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Housing affordability: Catch me if you can

Has housing affordability improved? Yes and no.

May 1, 2005


Ron Wirtz Editor, fedgazette
Housing affordability: Catch me if you can

Call it housing's version of the irresistible force meeting the immovable object.

Rental illustrationIn the booming 1990s, housing affordability became one of the hottest policy topics around, thanks to steadily rising rents and home prices. Task forces were formed, policy manuals written and new industry practices created to try to ease the mounting crisis in housing affordability.

Then in 2001 came the irresistible force—low interest rates and the start of a four-year increase in new rental and single-family housing—that you'd think would have improved the affordable housing situation, at least temporarily.

We know, for example, that more people have become homeowners in the last three years, including a large number of moderate- and low-income households. An influx of new rental units and ebbing demand for them have led to high rental vacancy rates, which in turn has moderated (and in some cases, reversed) rent increases for the last couple of years. (For those who need convincing, see the cover article.)

So, housing affordability has improved, right? Let's just say yes and no, and redirect your attention first to what lies beneath that question.

Affordability is a fuzzy and complex notion. Even with similar incomes, two people might have very different notions of affordability for virtually everything—housing, cars, shoes, entertainment—you name it. The federal government introduced some concreteness to the housing debate by drawing a (somewhat arbitrary) line in the sand, saying that households that spend 30 percent of more of their gross income on housing are "cost-burdened," or paying more than the government believes the average household can afford.

A raft of public policy reports on affordable housing suggests the problem is getting worse, not better. A November 2004 report by the National Low Income Housing Coalition (NLIHC), for example, said that 47 percent of renters in the country's largest cities and counties paid 30 percent or more of their gross income toward rent in 2003. In Hennepin County, home to Minneapolis, half of all renters are cost-burdened. The report noted, "This is the strongest evidence yet that the rental housing affordability crisis in America is not on the mend. Indeed, it worsened in 2003."

Then there is a ready-pile of anecdotes to throw on for good measure. According to multiple public housing sources, waiting lists for housing assistance are getting longer, not shorter, stretching into years in some locations. In Cass County, N.D., home to Fargo, "I can tell you that in the 24 years that I have been here, my waiting list has never been longer. We peaked recently at 18-24 months long," said M. Blake Strehlow, executive director of the county housing authority, via e-mail.

A renter's problem

At its most basic level, housing affordability is a renter's problem. Because homeownership requires more wealth—for down payment, monthly mortgage, property taxes and upkeep—those who can't afford a home generally have lower-priced rental options to fall back on. But if you can't afford rent, you have to swallow hard and move in with friends or family—or worse, become homeless.

And in general, renters face greater difficulty than homeowners in affording the cost of housing. That's because affordability is directly related to income, and average renter income is significantly lower than that of homeowners. In Minnesota, for example, annual median income for homeowners in 2003 was almost $60,000—more than twice the median income for renters of $26,400, according to a January report on the "crisis" in U.S. housing by a consortium of nonprofits.

So it's not surprising that renters are more likely to spend 30 percent or more of their gross income on housing compared with homeowners. According to the NLIHC, 35 percent of all Minnesota renters paid 30 percent or more of their income toward rent in 2000 and—maybe stating the obvious—the vast majority of them were low-income earners. On the other side of the street, only 15 percent of Minnesota homeowners were cost-burdened despite significantly higher median housing costs (though one in four homeowners in the state have no mortgage at all).

Homeowners also accrue other financial benefits that renters do not—federal tax deductions on mortgage interest, and equity built through mortgage payments as well as appreciation—that help pay back some of the monthly costs of owning a home.

Even within rental markets, the affordability matter is not very straightforward, complicated by the fact that the measuring stick—30 percent of gross income on housing—doesn't change, while most everything around it does. This means that important and widely overlooked elements tend not to be factored into affordability calculations. For example:

  • A surge of first-time home buyers (most of whom were renters) has left behind a smaller pool of renters. Because these renters-cum-homeowners have comparatively higher incomes, skimming them off the top leaves a renter population more concentrated with lower-income households, particularly as homeownership rates inch higher.

