts, which themselves incur additional costs.

Finally, managing properties which do not bring in enough rent to cover their costs breeds deferred maintenance and general deterioration, especially as almost the entire US public housing stock has more than 50 years of service under its belt.

Subsidy

During the Nixon Administration, the Federal government officially got itself out of the housing business and shifted its focus to supporting private and non-for-profit housing development. In a sense, this moment forms the foundation for our modern Affordable Housing ecosystem. Most significantly, the Housing and Community Development Act of 1974 introduced the Community Development Block Grant, which to this day provides lump sums of money to state and local governments for housing and community development work.

Coming into the capital stack as equity, grant funds reduce the amount of ‘skin in the game’ developers would otherwise have to come up with to make these deals work, which also reduces the expected returns and allows for tighter margins. They typically provide for “developers’ fees” and the model indirectly encourages developers to self-perform as contractors (or more accurately contractors to function as developers) to improve overall profit margins.

Because of the various layers (Federal, State, Local, etc.), the grants come with a significant amount of red-tape, and bureaucratic inefficiencies can grind this sector to a halt. The common refrain in New York City that “nothing is moving these days at HPD” may sound familiar to many readers here.  At the same time, because these funds come directly from the government, they can go to the most needed communities and demographics. When combined with low-interest government financing, the grants become powerful tools in building equitable communities.

Tax Credits

Introduced as part of the Tax Reform Act of 1986, the Low Income Housing Tax Credit, otherwise known as LIHTC (or “lie-tac”) currently accounts for 90% of all Affordable rental housing created in the United States today. Qualified projects generate tax-credits that developers sell through syndication, adding yet more equity to the capital stack. Although it fills a similar role as subsidy and comes with its own share of red tape, by generating capital through the private sector it operates at a much larger scale. Additionally, every dollar ‘raised’ goes directly to producing housing, as opposed to subsidy which has a much more circuitous route from tax dollars to bricks and mortar. Of course, engaging the private sector also makes it somewhat more difficult to target the funds.

As you can see, over the course of close to 100 years, the government has made a consistent effort to push the production of Affordable Housing on to the private sector, moving from actually producing the housing to providing public funds, to finally enabling the creation of tax-free equity entirely through the private sector. While this has resulting in an increased volume of construction, it has also fueled the transformation and, in many cases, gentrification of housing markets around the country. For this reason, we must continue to push for new ways to increase the capacity and relevance of these programs to provide housing for all the markets and demographics that need it so badly.

Enjoyed this article? Make sure to sign up for our monthly newsletter, "The Hyper Local", and receive insights into the NYC housing market, #zoninghacks to help you navigate the City codes, and more each month right to your email inbox.