One in six households in America — or 20.2 million — spent more than half of their pre-tax household income on housing costs entering 2011, according to the American Community Survey. And despite historically low interest rates and widespread home price declines, the number of households severely burdened by housing continues to rise.
We know this was happening even before the onset of the Great Recession. While the recent economic turmoil is credited for placing severe cost burdens on 2.3 million households, affordability problems were growing long before that.
The causes of this consistent growth in severe housing cost burdens are complex, but primarily reflect widening income inequality, which has been made worse by the recession, as well as ongoing losses in the low-cost rental stock and no significant growth in rental assistance efforts. Reducing burdens requires a multifaceted approach — one that includes policies to address income inequality generally. But action on many fronts is clearly needed given the size and seriousness of problem.
Housing is commonly defined as affordable when it takes up less than 30 percent of a household’s income. Those spending over 50 percent of their incomes are considered “severely cost-burdened” and are in a precarious situation. Harvard’s Joint Center for Housing Studies’s tabulations of the Consumer Expenditure Survey show that after paying for housing, those in the bottom expenditure quartile had just $619 per month left for all of life’s other necessities. As a result, they cut back on food (by more than a third), retirement savings (by about a third), and clothes and healthcare (by half). Also, with so much of their monthly spending already budgeted to day-to-day necessities, the ability of these families to build a rainy day fund to protect against potential job loss or other hardship is miniscule. When a household’s ability to provide its own safety net is stripped away, more are forced to rely on government safety nets, which are increasingly at risk due to fiscal tightening.
Having substantial shares of households facing such extreme housing cost burden is also bad for the economy because it leaves them less money to spend elsewhere. Households that live paycheck to paycheck are also less able to make education and small business investments that could ultimately lead to greater productivity and dynamism of the economy. Compare the image of a free-moving, opportunistic, upwardly mobile labor force to one that is cash-strapped and locked in low-wage, low-skill work in jobs they dare not leave for lack of the financial means to take the steps needed to move up the occupational ladder.
As it stands, severe cost burdens now affect about 18 percent of all households in the country, including 27 percent of all renters (10.7 million) and 13 percent of all homeowners (9.5 million). Renters account for more than half of all severe burdens though they are only about a third of all households. Most severely burdened households are white (11.8 million), but rates of severe burden are higher for minorities. Additionally, a growing number of severely burdened households are made up of those aged 65 and older, totaling 4.1 million at last measure.
Most of all, low-income households are plagued by severe cost burdens (fig. 1.) Half of all severely burdened households have incomes of $15,000 per year or less (the equivalent of full-time work at the federal minimum wage). For the most part the private market simply cannot supply housing that is affordable at this income level. For these 15 million households, an affordable monthly housing cost would be just $375. In 2012, there is no county in the country where the HUD-designated fair market rent for a modest two-bedroom apartment is at or below that level, and only nine counties (out of 4,765) where one-bedroom apartments rent for less. Even to avoid just severe cost burdens, housing costs for those earning $15,000 would have to be no higher than $625 per month, which is still below the fair market rent for two-bedroom apartments in most of the country. In fact, few find such a place.
Incomes Not Keeping Up
The rates of severe housing cost burdens for the lowest-income households are high and still growing. From 2007 to 2010, severe cost burdens among households earning minimum wage or less rose from 64 to 68 percent. Perhaps even more disturbing is that the number of households in this low-income category is growing faster than any other group. According to the ACS, household growth was concentrated among households with in the lowest income categories. From 2001 to 2010, the number of households earning less than $15,000 and $15,000Ð$29,999 grew by 15.3 and 15.8 percent respectively (4.7 million total), , while the number of households earning $30,000 or more grew by just 4.5 percent (3.4 million). With their higher burden rates, this disproportionate rise in the number of low-income households has increased the overall number and share of cost burdens. JCHS estimates that cost burdens rose an additional 25 percent due to this downward shift in income distribution.
While the Great Recession and subsequent soft labor market has inflated the numbers and shares of U.S. households unemployed and underemployed and increased the number of low-income households, incomes were falling and cost burdens were high and rising even before the Great Recession. In fact, real household incomes in the United States have been stagnant since the late 1990s. According to the most recent measure, after adjusting for inflation, the median household income in 2010 was below what it was in 1997, fully 13 years earlier. Over the past decade alone, real median income is down nearly $4,000, with declines affecting all age groups under 65.
Reversing this trend will be difficult because it reflects a growing disparity between skilled and unskilled workers. Identifying ways to enhance the earning potential of a larger segment of the population will be an important part of addressing housing cost burdens. There will be no easy fixes, but education, training, and retooling of skills could make a difference.
With stagnant and even falling income levels being the major culprit behind the growth in severe burdens, one of the ways low-income households escape housing cost burdens is by taking on another earner. Indeed, while 18 percent of households with a single earner are severely cost burdened, just 6 percent of households with two or more earners are burdened. Unfortunately, weak labor markets and stubbornly high unemployment rates have reduced the number of jobs and, in turn, the number of multi-worker households fell by over 2.5 million from 2008 to 2010.
For some homeowners, refinancing at today’s low interest rates could alleviate cost burdens. Indeed, the average fixed rate on a 30-year mortgage dropped below 5 percent by the end of 2010 and below 4 percent by the end of 2011 — the lowest levels in recorded history. As a result, refinances took off. Yet severely cost burdened homeowners still grew by another 350,000 households over the past year. Clearly, many homeowners were unable to take advantage of these low rates, and it appears that negative equity was a major reason. Because home prices drifted down yet again over the past year, home equity levels also dropped. According to CoreLogic, the number of homes with negative equity rose in late 2011 to 11.1 million. These underwater homeowners suffered losses in housing wealth and were also unable to qualify for a refinance mortgage to lower their monthly payments.