  • The average size and quality of apartment units have risen steadily while household size is going down. So as renter households get smaller and comparatively more concentrated in lower income brackets, renters as a group are living in larger, higher-quality (and thus, more costly) rental units.

  • Rental assistance in many forms is available from federal, state and local governments as well as nonprofits. But rarely are housing subsidies and other cash or cash-like assistance included in affordability calculations or trends. This skews the real gap in housing affordability and hinders an accurate assessment of the effect that existing programs have in combating affordability problems.

None of this suggests that concern over rental affordability is necessarily misplaced: the point is that affordability is an obtuse, moving target, and tracking affordability demands that an inordinate number of factors be taken into account and adjusted over time. That's how affordability can appear to be worsening despite contrary evidence like soft rental markets over the last several years.

First-timers getting creamed

It might not be immediately obvious that a strong push for homeownership can affect renter affordability. But it does.

Low interest rates since 2001 have led to a flood of new home buyers, most of whom are renters. Property managers and other industry experts from across the district—in the Twin Cities; Fargo, N.D.; Rapid City, S.D.; and Missoula, Mont., to name a few—reported seeing significant numbers of renters become homeowners. In Minnesota, four of every 10 home buyers were first-timers, and 75 percent of first-timers were renters prior to the home purchase (the remainder live with parents, relatives or friends), according to a 2003 survey by the National Association of Realtors. Even among those 2003 buyers who were not first-timers, 16 percent had been renting immediately before their home purchase.

This group represents the rental cream in terms of income. Median income for first-time home buyers in Minnesota was $58,000 in 2003, according to NAB—more than twice the median income for all Minnesota renters.

Every year a certain percentage of renters turn into new homeowners and are replaced by new renters—young adults moving out of their parents' house, divorcees moving from a home to an apartment and the like. But the last three years have been unprecedented in terms of first-time buyers, pushing homeownership rates to all-time highs nearing 70 percent. Everyone cheers the increase in homeownership—and for good reasons—but it has skimmed proportionally more high-income renters (who are much less likely to be cost-burdened) than usual from the general renting population, leaving it comparatively poorer on average. Voilà, the percentage of cost-burdened renters—like those in Hennepin County—increases almost by fiat.

A report by the National Multi Housing Council found that renter households earning at least $50,000 grew by 8 percent annually from 1997 to 2000—the fastest growth of any renter segment—and achieved a 20 percent share of the market. Since then, however, the door to that market has slammed shut. From 1999 to 2004, the number of renter households with incomes above $50,000 grew by one-tenth of a percent, while those below $20,000 grew by 3.5 percent, according to the NMHC. Monthly income for renter households from 2000 to 2003 declined by 4 percent in real terms, according to a report by the Joint Center for Housing Studies at Harvard University, the likely result of both recession-induced job loss and the migration of high-income renters to homeownership.

Movin' on up

When considering affordability patterns, one also needs to step inside an apartment, which has been following the path of single-family homes: bigger is better, and average quality is improving.

Median square footage for multifamily units built in the Midwest from 1999 to 2003 increased almost 10 percent to 1,125 square feet per unit. In 1978, for example, 41 percent of multifamily units built in the Midwest were under 800 square feet, according to U.S. Census figures. Fast-forward to 2003, and 800-square-footers made up just 6 percent of multifamily units, with most of that market share going to apartments over 1,200 square feet.

While size clearly matters in the market, so does quality, and apartments have been getting a makeover for the better part of a half-century. Many fundamental and mechanical improvements like central heating and better plumbing took place before 1990. Improvements since then have focused on what might once have been considered luxury items, but now are must-haves. Apartments continued to get larger in the 1990s, according the NMHC, but "much more striking was the higher quality of newly constructed apartments." Units built in the 1990s were much more likely to have two or more full baths, a garage, dishwasher, washer and dryer and central air. As a property manager in Fargo, N.D., attested to in a phone interview, "People really want everything in their unit."

