Affordable Housing 101

People most often qualify by earning below some percentage of an area-median income (AMI). The area used varies, but are typically counties, metropolitan statistical areas (metropolitan areas, which are collections of counties with a central city or collection of central cities), or regions defined by state governments (also collections of counties). The federal government uses the following groupings:

Extremely low-income: 30% of AMI (or less)

Very-low income: 31-50% of AMI (or less)

Low-income: 51-80% of AMI (or less)

Moderate-income: 81- 120% of AMI (or less)

These breakdowns are then adjusted for household or family size, typically annually (example here). It is worth noting how AMIs can vary widely across the country. For instance, given how affluent the Bay Area is, a 3 person household or family making $133,800 annually in San Francisco will qualify as low-income whereas the same size family in Cleveland, a far less affluent metro area, will qualify as low-income at $65,100.

The federal government provides most low- and moderate-income housing through two (supply-side) programs:

Public housing: households in public housing are generally considered low-income and pay 30% of their income for rent. Public housing is the oldest form of federal housing assistance. It is a federal program, but largely implemented through a decentralized system of public housing authorities (PHAs) like the Princeton Housing Authority, which have locally determined governing bodies, but must adhere to federal regulations. In Princeton, public housing developments include Redding Circle and the Hageman Homes on Clay Street.

Public housing has undergone transformations since it was first adopted in the 1930s and is now typically the housing of last resort for extremely- and very low-income households (this was not always the case and is not the case in other countries, where public housing is far more robust and houses low- and middle-income households). The number of public housing units in the U.S. has always been small relative to the overall stock of housing units – reaching about 1.4 million units in total before a decline beginning in the 1990s to the present level of around 1.1 million units currently in operation today.¹ This decline was precipitated by misguided and discriminatory policy decisions, both of which has led to an unfair stigma associated with public housing and a reluctance to pursue this crucial form of housing. For instance, the Faircloth Amendment passed in the 1990s as an amendment to the 1937 Housing Bill prevents an expansion of the public housing stock (or makes it very difficult). This is despite the fact that despite high-profile cases of public housing distress, studies of public housing in the 1990s found that the vast majority of the public housing stock was in good condition.²  

Since the 1990s, the most distressed public housing communities have been demolished through programs like HOPE VI. This program deconcentrated poverty by replacing distressed public housing units with mixed-income, lower density housing units, but in numbers far below what was demolished, leading to an overall decline in the stock of public housing. HOPE VI was eventually replaced by Choice Neighborhoods which, among other changes, requires a 1-1 replacement of demolished public housing units. The Rental Assistance Demonstration (RAD) program is another relatively new program allowing PHAs to convert their housing units to a different funding structure, allowing them to raise funds for much-needed repairs and maintenance.³ 

Low-Income Housing Tax Credit (LIHTC): under this program, the Federal Treasury provides funding in the form of tax credits to states, which implement their own programs for distributing these tax credits to developers in exchange for affordable housing developments. That is, developers apply for these tax credits through affordable housing plans and the winning proposals are awarded the funding. Most affordable housing developments built today depend on this funding. Examples of this type of housing in Princeton would be Elm Court. 

Similar to public housing, these units are typically restricted to low- and moderate-income households, but unlike public housing, rents are generally not restricted to 30% of a household’s income. Many, but not all residents of LIHTC developments typically earn extremely low- and very low-income households. It is also not uncommon for residents of LIHTC developments to also have a housing choice voucher to help pay the rent.⁴ 

States vary quite a bit in how they operate their LIHTC programs. Some states, like New Jersey, have somewhat recently begun to incentivize developers to build in low-poverty areas of the state. Traditionally, and in most states, LIHTC housing tends to concentrate in qualified census tracts – essentially, high-poverty areas.⁵

Other programs, which comprise a much smaller share of the overall stock of low- and moderate-income housing nationwide include the following:

Local government programs: localities operate a wide range of programs in addition to those above. For instance, Princeton operates an affordable home ownership program that allows low- and moderate-income households to own their unit and develop some equity, sharing the rest with the municipality in order to keep the unit affordable for the next household.

Section 8: Section 8 refers to a section of the Housing and Community Development Act of 1974 which encompasses the Housing Choice Voucher program (see below), but also a set of other programs referred to as “New Construction,” “Substantial Rehabilitation,” and “Loan Management Set-Aside,” all of which are meant to subsidize the operation of multi-family rental units for low- and moderate-income households 

Section 202: Section 202 housing is a program that subsidizes the construction, rehabilitation, or acquisition of housing units for very low-income seniors 

Section 515: Section 515, operated by the Department of Agriculture, subsidizes multifamily housing for very low-,  low-, and moderate-income households in rural areas

Section 811: Section 811 subsidizes housing for extremely low- and very low-income adults with disabilities

Community Development Block Grant (CDBG): created through the Housing and Community Development Act of 1974, the CDBG is a block grant disbursed to certain municipalities and counties to support community development that primarily benefits low- and moderate-income households. The funding can be used to build and acquire affordable housing, though it is typically insufficient to build a large number of units.

HOME Investment Partnerships Program (HOME): like the CDBG, HOME is another block grant provided to states and localities to build and acquire affordable housing.

National, state, and local housing trust funds: Trust funds are essentially a separate source of funds that governments of all levels use to fund activities related to supporting housing for extremely low-, very low-, low-, and moderate-income households, though these activities vary quite a bit from place to place.  