In late 2012, the Obama administration and Treasury department revised the Home Affordable Refinance Program to better enable underwater and unemployed homeowners to refinance — taking away credit and income screens as well as freeing lenders from renewed liability if HARP-refinanced loans defaulted. As a result, refinances spiked shortly after the new guidelines were enacted. However, this program only applies to homeowners with mortgages owned or guaranteed by Freddie Mac and Fannie Mae. FHA-insured mortgages have similar options, but no such program exists for the millions of homeowners with mortgages not backed by the federal government in one form or other.
Another path out of cost burdens for low-income renter households is rental assistance — if they can find it. According to the 2009 HUD Worst Case Needs report, only one in four very low-income households receive such assistance. And needs are growing much faster than assistance levels. While the 4.8 million families receiving HUD rental assistance in 2011 marked an increase of 73,000 over the previous two years, the number of severely cost-burdened renters earning less than $15,000 grew by a whopping 430,000 in 2009-2010 alone, with 2011 data — due out early this fall — likely to show additional growth.
The continued weakness in the labor market has put increased pressure on the number of families reached by government assistance. Market rent increases continue to add to that pressure. According to MPF Research, rents were up in almost every market tracked, and overall increases from 2010 to 2011 were double those of the previous year. With incomes falling, the gap between income and rents has widened. With vouchers and other major rental assistance benefits pegged at 30 percent of household incomes, this widening gap has raised the assistance needed per household and therefore means more funding is needed to assist the same number of households.
The Way Forward
What are we to do to reduce the number of severely cost-burdened households? The size of the problem alone suggests that the answer will not be simple or easy and will require raising incomes, lowering housing costs, preserving the stock of affordable housing (assisted or otherwise), and creating new opportunities to live affordably.
One critical hurdle is that construction and development costs are simply too high relative to incomes to enable private construction to produce new units that are affordable to low-income, unsubsidized households. In 2011, the median rent of a newly constructed unit was over $1,000 — two and a half times what would be considered affordable to a family earning the minimum wage, and enough to put a family with two full-time minimum-wage earners into severe burden. The principal means of expanding the affordable housing supply with new units has been the Low Income Housing Tax Credit program, which produced over three quarters of a million new units from 2001 through 2009. However, current fiscal conditions have placed programs funded by tax expenditures, like LIHTC, at risk.
With new construction generally unable to provide housing affordable to the lowest income groups, preserving the existing affordable rental stock is key to stemming the growth in cost burdens. Declines in the number of low-cost rental units over the past decade have made it more difficult for low-income families to find affordable rents without assistance. From 1999 to 2009, one third of units with rents under $400 were lost to the low-cost stock. Approximately 12 percent of these losses were permanent due to demolition or otherwise. Conversions to higher rents and other non-residential uses took the rest. Given the average age of an unassisted affordable unit, regulatory and tax policies that encourage investment and retention of this stock will be increasingly needed and helpful.
But increasing the affordable housing stock is not just about producing new units. It’s also about demand-side subsidies to make existing rentals more accessible. In fact, in markets where there is a sufficient supply of rental housing, demand-side subsidies often make the most sense. Since the 1980s, vouchers have been a key means of expanding rental support, as project-based programs were mostly phased out. But the number of vouchers in use has risen only slightly in the past decade, while public housing and project-based units have declined substantially (fig. 2). With a gap of over five million between the number of households earning $15,000 or less and the number of rental units affordable at this income, now is not the time to ramp down either strategy.
Finally, the main ingredient in lifting millions of households out of severe cost burden is a recovery in the job markets. This may be the toughest nut to crack. Affordability was worsening and income inequality was rising even before the recession. And while more jobs will ease the burden on severely cost-burdened households, much of the stagnation of incomes at the bottom is structural and due to what Harvard and MIT labor economists Lawrence Katz and David Autor call “the polarization of labor markets,” that is, the increase in low-wage, low-skill service sector jobs that are without the opportunities for advancement in skill level and pay, which are leaving even employed households struggling.
Even as the number of unemployed households expanded, the rise in fully employed households with severe cost burdens actually outnumbered that of the unemployed. The longer-term trend toward widening income distribution is a more fundamental problem that will require advancements that may be largely outside of housing. For instance, ensuring all children access to quality schools that provide a strong foundation of knowledge and skills to enable them the opportunity for higher-skilled, high-paying jobs will help future generations afford housing.
The causes of the decrease in housing affordability are complex and it’s clear that there is not one single approach to solving the problem. It is also clear that current approaches have not been sufficient to keep the problem from growing, let alone reverse the trend. Fiscal realities require that current housing assistance programs continue to innovate to find ways to help more with less. Expanding efforts that are known to work and refining approaches with demonstrated efficiency will be key. Decades of research and evaluations of programs like Jobs Plus, Family Self-Sufficiency, and Moving to Opportunity have demonstrated that assisted housing done right can be a springboard to opportunity through services and financial incentives that help households take steps to increase their earnings. They also demonstrate that housing security is a crucial first step to greater financial security for low-income households.
Preserving the affordable housing that currently exists and creating new opportunities to live affordably will also create new opportunities to combat poverty and raise the incomes and overall well-being of the growing number of low-income households in America whose housing cost burdens are holding them back.