But that quality is not factored into our notion of affordability—unless, of course, we expect people to pay the same rent for higher quality over time. In a 2002 study, Ron Feldman of the Minneapolis Fed pointed out that when quality improvements and inflation are considered, the adjusted rental price in the Twin Cities in 2000 "was virtually the same" as in 1990.

Ironically, as apartment size, quality and cost have increased, the average size of renter households is moving in the opposite direction. Average renter households in Minnesota have 1.99 occupants compared to a household size over three in the 1960s. According to U.S. Census figures, 47 percent of rental units were occupied by just one person in 2000; in 1960, that figure was just 26 percent. In North Dakota during this period, the rate jumped from 18 percent to 45 percent, much of the increase coming from a graying population of elderly singles who either have never been married or have lost a spouse.

Off-ledger income

If all this doesn't confuse the affordability issue enough, let's add one more ingredient: government assistance.

That assistance comes in many forms. It comes directly from programs like Housing Choice Vouchers, the largest part of the Section 8 federal housing program, which provided direct rent subsidies to about 2 million households in 2004 at a cost (including administration) of some $15 billion. Most of the vouchers go to extremely low-income households (defined as those earning 30 percent or less of area median income, or AMI). HCV requires that recipients pay 30 percent of their gross income toward the monthly rent of an eligible unit, and the voucher picks up the remainder.

In 2000, there were about 57,000 HCV recipient households in district states (including all of Wisconsin, but not the Upper Peninsula of Michigan), according to a January 2003 HUD report. Their average income was below $10,000 in each state, and the average monthly rent subsidy ranged from $247 in North Dakota to $351 in Minnesota, reflecting different market rental rates. But in all cases, rental subsidies represented an average of about 55 percent of total rent due. (What's happened since then in terms of voucher trends is difficult to say with certainty. HUD does not break down voucher figures regularly by state. Two data sources suggest there were about 70,000 vouchers in district states in 2004; much of that increase appears to be due to a shift away from so-called project- or building-based assistance, which is dwindling.)

Other assistance offers cash, or a cash-equivalent, to low-income households. For example, in district states, 321,000 low-income households received $700 million in food stamps last year. The Earned Income Tax Credit also supplements the earnings of low-income working households, particularly those with children. Households with two or more children are eligible for up to $4,300 in cash annually from the federal government, none of which is considered income in a reported sense; Minnesota and Wisconsin residents can receive still more from similar state-based programs. In district states, some 890,000 low-income working families claimed almost $1.1 billion in federal EITC in 2003, according to data from the Center on Budget and Policy Priorities.

Yet despite the fact that these and other programs have the very real effect of either increasing income or reducing out-of-pocket costs for housing, none of them are factored into official statistics on cost-burdened households, which are usually calculated from broad-based income and housing data from the U.S. Census.

That doesn't mean low-income renters are riding the gravy train to luxury, not by a long shot. Counting all assistance as income would hardly vanquish the affordability gap. The HCV program assists fewer than one in six cost-burdened households in the district. But it does mean that the real affordability gap is inflated to some unknown degree and obscures the utility of programs designed to alleviate hardship in the first place.

Indeed, even if you accept reports on the percentage of cost-burdened households at face value, there is only a tenuous grasp on how many such households apply for assistance and how many ultimately receive it. There are estimates, of course, but also enough disagreement to suggest no one knows for sure. According to a 2003 report on rental subsidies by the U.S. Census, 18 percent of renter households received rental subsidies of one form or another in 1999. A 2002 report by the NMHC, crunching data from the American Housing Survey (conducted by the U.S. Census), put the figure at 26 percent for the same year.

