After years-long notice and comment periods, a final rule on using small area Fair Market Rents to determine housing choice voucher payment levels was supposed to take effect. However, the Trump administration has recently announced a two-year suspension of the rule. In a letter sent to housing authorities in these metropolitan areas, HUD claimed that the rule was suspended because it needed more time to analyze the impact of the policy change’s costs and benefits. [Editor’s Note: Civil rights groups are suing HUD over this delay.]
The idea behind small area Fair Market Rents is providing more residential choice. Through the housing voucher program, eligible families spend 30 percent of their income on rent, and HUD pays the rest up to what is considered the Fair Market Rent, which is HUD’s estimate of the amount needed to cover rent and utility costs in a given metropolitan area or county. If a voucher household chooses a unit in which the gross rent is above the Fair Market Rent, the household has to cover the difference. This tends to limit voucher holders to areas with rents below the applicable Fair Market Rent and discourages them from renting in high-rent areas, which more often than not have better public schools and access to jobs and services.
The Obama administration designed the small area Fair Market Rent rule to address this problem, intending to expand voucher holders’ housing options in such “high-opportunity” neighborhoods by allowing payment standards to be based on zip code rather than region.
The growing body of evidence linking neighborhood conditions to the economic and health outcomes of children in poverty points to the need for a better understanding of how housing vouchers could increase access to opportunity. According to research led by Raj Chetty, when compared to children remaining in more disadvantaged neighborhoods, those children who moved to higher opportunity neighborhoods showed lower rates of teenage pregnancy, higher education attainment, and bigger earning gains as adults.
Small Area Fair Market Rents Improve Equity
A test of small area Fair Market Rents already showed positive impacts on relocation to higher opportunity neighborhoods. A report about a demonstration of the small area Fair Market Rents in five public housing agencies found that high-rent zip codes offer more opportunities than low-rent zip codes do, although there were 3.4 percent fewer units available overall. According to another recent study, the opportunities available in neighborhoods chosen by housing voucher households through small area Fair Market Rents in the Dallas metropolitan area improved compared to neighborhoods chosen by those in nearby metropolitan areas using a single Fair Market Rent.
Would this result be consistent in other metropolitan areas? In a recent working paper, I explored potential access to housing in better neighborhoods in “Washington-Arlington-Alexandria, the DC-VA-MD HUD Metropolitan Fair Market Rent area,” one of 23 metropolitan areas where small area Fair Market Rents would have gone into effect with the now-delayed rule.
In FY2015, the Washington Metropolitan area had only one Fair Market Rent ($1,458) for counties in DC, Southern Maryland, and Northern Virginia—with the exception of Warren, Virginia, ($910) and Jefferson, West Virginia, ($854). About 62 percent of census tracts in the metropolitan area had a median gross rent greater than the applicable Fair Market Rent. If small area Fair Market Rents had been implemented in the same year, the metropolitan area would have had a total of 379 zip code–level Fair Market Rents (including areas across metropolitan area boundaries) that varied from $680 to $2,190.
Drawing upon 2015 data at the census-tract level, I estimate changes in the pool of units potentially affordable to housing voucher recipients through the zip code–based payment standard by poverty rate and racial segregation of their location. A unit is considered affordable if the rent is below the applicable payment standard, either the original Fair Market Rent or small area Fair Market Rent.
Housing voucher households in the Washington metropolitan area would have rented more units under small area Fair Market Rents (48.4 percent of the total housing units) than under the Fair Market Rent (46.7 percent), resulting in a net gain of nearly 13,000 units potentially newly affordable to housing voucher recipients (Fig. 1). The share of affordable housing across different neighborhoods would have been comparatively evened out, as the gain in units in high-rent zip codes cancels out a loss in units in the low-rent and moderate-rent zip codes. Notably, the share of affordable housing would have increased considerably in low-poverty neighborhoods from 35.8 percent under the Fair Market Rent to 45.2 percent under the small area Fair Market Rents. While the share remains constant in high-percentage-white neighborhoods, the new rule would have also added about 10.9 percentages in moderate-percentage-white neighborhoods.
