#193 Winter 2018-19 — Housing Markets

Whose Affordable Housing Crisis?

Being priced out of appreciating neighborhoods is not the housing affordability problem most Americans face. But they are facing one.

Milton Street in Cincinnati.

A graphic that shows the precent of 300 largest metros where median rent is affordable.To judge from much of what one reads in the media, families with healthy middle-class incomes are unable to find decent housing in the U.S., while gentrification is running rampant, swallowing low-income neighborhoods and entire cities whole. And like most things one reads, it’s partly true. If we look at places like New York, San Francisco, or Seattle, it’s pretty much the case. At the end of 2018, the median sales price of a Seattle home was $760,000, well beyond the reach of all but the upper strata of that affluent region’s population, let alone the rest of the country. And that, in turn, was only a little more than half the median price in San Francisco, the nation’s costliest big city.

But at the same time, the median house sales price in Detroit was $40,000, easily within reach of anyone at just about any income level who can—a major caveat—qualify for a mortgage. But Detroit is no more typical of the “United States housing market” than San Francisco. In fact, there is no such thing; there are literally hundreds of different markets around the country, defying easy characterization. Not all strong market cities are as expensive as San Francisco; Dallas is a fast-growing city with a strong housing market, yet $199,999 will buy you a new four-bedroom house. There are many more areas like that than there are places like Seattle or Washington, D.C.

Rents don’t vary as much from city to city as sales prices do, but they still vary quite a bit. But once again, in most parts of the country rents are within the reach of a moderate-income family earning $35,000 or $40,000, while far from affordable to a lot of people who desperately need housing. More than 70 percent of the nation’s 300 largest metropolitan areas (not just central cities) have median rents that are affordable at 80 percent of the national median household income (roughly $60,000) and over one-third have median rents affordable at 60 percent of national median. (This is somewhat misleading because local incomes in areas with very low rents are likely to be below the national median, and those in high-rent areas are likely to be higher than the national median, but the general point still holds.)   

When we look at gentrification, we see a similar pattern. At one end, there are a handful of cities where gentrification is spreading across most neighborhoods; and moreover, where high prices mean that once an area gentrifies, few people other than the affluent can still afford to live there. That’s the picture in New York (at least in most of Manhattan and Brooklyn), San Francisco, probably Denver, and a few other places. In these cities, even in the areas that are not being gentrified, prices are still going up, pushed by the citywide price pressure.

[RELATED ARTICLE: What Does ‘Gentrification’ Really Mean?]

If we look at gentrification in other cities, though, we find a very different picture. I’ve studied St. Louis quite a bit in recent years. As older industrial cities go, St. Louis is doing fairly well, but it’s still a relatively poor city, and gentrification is largely limited to a handful of neighborhoods that lie immediately south of the city’s Central Corridor, which is the area where downtown, St. Louis University, the major medical centers, the most upscale neighborhoods, and world-famous Forest Park are all situated. Most of the rest of the city is not changing much, or experiencing an increase in poverty and disinvestment. In a study that compared neighborhood trends in metro St. Louis from 1970 to 2010, the researchers found that “only 5,816 people live in census tracts that transitioned over the 40-year period from high poverty to low poverty, whereas 98,953 live in [census tracts] that became newly poor during that period.” A national study that looked at the 51 metropolitan areas with populations of 1 million or more found the same ratio—roughly 20 to 1.

Second, when a neighborhood gentrifies in a city with relatively low property values like St. Louis, prices rise gradually, but never reach the stratospheric levels found in hot market cities. In a market like St. Louis, where the metro median sales price was $167,600 in late 2018, the pressures on prices—except for one or two super-prime neighborhoods—to rise to hot market levels simply aren’t present. A two-family house shown in move-in condition on a beautiful street in the city’s prime Shaw neighborhood was listed late in 2018 for $215,000.

While sales prices have been rising faster in St. Louis’ gentrifying neighborhoods than in the rest of the city, rents—somewhat surprisingly—have not. Quite a few units in Shaw list for between $800 and $1,000 per month. Paying $900 per month for a two-bedroom unit, in a metro where the HUD Area Median Income (AMI) for a family of four is $76,800, is affordable on its face to a family earning 47 percent of AMI. I will come back to the significance of that number later.

So, if housing prices are low, and gentrification limited in cities like St. Louis and dozens, if not hundreds, of others around the country, does that mean they don’t have an affordable housing problem?

No. Emphatically not. But they have a different affordable housing problem than hot market areas. What does that mean? Bear with me while I run some numbers.

Breaking It Down

If you are a renter who lives in San Jose, California, or Washington, D.C., and you have an annual household income of $40,000, the odds are you’ll be cost-burdened: 87 percent of renters in San Jose and 64 percent of renters in D.C. who earn between $35,000 and $50,000 spend 30 percent or more of their income on shelter. If you’re making the same income but living in St. Louis or Cincinnati, the odds are just as high that you will not be cost-burdened. Only 19 percent of renters in Cincinnati and 23 percent of renters in St. Louis in that income range spend 30 percent or more of their income on shelter.

The picture is very different for tenants earning under $20,000. Just about anywhere in the United States, no matter the housing market, 80 percent or more of all tenants earning under $20,000 will be cost-burdened, and most will be paying 50 percent or more of their income on shelter. In Detroit, it’s 90 percent; in Portland, Oregon, it’s 87 percent; and in Cincinnati, it’s 85 percent.