Guess how many

Growing waiting lists are often held up as a barometer for growing assistance needs and lagging affordability. In Fargo, the waiting list rose from 600 to 1,000 over the past three years. In Minot, N.D., "Currently, the waiting list is at an all-time high," according to a public housing official there. In Dakota County (Minn.), the Community Development Agency has a waiting list of 1,000 for its 400 units of workforce housing, and a "staggering" 1,900-name waiting list for 244 scattered-site public housing units, according to an agency source.

But waiting lists are not the same as actual need, at least by government definition. Said one North Dakota public housing official, "It's one thing to apply, and another to apply and be determined eligible." In Pierre, S.D., "about one in four who apply for assistance actually receives it," e-mailed John Stengle of the Pierre Housing and Redevelopment Commission.

The reasons households on waiting lists do not receive housing assistance are many, and complicated. About one in four applicants receive assistance at the Northwest Minnesota Multi-County Housing and Redevelopment Authority, which serves a seven-county corner of the state out of an office in Mentor. For every applicant who receives assistance, "the other three are either over income [eligibility guidelines] ... have moved to other areas or are unable to find housing within the federal guidelines established for rental assistance," according to executive director Lee Meier, via e-mail.

And despite long waiting lines, officials from a handful of public housing agencies said those receiving assistance are having much better luck of late finding appropriate housing. That's because soft rental markets have made landlords more willing to participate in various Section 8 programs.

Five years ago in the Twin Cities, with ultra-low vacancy rates among affordable apartments, "less than 40 percent (of voucher holders) were capable of finding an apartment," according to L. Peter Bast, an official with HUD's Minnesota state office. Today, he said, "it's about 99 percent. ... There has been a significant increase in the willingness (of landlords) to take that voucher because it guarantees them a tenant," and potentially a long-term one, Bast said.

Ditto in La Crosse, Wis. "There seems to be a saturation of rental properties, which is making for more competition and reduction of rents and/or a lot of special deals," said Pat Dienger, executive director of the La Crosse County Housing Authority, in an e-mail. Applicants are "being more selective, with reduced numbers of applicants renting an affordable apartment sight unseen just to get a place. It used to amaze me that applicants, in the past, wouldn't even ask to see the apartment. They would just fill out an application and put down a deposit."

In Brainerd, a high-growth region in central Minnesota, "[t]he rental market has definitely changed from the late '90s," according to Doug Grout, head of the Brainerd Housing and Redevelopment Authority, also via e-mail. "We have noticed that voucher households in our market are finding decent, available units with little effort. This is entirely due to the soft rental market, though our population continues to grow. Rental property owners and managers who wouldn't work with the voucher program before are now willing to work with us. Overall, good news for voucher households."

How long those conditions linger is anyone's guess. In part, it will depend on the broader economy and its influence on private demand for rental housing. Recipients of housing assistance also might be affected by policy changes proposed by the Bush administration that would change the structure and funding for some housing assistance programs, including the tenant-based HCV.

A little help here?

For very-low-income households, there is cause for concern because the supply of units affordable to these households is dwindling as substandard units get demolished, some units get fixed up and still others see rent increases over time in response to market demand. While that's good on one hand—few people yearn to live in bad housing, for example—replacing these units at a similar price point is difficult because of high land costs, local opposition to such developments and government regulations that impose high quality standards.

Katherine McFate of the Rockefeller Foundation noted at a 1999 New York Fed conference that "the poor pay more—too much—of their income for housing than they did in the past. The simple explanation for this is that we have regulated substandard housing out of existence-the result is that the poor have safer but more expensive housing, and less money available for other goods."

It's not so much that the market currently has no units affordable to low-income households. District states have between 1.01 to 1.68 units of affordable rental housing for every household with very low income (defined of those earning 50 percent or less of AMI), according to data from NLIHC. But many of these units are simply unavailable because higher-income households live in them. Once availability is added to the equation, the number drops by roughly half in district states—there are only two or three units available (depending on the state) for every four very-low-income households. Metro regions are often tighter still, and the availability problem gets worse as income goes down.