The federal government provides other types of (demand-side) housing assistance:

Housing Choice Voucher (HCV) program: this is by far the biggest demand-side housing program of the federal government. Formerly called (and still referred to as) Section 8 housing vouchers, the HCV program is implemented by PHAs and has two components: project-based vouchers (PBVs), which are tied to a particular development, or tenant-based vouchers, the far more common type of HCV. Tenant-based vouchers allow households to secure housing on the private market in which they generally pay 30% of their monthly income on housing whereas the voucher covers the difference between what’s referred to as the Fair Market Rent (FMR) and 30% of the renting household’s income. What’s the FMR? It’s the rent ceiling that HUD will pay for vouchers in a given area, typically a metropolitan area – generally the 40th percentile of rents in that area.

Like other housing programs, though HCVs have proven to reduce homelessness and promote housing stability and affordability for the households who receive a voucher, HCVs are woefully underfunded. About 1 in 4 households who qualify for assistance receive a voucher. Moreover, many households who receive a voucher are unable to use it. Two major issues with HCVs limit the success of households actually finding housing: (1) a lack of rental units with rents at or under the FMR, particularly in lower-poverty settings and (2) landlords in many places are not required to accept HCVs as a valid form of payment. In states like New Jersey where landlords must accept HCVs, many simply ignore the rules and break the law, oftentimes in ways that renters may not even realize. Lack of funding and lingering stigma associated with HCVs limit the effectiveness of the overall program.⁶ 

Other providers and forms of affordable housing (which often leverage public financing) include:

Inclusionary zoning/housing: Inclusionary zoning or housing refers to the provision of low- and moderate-income housing units alongside market-rate units (oftentimes referred to as set-asides) financed by the developer, with or without public subsidy. These programs can be mandatory or (more likely) voluntary and incentive-based. In the latter case, developers usually are awarded increases in density through a variety of means (e.g., can build a taller building, can provide less parking) in exchange for the low- and/or moderate-income housing units. A typical threshold for low- and/or moderate-income set-aside is 20% of all housing units, but this threshold can vary substantially, especially depending on how the overall housing development is financed.

Nonprofit or charitable organizations (such as community development corporations like the New Jersey Community Development Corporation or Habitat for Humanity) build  low- and moderate-income housing units. These organizations raise money through charitable means, but receive most of their funding from governments or community development financial institutions like the Local Initiatives Services Corporation (LISC).

Shared equity housing: these are forms of housing operated by nonprofit organizations like limited-equity cooperatives, community land trusts, and the like. They are not always restricted to low- and moderate-income households and typically operate very differently than traditional units of owner-occupied or renter-occupied housing, typically through sharing the equity that accrues to owners of housing units with the nonprofit organization to keep the housing permanently affordable. 

Public policy began to shift away from public housing beginning in the 1970s and move towards public-private partnerships like Section 8 and LIHTC to provide below-market rate housing opportunities. Unlike public housing, these partnerships legally require the owners to keep the rents affordable for a limited number of years, typically 15-30 years, after which the owners can convert the units to market rate rents. This has led to an additional challenge to promoting affordable housing – expiring affordability controls. HUD has a few programs that incentivize Section 8 owners to renew their contracts, but ultimately, the stock of affordable housing is at risk of being further depleted over time due to these expiring affordability controls.

This is a common and understandable question. If we know that housing for low- and moderate-income households is the most undersupplied housing and the least likely to get built, shouldn’t we just require developers to provide larger set-asides or just build 100% low- and moderate-income units? It’s a reasonable question, but the problem is most developers do not have the financing to do this. Low- and moderate-income housing may cost less to the residents by design, but it is still very, very expensive to construct – sometimes more than market rate housing given additional standards and requirements, and the lower rents generated by this housing compounds the problem. 

Take a look at this example from the Washington, D.C. metro area – a high demand housing market like the one in the Princeton region. As the math in the example above details, it becomes practically impossible to build a meaningful number of low- and moderate-income units even if the developer earns no profit. This underscores the point that our lack of affordable housing is not driven by greedy, unscrupulous developers, but by a profound lack of public subsidy for the amount of low- and moderate-income housing that we need. 

These three steps would very likely lead to profound reductions in homelessness and housing instability: 

Commit more money to permanent social housing: developers can be encouraged to build more non-market rate units by lowering the costs of development, but they will ultimately only build units for which they can make a profit or break even, which will almost always exclude housing for those with the lowest incomes/no income without major public subsidy (not to mention, affordability controls can expire). To account for this, we need to commit far more resources to publicly-financed, permanently affordable housing. The best approach would be a public option for housing in which publicly-owned housing is built and provided for households of a range of incomes, not just the poorest of the poor, both to (1) promote financial feasibility and (2) promote socioeconomic integration. It’s not a pipe dream. Places like Vienna and Singapore have been doing this successfully for decades. 

Fully fund HCVs, require landlords to accept them, and enforce this rule: this would mean every household qualifying for a HCV would get one and that landlords could not turn them away. This would profoundly reduce homelessness and rent burden (e.g., spending more than 30% of one’s monthly income on rent), especially if done in tandem with construction of low- and moderate-income housing units.

Remove exclusionary zoning and land use barriers: fully funding HCVs is a necessary, but insufficient step to solving housing unaffordability because we already lack millions of units (including market-rate units) to provide for all households. A key barrier to providing these housing units, particularly in low-poverty, majority white places with little affordable housing are exclusionary zoning and land use practices. Removing these arbitrary and costly barriers will legalize more of the market-rate and affordable housing units that we know we need and help for-profit and nonprofit developers build them, particularly in ways that reduce segregation.