Hearing the words “federally assisted housing,” aka “affordable housing,” brings to mind for many the large, high-density public housing high-rises in cities across the U.S. What may not be well-known is that efforts to develop quality affordable housing in the United States began almost half a century earlier.
In the beginning
The first affordable housing development was the Garden Homes built in 1923 in Milwaukee. After this initial effort there were several attempts made through government initiatives to provide reasonably priced housing to low-income families. The first of these were the Housing Division of the Public Works Administration, a key part of the New Deal, and the Wagner-Steagall Act of 1937, which enabled the construction of 50,000 affordable units in 1939 alone.
The Housing and Development Act of 1965, which created the U.S. Department of Housing and Urban Development (HUD), elevated housing to the cabinet level. The creation of HUD allowed for public/private partnerships where housing subsidies were provided to residents in homes built through private construction. Resident-based subsidies still exist in today’s Housing Choice Voucher program, which assists 2.5 million households in meeting their housing costs.
Efforts under the Consolidated Farm and Rural Development Act of 1972 promoted the development of affordable housing in rural areas for both homeownership and multifamily rental properties. Known as rural development, or RD, the rental properties are typically small and located in less populated areas of the country. RD-funded rental properties total about 15,000, a much smaller number than the HUD-funded 22,000 properties and 1.4 million public housing units throughout the country.
Two new programs in one legislative act
The Housing and Community Development Act of 1974 created two programs that support affordable housing. First—and maybe best known—of these is the Section 8 program, under which rents are directly subsidized. This was the first program where rental subsidies were project-based. A family residing in a Section 8 property pays for rent with 30% of its income. Eligibility for these properties is restricted to individuals or families that are extremely low-income, i.e. earning 30% of median income.
The demand for project-based Section 8 apartments left the program open to abuse of the system. One area of abuse was in income reporting. In late 2009, HUD implemented and required use of the Enterprise Income Verification (EIV) system. This online system provides managers with a database of employment and income information for all residents in HUD-subsidized housing. Use of this system has increased the accuracy of subsidy payments, ensuring families are truly paying the correct amount, or their designated share, of rent.
The second program was the Community Development Block Grant (CDBG) fund. CDBG funds are provided to municipalities and can be allocated for a variety of projects related to economic development. Typically, about 25% of CDBG funds are utilized each year for housing-related development. Unfortunately, CDBG funding has steadily decreased over time. In 1979, $13 billion was allocated to CDBG funds. This amount has decreased to under $4 billion in the 2019 fiscal year.
Alternative approaches came with the move away from project-based developments. One was the HOME Investment Partnerships Program, which is similar to CDBG. However, unlike CDBG, there is a matching funds requirement. This means for each HOME dollar allocated, there is a matching liability created. This liability is satisfied through other contributions for affordable housing, such as cash, donations of land or other state or local funds. These other contributions stretch the HOME funds further, maximizing each dollar.
New legislation brings a notable shift
The Tax Reform Act of 1986 impacted affordable housing development significantly. This legislation created the Low Income Housing Tax Credit (LIHTC). While not a direct funding or subsidy program like Section 8, LIHTC has been the primary vehicle for affordable housing development since its inception. The premise of LIHTC is simple: Private equity is incentivized to develop housing through a dollar-for-dollar reduction in income tax liability. The credits are allocated by each state via a competitive process. Once awarded, credits are sold to equity investors. The cash generated then funds development costs. In exchange for the credits, the property is restricted as affordable for a minimum 30-year period.
LIHTC rents are based on area median income (AMI). Eligible individuals earn at or below 50% to 60% of AMI for the area where the property is located. Rents at these levels can exceed $1,500, or even $2,000 per month in high-income areas. This rent level remains unaffordable for many individuals despite the homes being income-restricted and marketed as affordable.
A Government Accountability Office (GAO) study in 2018 found that between 2011 and 2015 there was annual development of 50,000 new units under LIHTC. Coincidentally, this is the same number of units built in 1939 under the Wagner-Steagall Act, when the U.S. population was at 131 million—60% smaller than today.
The scarcity of—and fierce competition for—LIHTC allocations often means several funding sources are combined for a single property. CDBG, HOME and LIHTC may be layered with existing HUD or RD subsidies. Each of these programs has its own compliance guidelines and regulations. Along with EIV, mentioned earlier, compliance requirements can be overwhelming. For example, individuals approved by HUD can only view HUD EIV information. Since LIHTC compliance is separate, you must maintain double files, one for the HUD subsidy and one for the LIHTC compliance.
The intense competition in each state for LIHTC awards has led to developers offering additional support services to residents in order to strengthen their funding applications. These services can include life skills, financial literacy, educational classes and on-site healthcare services. Without these programs, it is unlikely that a proposed development can receive a LIHTC award.
The challenges of today’s affordable housing
Affordable housing development today is not so much development of new housing. It is redevelopment and preservation of the older project-based Section 8 housing and RD multifamily properties constructed 40 to 50 years ago. This has resulted in new challenges for those managing affordable housing.
Doing more with less has been the mantra for affordable housing for many years. Program compliance, which is typically not consistent between the four or five funding sources, means managers are completing multiple reports. This reduces available time to connect with residents.
With preservation as the focus, the need for additional affordable homes isn’t likely to diminish for many years. While the challenges of developing and managing affordable housing are many, so are the rewards. It’s gratifying to see a family settled into a home. Ending each day knowing you made a difference for someone is a feeling that compares to nothing else.