What is affordable housing?

“Affordable housing” can mean different things to different people. Terms like “workforce housing” are used widely, also. At its essence, “affordability” refers to a household’s ability to pay for housing and still have money remaining for other monthly necessities. Housing typically is defined as “affordable” when it costs no more than 30 percent of a household’s income. Households that spend more than 30 percent of their income on housing are considered to be “cost burdened,” while those that spend more than 50 percent of their income on housing are considered to be “severely cost burdened.”1 For renters, housing costs refer to rental payments and utilities. For homeowners, housing costs include a mortgage payment (including interest), taxes, insurance and utilities, in addition to other relevant costs such as homeowner association fees.

Housing cost burden can mean fewer resources available each month for such necessities as food, transportation and health care, especially for low-income households. Cost burden cuts across renter and homeowner households alike. Although this 101 focuses primarily on affordable rental housing, many programs and policies also support affordable homeownership. A summary of affordable homeownership programs is provided at the end of the following section on common programs that support affordable housing.

Across all types of affordable housing, the need far outweighs the supply. As recently as 2017, for example, an estimated 20.5 million renter households were cost burdened, while an additional 17.3 million homeowners were cost burdened in 2018.2 Data from 2019 reveal that 567,715 individuals were experiencing homelessness, with 30 percent of these individuals in families with children.3 In 2017, less than one quarter of all very low-income renter households that were eligible for federal rental assistance actually received it. Waitlists for public housing and housing choice vouchers (described in the following section) can be years long, if they are open at all. According to one estimate, approximately 4.4 million households were on public housing authority (PHA) waitlists in 2016.4

It bears noting that the burden of an inadequate supply of affordable housing, from high housing cost burdens to homelessness, falls disproportionately on nonwhite individuals and communities of color. To illustrate this inequity, consider that although nearly one in four Black households is severely cost burdened — spending more than half of their income on housing — this is true for just one in 10 white households.5 And African Americans make up more than 40 percent of the population experiencing homelessness, even though they represent only 13 percent of the population overall.6 This disproportionate burden is the result of decades of discriminatory and segregationist policies, a legacy that perpetuates disparities to this day.

SUBSIDIZED AFFORDABLE HOUSING

Housing subsidies address cost burden by reducing or limiting housing costs, which can include utilities. Housing is considered “subsidized” if financial assistance is used to maintain affordable rents for households at certain income levels (most often for low- or moderate-income households). Subsidies can be tied to the building or unit (“project-based subsidies”) or can be granted to specific households (“tenant-based subsidies”). Project-based subsidies typically are provided to finance the development of the project or to support ongoing property maintenance, in exchange for affordability restrictions (i.e., limits on the rents that can be charged for those units, and limits on the incomes of people who can live there) on a certain number of units in the property. Tenant-based subsidies generally target specific eligible populations (e.g., low-income households or persons with disabilities) and allow households that receive the assistance to choose where they live, so long as they find a landlord that is willing to accept the subsidy. Common project- and tenant-based subsidy programs are explored further in the next section on programs that support affordable housing.

To help understand the role of subsidies in creating and maintaining affordable housing, the Urban Institute has a useful online tool titled The cost of affordable housing: Does it pencil out? that explores the deficit of affordable housing units across the United States.

UNSUBSIDIZED AFFORDABLE HOUSING

It is important to note that not all affordable housing is subsidized. In addition to subsidies, housing costs also can be reduced or suppressed through policies, processes and broader market conditions that impact the cost of development and property maintenance and, in turn, the price residents pay. Housing that does not receive direct subsidy also may be available at an affordable price from private landlords in the housing market, without any subsidy or government support to operate these housing units. In some areas, in fact, this can be the predominant form of affordable housing because of the limited amount of subsidy available compared to the need for affordable housing. These properties may be affordable to lower- income households without subsidy for several reasons, generally relating to the characteristics of the property or the surrounding neighborhood. For instance, the properties may be in poor physical condition, disconnected from amenities or resources like transportation or job centers, or located in a neighborhood that historically has not been considered desirable. In many cases, these neighborhoods suffered from disinvestment as a result of decades of discrimination and systemic racism in the housing sector.