Similar to what was found in the previous demonstration in five housing authorities, affordable housing inequality across the Washington metropolitan area would have greatly improved with the zip code-based payment standard by more than 46 percent from 0.23 to 0.12 (Fig. 2).
Despite high levels of inequality in low-poverty and high-percentage-white neighborhoods, the new rule would have provided voucher recipients with more evenly distributed affordable units across these neighborhoods, possibly leading to less segregation overall.
In his Pultizer-prize winning book, Evicted, Matthew Desmond argues that the housing voucher program could be expanded without additional costs by implementing small area Fair Market Rents. This may or may not be true, depending on the number of voucher recipients in low- and high-rent zip codes (See Table 1).
Housing vouchers cover the difference between 30 percent of a household’s income and the fair market rent. If a household’s rent is higher than the fair market rent, they are responsible for paying the excess amount. To get a sense of the cost effects of switching to small area fair market rents, let’s consider two extreme scenarios. In both scenarios, we’ll assume that the households stay in their current residence and do not move.
In the first scenario, all voucher recipients have rents that are equal to the applicable regional fair market rents. In low-rent areas, the small area FMR is lower than the regional FMR. Therefore, if a small market fair market rent payment standard is applied, a household in a low-rent area paying the regional FMR would find that a smaller portion of their rent is covered by their voucher and housing authorities would be able to reduce housing assistance payments in those zip codes. Households in high-rent areas would not be affected. Under this scenario, the new rule saves more than $8 million in the Washington metropolitan area.
In the second scenario, all voucher recipients have rents that are equal to the applicable small area Fair Market Rents. In this case, with a rule that shifts payment standards to the small area fair market rent, voucher households in low- and moderate-rent areas would not be affected, but households in high-rent zip codes would now find the entirety of their rent above the 30 percent of income covered by their voucher. An additional $3 million would be needed in the Washington metropolitan area just to cover the difference between the fair market rent and small area market rent in high-rent areas.
In practice, changes in spending would be in the middle of these two extreme scenarios. Then what is the necessary condition in which small area Fair Market Rents avoid additional costs? Assuming no moves, there would need to be enough overcharged vouchers in low-rent zip codes to balance out the excess voucher costs in high-rent zip codes. Given that the percentage of the “over-housed” (more bedrooms than people, one indicator of possible overcharging) is much higher in low- and moderate-rent zip codes (10.8 percent) than in high-rent zip codes (3.9 percent), the new rule would likely be cost effective in the Washington metropolitan area. Nevertheless, if many voucher households move to high-rent zip codes as the new rule intended, it would inevitably require more budget, or result in fewer households receiving assistance. Some organizations, including the National Association of Home Builders, have expressed such concern.
Small Area Fair Market Rents put a burden on housing voucher recipients who currently live in low-rent zip codes, since many of them would have to pay more under the new rule if they didn’t want to move. (Desmond has theorized that such a rule would cause landlords in low-rent areas to lower their rents to the small area fair market rent since they had lost the incentive to overcharge presented by the old payment standard, but it is not known if this would happen, and even if it did, it presumably would not happen immediately.) This could lead to an increase in housing instability and housing cost burden problems in those zip codes. Additional constraints in residential location choices beyond financial barriers, such as discrimination by landlords, a lack of access to public transit or vehicle, strong social ties in the original neighborhoods, and difficulty of crossing housing authority jurisdiction boundaries would mean that households could not always solve these problems with a move.
Still Worth It
The final SAFMR rule did try to address these issues, however. The rule includes tenant protections, and provides housing authorities the option to temporarily withhold voucher contracts from payment standard reductions and gradually reduce housing assistance payment over time. The new rule would have been implemented to certain metropolitan areas meeting several criteria that take into account the complexity of administration and rental market strength.
Since it is clear that small area Fair Market Rents expand housing options in high-opportunity neighborhoods, the delay should not be a prelude to its cancellation, but the final rule should take place as originally planned.