Affordable for Whom? A Primer

When I went door-to-door talking up a candidate who wanted to fund more affordable housing, people sometimes replied, “OK, but what does ‘affordable’ really mean? Who is it affordable for?” This question comes up a lot.

I remember being unsure at the time whether this was genuine confusion or just casting uncertainty and doubt as a smokescreen for opposition. There are political battles over affordable housing, but complex ones, without a clear division into camps. But many people are genuinely unsure about what affordable housing means, so this post is intended to serve as a primer for those people. 

The most common kind of housing required to be affordable is what’s known as “deed-restricted” affordable housing, meaning that the owner has committed to keep some or all of the units affordable at a certain methodology, and to require the same commitment from any future owners if they sell. “Deed-restricted” means the government preserves the commitment as inseparable from the deed; the commitment is also known as a “covenant”. Non-profit or for-profit companies can both make these commitments. 

Fundamentally, for anyone to build affordable housing, they need to know where the money for building will come from. What doesn’t come from rents will have to come from somewhere else, usually government or philanthropy, and you have to have it all firmly lined up in advance. You also need approval from the city, as with all building. 

The biggest way we make this housing happen is through a federal program called the Low Income Housing Tax Credit (LIHTC, usually pronounced “lie-tech”). The practical things to know about LIHTC are that it is:

  • Highly complicated and effectively requires housing be built in specific configurations;
  • A big enough source of funds that most affordable developers will use it if at all possible; and 
  • Still not big enough on its own to finance most projects, especially in high-cost cities.

So developers usually layer together LIHTC with several other funding sources: state or local grants, low-interest loans, philanthropy, or an array of other federal programs. Every program tends to have its own rules and requirements, which all need to be juggled and weighed against each other. According to the Terner Center, 90% of California’s affordable development now layers at least four different programs to become feasible. “Major hassle” does not even begin to describe it.

If only 25% or 50% of a building’s units are affordable, the others can be rented out at market rate, which is another source of money to fund the affordable units and reduces the subsidy needed. 

So say you jump through all the hoops and get your building built and start looking for tenants. What kind of rents have you committed to charge them? 

Most programs’ affordable rents follow standards set by the US Department of Housing and Urban Development, which in turn calculates off two reference points: area median income (AMI) and household size

In short, they take government statistics on family incomes in your county, then define “low incomes” in relation to that. So you have Low Income, which is 80% of median; Very Low Income which is 50%; and Extremely Low Income which is 30%. Rent is then set at 30% of all of these income levels, varying by household size. 

So, to get the required rent for a Very Low Income unit, you divide Area Median Income by 12 for monthly income, then multiply by 50%, then multiply that by 30%. Here’s what that works out to in Alameda County:

Affordable monthly rentOne-person householdTwo-person householdFour-person household
Very Low1,1991,3701,713
Extremely Low7208231,028

So what are the pros and cons of building housing like this, with these kinds of rents? 

Pro: It works out to fairly reasonable rent for working people and families in its area, compared to market rate. Here’s an article on residents able to live in modern, new units in Oakland on working-class salaries in this way. 

Pro: The rent calculation methodology is relatively simple, standardized, and forecastable for those working out the financing. And you need financing. If you just said up front “we’ll charge tenants what they can afford” you would have trouble engaging even a community lender. 

Con: Area Median Income rises faster than working-class incomes. It’s based on incomes of everyone in the county, even salaried professionals. If low-end wages are going up slower, it might not register that. If working-class people are moving out of the county because of high rents, AMI will go up. Right now in San Francisco, 100% AMI for one person is over $100,000 a year, largely for that reason. 

Con: Rents are based on expected income, not actual income. If you qualify for a 60% AMI unit, you will be charged as if your income were 60% AMI — even if it’s lower. And it will typically rise as AMI does. Sometimes, if your income changes, they might be able to move your unit to a lower income category, but there are no guarantees.

Con: The building’s affordability is not forever. The affordability requirement, or covenant, most commonly lasts 55 years. After that, an owner can make it all market-rate if they choose (although the building’s age by then may make that difficult), or they could bulldoze and build something market-rate. But if you wanted to require your building be affordable forever, or for its whole life, you’d need to find more financing at the start. (Other countries have developed better models, where mixed-income social housing is designed to support its levels of affordability for the entirety of a building’s expected life; that usually means a greater mixture of middle-income people in it.)