Unsubsidized affordable housing units can be at risk of loss if they are not taken care of and deteriorate past the point of livability or if they are converted to market rate units in response to or in anticipation of growing demand, which can lead to higher cost burden or displacement for existing low-income residents. Programs and policies for the preservation of affordable housing can help protect these units and prevent displacement, regardless of market changes.

What are the most common programs that support affordable housing?

Multiple federal, state and local programs support the creation or operation of subsidized housing for households with varying income levels and characteristics. The most common federal programs are summarized in the following table, and described in greater detail below. Descriptions of additional state and local programs, as well as affordable homeownership programs, are also included at the end of this section on common programs that support affordable housing.

LOW-INCOME HOUSING TAX CREDITS

The Low-Income Housing Tax Credit (LIHTC) program is the primary source of financing for the construction and preservation of affordable housing in the United States. Jointly administered by the Internal Revenue Service (IRS) and state-authorized tax credit allocation agencies, the LIHTC program provides a tax incentive for investors to invest in the acquisition, construction or rehabilitation of affordable housing for low- income households.16

Two levels of tax credits are available, known as 9% or 4% tax credits. While the 9% tax credit is used most commonly for new construction, the 4% tax credit typically is reserved for rehabilitation projects and financing through tax-exempt bonds. See the 2018 Urban Institute report titled The Low-Income Housing Tax Credit: How It Works and Who It Serves for a comprehensive summary of the tax credit program. LIHTC developments are owned and operated by private entities, including for-profit housing developers or nonprofit community development corporations.

Although no operating subsidy is provided to the owner or operator of the housing, the LIHTC program ensures affordability through rent restrictions. As tax credits alone often are not enough to close the gap between development costs and deeply affordable rents, most LIHTC properties have many layers of financing — often including multiple forms of federal or state subsidy — ensuring deeper affordability for low-income households. In fact, many states and localities offer funds specifically designed to help close this gap, sometimes referred to as “gap financing.” Additional types of state and local support for housing are outlined below.

Rent restrictions for LIHTC units are based on what is considered affordable at different percentages of the area median income (AMI), rather than the income of a specific tenant. Projects financed through LIHTC must commit to maintaining affordability for renters with low incomes for at least 30 years. Under this commitment, however, properties are subject to only a 15-year compliance period, during which a state housing finance agency is able to take away or “recapture” a tax credit if LIHTC regulations are not met. Following this 15-year compliance period, property owners may choose to opt out of the program through what is known as a qualified contract, making these properties vulnerable to losing their rent restrictions and affordability under the LIHTC program.17 Many housing advocates at the state and federal level have argued against qualified contracts, arguing that they undermine the intended affordability aims of the program.

Nonetheless, some states may require or prioritize longer affordability periods when awarding tax credits. These criteria are articulated in the state’s Qualified Allocation Plan (QAP), which is required under the LIHTC program and is updated annually to reflect state and local priorities for affordable housing development across a range of categories, including housing location or populations served.18 For information on state QAPs, the Novogradac Affordable Housing Resource Center links to each state’s QAP in its online database

HOUSING CHOICE VOUCHER PROGRAMS

The Housing Choice Voucher (HCV) program is a federally funded program that is administered by PHAs and allows eligible individuals and families to afford housing in the private rental market. A housing choice voucher covers the difference between the rent a tenant can afford (i.e., 30 percent of their monthly income) and either the gross rent charged or the PHA’s payment standards for that type of unit, whichever is lower. Payment standards are intended to reflect the cost of renting a moderately priced unit in the local housing market and, thus, vary by locale.19 In markets with rapidly increasing housing costs, however, payment standards may not keep pace with local housing costs.