Chart: Average Number of Affordable and Available Housing Units per Very-Low-Income Household, 2000

Programs are available to preserve existing units and to subsidize the private development of new affordable units, the biggest of which is the growing Low Income Housing Tax Credit, which incurred an estimated tax expenditure of about $6 billion in 2003. From 1992 to 1994, the program subsidized 56,000 units a year nationwide. From 1999 to 2001, that average jumped to 97,000 units, according to a 2003 HUD report.

That has helped the affordable housing situation in general, but apparently not much at the lowest end, those making 30 percent of AMI. Here's why: LIHTC offers dollar-for-dollar tax credit over 10 years for those developments with 20 percent of units affordable to households earning 50 percent of AMI, or 40 percent of units affordable at 60 percent of AMI.

Not surprisingly, tax credits have clustered around units offering rents in the high end of that allowance because the subsidy can leverage more total units. As a result, the stock of units affordable for those earning between 51 percent and 65 percent of AMI rose by 7 percent from 1991 to 1999, according to 2001 testimony before a House committee by Kathryn Nelson of HUD's Office of Policy Development and Research. Conversely, the number of units affordable to those making less than 50 percent of AMI dropped by 1.3 million and by more than 900,000 units (14 percent) for those earning less than 30 percent of AMI.

"The worst shortages—and technically, in most locations, the only shortages—are of housing affordable to extremely low-income renters," Nelson testified.

Possibly exacerbating the problem for extremely low-income households is the fact that many private properties participating in project-based housing assistance (who hold HUD-subsidized mortgages and serve a large share of this population) will see their contracts expire in the next five to 10 years, at which point apartments can convert to market-rate rents.

There is considerable hand-wringing over the possible displacement of the poorest households, particularly if tenant-based vouchers are not funded to pick up the slack. Surprisingly, however, no research could be found that demonstrated whether this market-rate conversion was actually occurring. Several state officials confirmed a lack of data in this regard; Wisconsin is in the process of conducting a survey of property owners in the program to find out for itself.

Apartments: Half full or empty?

In some respects, it's a matter of whether you look at the rental market glass as half-full or half-empty. In the short term, higher vacancy rates have helped with general availability and kept a lid on rents. According to Bast, from the Minnesota HUD office, vacancy rates for affordable housing units run about 5 percent—still tight in many respects, but a vast improvement over the 1 percent vacancy rate a few years ago.

A Twin Cities rent survey for the fourth quarter of 2004 by GVA Marquette Advisors of Minneapolis showed some good and bad signs for low-end households. Over the previous year, rent went down slightly for one- and two-bedroom units, which also doesn't factor in rent concessions that have been widespread since late 2001. But rent on studio apartments increased 5 percent in the past year, and less expensive units in general are seeing lower vacancy rates, according to the GVA survey.

"I would have to say that anecdotally it's always tough for low-income renters," said Brent Wittenberg, GVA vice president.

In Missoula, Mont., "there is a lot more choice and affordability" for low-income renters, said Kathy Dutton, site manager at Council Groves Apartments, a 72-unit low-income complex that participates in the Section 8 project-based program, which means that they are under contract with (and subsidized by) HUD to offer affordable rents.

Over the last three years, the area "has been saturated with [rental] building," Dutton said. "It was an owner's market. That pendulum has shifted tremendously. I see it as a renter's market today." She said she knows of apartments that previously rented for $800 and are still sitting vacant despite rent slashed to $725. The reasons are obvious. "You go down the block, and you'll see five 'for rent' signs in a two-block area."

Dutton sits on various boards with managers of market-rate rental properties, and "just to hear how they are struggling" from a manager's perspective, she said, "I see it getting worse before it gets better—rents going down and more concessions."


Ron Wirtz
Editor, fedgazette

Ron Wirtz is a Minneapolis Fed regional outreach director. Ron tracks current business conditions, with a focus on employment and wages, construction, real estate, consumer spending, and tourism. In this role, he networks with businesses in the Bank’s six-state region and gives frequent speeches on economic conditions. Follow him on Twitter @RonWirtz.