Government and city leaders speak about the need for affordable housing across the country. It is a broad term that has many expectations as well as workable solutions. In this article, we will cover ways to think about affordable housing, but also how government entities, private developers and not-for-profits help to create it.
Defining Affordable Housing
Loosely defined by federal standards, housing is affordable if a person pays no more than 30% of gross income toward housing. In recent years, finance experts say this definition needs revising. It comes from a time when public housing regulations in the U.S. capped rents at 25% (1969) and later to 30% of gross income (early 1980s) as a standard guideline for affordability.
However, a survey of more than 1,000 consumers by CardRate found that more than three-fourths of Americans are probably spending more than 31 percent of their gross income on housing and utilities. This data could be interpreted to mean that consumers need to allocate more of their budgets toward housing than the 30% guideline to meet market realities. It also likely demonstrates that housing is less affordable than it used to be relative to median U.S. incomes.
Calculating What is Affordable Housing
A home purchase has historically been a positive, wealth-building asset over time. Home values and prices have grown steadily, despite recessionary pressures. To be affordable to a median-income U.S. household, which was $80,610 in 2023, that household would need to spend about 43% of their monthly income on a median-priced mortgage in the U.S. (assuming a median home price of $420,400 at 7.5% interest with a 30-year fixed mortgage).
This percentage for home costs does not include other bills related to the home such as utilities or lawn care equipment. It also does not include a down payment or use of special homebuyer programs such as first-time homebuyer, VA mortgages or adjustable rate mortgages.
There are other variables, too, such as urban vs. rural housing costs or the size and age of homes on the market. People may pay less for a home that is older or located in a rural area, but most finance experts still recommend that homebuyers maintain a home improvement and maintenance reserve, even for new construction homes.
All of this is to say that home affordability is pushing some consumers toward multi-unit developments as a first-time purchase as well as requiring a longer period of rental housing before they purchase a home. They may also decide to rent from family members or receive a family loan or gift to help with a larger down payment.
If income is a perpetual barrier to home affordability, larger federal programs were designed to reduce the cost burden.
Federal Housing, Credits and Incentives
This brings us to another definition of affordable housing. Among not-for-profits or private developers that receive tax credits and incentives, the term affordable housing refers to housing with rent or price restrictions. An article in the Times-Herald of the San Francisco Bay Area noted the differences between housing types due to the programs or ordinances used to develop a property. Here are some of them:
Public housing – a government agency develops and owns the housing complex, and housing is rented out at below-market rates to support affordability. There are income restrictions to qualify for public housing. Local housing authorities control the units independent of the city and they must comply with federal law under the U.S. Department of Housing and Urban Development (HUD)…which typically finances them.
LIHTC funded housing – The Low-Income Housing Tax Credit program was created in 1986 to incentivize investment in affordable housing. Developers apply for tax credits, which they transfer to corporations in exchange for an investment in their building. The corporations get lower taxes, and the developer gets most of the development costs financed, but they still need gap financing from various local programs or lenders. Every year, there are more requests for tax credits than there is funding to go around.
Inclusionary housing – Developers creating new market-rate housing may be required to provide a certain percentage of affordable units in the building in certain inclusionary zoning areas.
Incentivized housing – Developers may be able to build higher density or taller buildings by including a portion of affordable units. In some cases, they can ignore local zoning laws by consistently renting out a percentage of these units at affordable rents.
If they understand the definitions of affordable housing, then developers, legislators and consumers can make better decisions regarding how and where affordable housing is made available for everyone.
For more information on accounting or compliance services for affordable housing development and management, talk to us at LvHJ.
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