The HCV program includes tenant-based vouchers (TBVs) and project-based vouchers (PBVs), both of which are overseen by HUD’s Office of Public and Indian Housing. Funded by congressional appropriations to HUD, the HCV program serves approximately 2.3 million households annually.20 Overall, at least 75 percent of Housing Choice Vouchers must go to households at or below 30 percent of AMI. TBVs and PBVs are described in greater detail here:

PUBLIC HOUSING

Although the term “public housing” is used widely, the term refers to a specific type of federally funded, permanently affordable and deeply subsidized housing. Created by the United States Housing Act of 1937, public housing is the nation’s oldest subsidized housing program. PHAs administer the program on a local level, providing rental units in PHA-owned properties to households below 80 percent of AMI. PHAs are required to target at least 40 percent of new admissions to households at or below 30 percent of AMI. Individual housing agencies also may create admissions preferences for individuals experiencing homelessness, households led by elderly persons and people with disabilities, or working families.33 As of 2016, PHAs served more than 1.13 million households nationwide via the public housing program.34 Of those households, 91 percent were considered very low income (below 50 percent of AMI), while 72 percent were considered extremely low income (below 30 percent of AMI), a reminder of the role that public housing serves in housing some of the nation’s most vulnerable households.35

Unlike other affordable housing programs, public housing is funded solely through federal dollars and is characterized by public ownership of housing units, in addition to permanent affordability. Housing authorities receive two types of grants from congressional appropriations to HUD, referred to as operating and capital funds.36 The Public Housing Capital Fund subsidizes physical development and maintenance, and the Public Housing Operating Fund provides an ongoing rental subsidy through an annual contributions contract (ACC) between HUD and a given PHA.37 ,38 Although operating and capital funds are intended to cover the gap between resident rent payments and operations and maintenance costs, the reality is that recent funding allocations have failed to fully meet the needs of aging PHA properties. Estimates place the current capital backlog of needed physical repairs and renovations at close to $70 billion,39 increasing by approximately $3.4 billion annually.40

Additionally, the federal government is no longer funding the development of new public housing units and instead is encouraging PHAs to redevelop and modernize properties through public-private partnerships and other financing approaches. In some cases, PHAs may be able to combine federal redevelopment funds, tax credits and other investments to construct new public housing. For the past several decades, PHAs have been able to leverage other competitive federal funding to support the refurbishment, redevelopment or conversion of public housing into other forms of subsidized housing, through such programs as HOPE VI, Choice Neighborhoods or the Rental Assistance Demonstration (RAD).41

STATE AND LOCAL HOUSING PROGRAMS

In addition to the federal programs described in the previous sections, many state and local housing programs support the accessibility and availability of affordable housing locally. Although federal funds and programs for affordable housing reach millions of households annually, the need for housing support nonetheless far exceeds the supply. Local governments have a range of tools at their disposal to promote affordable housing, from indirect incentives to direct development approaches. Examples and suggested resources for local housing programs and policies are included below. Helpful information on state and local housing policies is summarized on the Local Housing Solutions site.

How is affordable housing regulated?

No single governing body or process oversees affordable housing locally. Depending on the program, oversight and accountability vary greatly. Because subsidized affordable housing programs are administered at the federal, state and local levels, regulations and compliance standards vary, although many follow standards established by HUD. When affordable housing developments utilize multiple funding programs, they must meet all relevant standards for compliance and reporting. A brief summary of regulations for several of the most common housing programs (described previously in the section on common programs that support affordable housing) are included in the table below:

How is housing provided for individuals or families experiencing homelessness?