Con: Implementation is project-by-project and can be bureaucratic and, occasionally, unaccountable. With some exceptions, there’s no central registry of deed-restricted affordable units and not a whole lot of monitoring that they are charging the promised rents. Each owner, nonprofit or for-profit, might interpret requirements differently, a few might outright twist them, and it can be lengthy and difficult to hold them to account. 

Con, incorrectly regarded as damning: It’s not typically affordable to people experiencing homelessness. It’s true, and it’s not ideal, but unfortunately it’s to be expected based on the anticipated income levels needed to finance the construction. While guaranteed housing to get people off the street is sorely needed, that is an entirely different category of project, usually called supportive housing, where the units are smaller and the financing assumes the residents will pay little to no rent themselves. 

Myth: “It’s a scam that speeds gentrification.” Affordable housing is not a cure-all, but research shows that building more of it significantly slows displacement. In some cases, where a city’s elite targets a disadvantaged area for classic urban renewal, and it’s the only place dense development is taking place in a city, it might in practice work as the vanguard of displacing development. But in the considered opinion of most, the biggest thing wrong with deed-restricted affordable housing is that there’s not ten times as much of it. 

So what else do we need, on top of more funding for deed-restricted affordable housing? 

I will cover this more in future posts, but other things we need include:

  • Let affordable housing be built almost anywhere, densely and with less BS process and restrictions. Currently, cities’ zoning rules mean affordable developers have very few sites they can build on, and they are usually up against for-profit developers in the bidding. Lengthy approval processes where city councils have discretion to stop projects for any reason mean that top of all the other hassles, they have to mount a full-scale public relations campaign to get approved. If the massive delay doesn’t kill projects, often a Christmas tree of added unfunded mandates like parking replacement does. Finally, the denser a project, the more affordable units you can get at less subsidy, because you’re using limited land more efficiently. This is why nonprofit developers are among the biggest boosters of more permissive zoning everywhere, that would make their developments less subject to the whims of councilmembers and NIMBYs. 
  • Increase Section 8 voucher funding and make it a right for anyone with qualifying income. Section 8 vouchers make up the gap between people’s income and rent so that, ideally, they can afford market-rate housing — but its federal funding is far under the amount needed, so most people spend years on the waitlist before they get it. Making it a guarantee, more like food stamps, would help millions of the most at-risk people in the meantime, until we build enough affordable housing, and would cost little compared to most social spending programs. 
  • Repeal the Faircloth Amendment and build more public (government-owned) housing. The Faircloth Amendment, from 1998, bars the federal government from adding to the stock of public housing, which works completely differently from private deed-restricted affordable housing. People have bad opinions of public housing, but mostly because it’s been deliberately neglected, not because it’s an inherently bad solution. Public housing is another big piece of the puzzle and will bring housing to people who need it. 
  • In California, repeal Article 34 of the State Constitution which throws up further roadblocks to local governments getting affordable housing built. Read more here.
  • For middle-income people, end exclusionary rules like apartment bans that prevent the private sector from providing abundantly. I will cover this in future posts, but for people not in low-income categories, the market can and should provide affordable housing without needing public subsidy – if sufficiently reformed. To the extent it doesn’t, we can get it by reforming zoning rules – not diverting scarce tax dollars from lower-income housing. 
  • Rent control and just-cause eviction protections for all. Capping rent growth over time is a basic consumer protection that limits evictions for the people at most risk and is easy for landlords to plan around. Of course, it works best paired with an abundance of affordable and market-rate housing, for the people who have to move for non-rent reasons – or who merely want to.

If there is one thing I hope people who read this far will take away, it is: Affordable housing in real life has imperfections, but that’s not a reason to oppose more of it when you have the chance. Every newly created affordable home is a huge benefit to someone sorely in need. We need to fund, and legally allow, far more of such housing.

One final comment I hope readers keep in mind: when evaluating options for affordable projects, the best metric is the number of affordable homes rather than the percent, which can be misleading. Compare the following two project options, with the same amount of public subsidy:

Option AOption B
Affordable units1020
Total units50200
Affordable %20%10%

Option B houses more people at low income levels and could plausibly be made with the same total subsidy, because more market-rate units are there to subsidize more affordable units. So Option B is superior to Option A, even if divides out to a lower percentage.

Stay tuned for my next housing post: The housing crisis: Causes and consequences.

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