Assistance is provided to individuals and families experiencing homelessness through a variety of programs. Enrollment in these programs is dependent on the needs of any given individual or family and the available resources at the time they enter the homelessness system locally. The main distinctions between the various homeless programs are the length of stay or financial assistance provided and the scope of supportive services offered. Common programs include the following:

• Emergency Shelter: Emergency shelter, in which individuals and families are offered shelter in a homeless facility for a set period of time, often is the first entry point into the homeless system. Although emergency shelter may offer only limited private space and limited shared living space, it nonetheless is a critical service for individuals and families who experience homelessness. Defined as temporary spaces, with limited space for children to do homework or play, research has found that emergency shelters are unhealthy for family stability and child well-being.56
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  56 Cunningham, Mary, Sarah Gillespie, and Jacqueline Anderson, Rapid Re-Housing: What the Research Says (Washington, DC: Urban Institute, June 2015), https://www.urban.org/sites/default/files/publication/54201/2000265-Rapid-Re-housing-What-the-Research-Says.pdf

• Transitional Housing: Transitional housing is designed to provide shelter to individuals or families experiencing homelessness for up to two years. As the name suggests, transitional housing offers subsidized housing with supportive services designed to help individuals or families experiencing homelessness secure employment, become self-sufficient and transition out of the homelessness system. Transitional housing ranges from independent units to congregate living facilities. The program often requires job training or employment as part of eligibility for the housing, which can pose a barrier to entry for those currently experiencing homelessness.
• Permanent Supportive Housing (PSH): PSH provides the longest and most in-depth support for individuals and families transitioning out of homelessness through permanent affordable housing (with no set time limit) that includes access to supportive services tailored to meet residents’ needs. In the case of households with children, PSH programs primarily serve families that include parents with disabilities that render them unable to maintain stable housing without additional support.
• Rapid Re-housing: Focused on providing immediate housing stability, rapid re-housing is an intervention that helps individuals and families exit the homeless shelter system quickly. Rapid re-housing programs place individuals or families into housing and provides short-term help with housing expenses, including rent arrears, ongoing rent assistance and moving costs. Although this approach has been shown to be very successful for families, it is not a long-term solution for households that are unable to access regular employment and afford market rents.

What is the impact of affordable housing on families?

Affordable housing can have a significant impact on resident health, overall stability, mental health and employment opportunities. Housing assistance has been proven to reduce homelessness, housing instability and overcrowding, which can then contribute to other positive outcomes for children and families.57 For families with children experiencing homelessness, a vast body of research points to the interconnectedness of housing status and children’s development.58 Housing assistance often ensures stability — which, in turn, leads to improved educational performance, mental and physical health, and overall child well-being.59 In some cases, HCVs also may enable families to live in safer, lower-poverty neighborhoods with access to higher-quality schools and other services, which may facilitate better life outcomes.60

In contrast, a lack of affordable housing or housing discrimination in higher-opportunity areas may lead families to live in overcrowded or lower-quality housing in distressed — and often highly segregated — neighborhoods. Research has shown that living in a lower- poverty neighborhood can positively impact a child’s economic outcomes later in life.61

Embedding additional services in affordable housing programs is one way to further improve resident outcomes. Within the public housing program, several programs are geared toward helping residents gain self-sufficiency and economic mobility. The Family Self-Sufficiency program creates an interest-building escrow account for participating residents who receive workforce training, job search assistance and other services to support increased income, all while maintaining access to rental subsidy.62 Jobs Plus is another program that aims to connect residents to jobs with case management services.63 Many PHAs also have a Resident Opportunities and Self-Sufficiency (ROSS) Grant Program Coordinator who assesses resident needs and coordinates local resources.64

Many of the above programs seek to offset or directly address a structural challenge of subsidized housing, in which residents may have a disincentive to increase household income out of fear of losing their rental subsidy entirely. The structure of subsidized housing programs may create a “cliff effect,” in which a marginal increase in a household’s income can lead to a steep decrease in or loss of their housing subsidy. With a demand for affordable housing that far exceeds supply, and a lack of housing assistance for households earning moderate incomes, the cliff effect illustrates the harsh realities of the current housing market. Households receiving assistance are required to report changes in income so that adjustments can be made to their payment standard, which may inadvertently disincentivize earning higher wages. Given that the average income of public housing households was just $14,444 in 2016, rental adjustments and loss of subsidies can be detrimental to very low-income households, regardless of minor boosts in income.65