The absolute numbers show the same pattern. In San Jose—one of the most expensive cities in the United States—there are more cost-burdened renter households earning over $35,000 than under $35,000. But in Cincinnati there are almost 27,000 cost-burdened renter households earning under $20,000, compared to fewer than 3,000 earning over $35,000.

Strong-market cities have what one might call a “middle-class affordability” problem, but for the most part, cities with weaker markets do not. What they do have is an overwhelming problem of affordability—and from all accounts, a housing quality problem as well—affecting their poor and near-poor residents, basically households earning under $20,000 or $25,000 per year. And those households make up a much larger share of the population in a relatively poor city like Cleveland or Milwaukee than in an affluent city like San Francisco. Forty-six percent of all households in Cleveland earn under $25,000 per year, compared to only 18 percent in San Francisco.

That leads to a series of questions. The first one is why don’t rents decline the way sales prices do? There are neighborhoods in Detroit or Cleveland where you can buy a house—not in great shape, perhaps, but livable—for $20,000. You’d spend less than $200 per month on taxes, mortgage, and insurance for that house. But that same house may rent for $700 per month. That doesn’t seem logical, but it is.

While house sale prices will keep going down nearly to zero until they reach their market level—if there is one—rentals work differently. Landlords have to factor in how much they need for maintenance, reserves, repairs, taxes, and some combination of mortgage payments and an acceptable return on the value of their equity. Landlords also factor in their expectations. If they think their property is appreciating, they’ll accept a lower annual rate of return on equity, because they figure they’ll make up for it when they sell the property. But if they think it’s losing value, they’ll look for a higher annual rate of return to make up for the fact that they may not get their money back if they try to sell it down the road. The lower their expectations are, the more they will try to increase their net cash flow, cutting back on maintenance, and even not paying property taxes. So even a landlord who owns a house worth $0 on the market may still need to rent it for $700 to cover their costs and get a sufficient return.

If a landlord can’t get the minimum rent they feel they need to make ends meet, they are not likely to lower the rent below that level, which would mean knowingly losing money. Instead, they’re more likely to walk away.

For a single parent with two kids earning $15,000 per year, $700 per month works out to 56 percent of gross income, a rent burden that puts them in permanent housing insecurity, at constant risk of eviction, doubling up, or homelessness. These are the families that Matt Desmond writes about in his book Evicted, and there are a lot of them. Almost 1 out of every 4 families in Cleveland is a single parent earning less than 1.5 times the poverty level. And they are not the only households in weaker market cities whose low incomes put them at risk—all of these cities have large numbers of single people and smaller numbers of other families who struggle to pay rent every month. On top of the affordability issue, all accounts make clear that a lot of the houses and apartments low-income households do find to rent in these cities are in sorry shape, with unreliable heat and leaky plumbing, mold and mildew, peeling paint, and other conditions that affect their tenants’ health and safety.

We Need Better Options

So is the solution to build more affordable housing? If we’re talking about the Low-Income Housing Tax Credit (LIHTC) model, which accounts for almost all of the affordable housing being built in the United States today, the answer is probably no. The fact is that almost all LIHTC units are too expensive for the people who need them most. LIHTC project rents are pegged to be affordable to households at 50 or 60 percent of AMI, depending on which option the developer chooses. In weaker market cities those rents are not only far above what poor or near-poor families can afford, they are usually higher than the median market rent in the same city. In Cincinnati, a new LIHTC two-bedroom apartment affordable at 60 percent AMI can rent for up to $1,057 per month. That is 40 percent above the median market rent for a two-bedroom apartment, and nearly double what the median single parent in Cincinnati can afford if they spend 30 percent of their income on rent.

In most parts of the United States, LIHTC projects charge more than what most families who need better housing can afford. But those families don’t have better options. As a result, when we look at the numbers, we find two startling things: Close to half (43 percent) of all families who live in LIHTC units spend over 30 percent of their gross income for shelter. And of the families who spend 30 percent or less of their income, about two-thirds have project- or tenant-based vouchers (based on my analysis of data in Understanding Whom the LIHTC Serves: Data on Tenants in LIHTC Units as of December 31, 2015). Without vouchers, the great majority of LIHTC tenants would spend more than 40 percent of their income on rent costs. LIHTC projects improve the quality of their residents’ housing, but without vouchers, leave their affordability problems and insecurity unchanged. LIHTC is not a solution.

Moreover, most LIHTC projects are built in high-poverty neighborhoods, areas where sites are available and more CDCs are active, but where total housing demand is not growing. As a result, those projects often cannibalize the existing housing stock; in other words, as new LIHTC units come on line, most of their tenants come from existing rental housing in the same (or similar) neighborhoods, often bringing Housing Choice Vouchers with them. They move out of private market units, or older LIHTC projects, in to areas that already have a large surplus of housing, putting even more units at risk of abandonment.

Production programs by themselves can help meet the needs of struggling middle-class families in San Jose or Seattle, but without increased demand-side or operating subsidies—vouchers, or something similar—we will never meet the needs of the poor and near-poor families who most desperately need a decent place to live and get them the security that comes with knowing that they and their children won’t be out on the street next month.

Creating a universal housing allowance program for those whose incomes are too low to be able to afford modest but decent housing in the private market is far more important to meeting the needs of weaker market communities than increasing production of subsidized housing along LIHTC or similar models. Not to mention that it would be vastly more cost-effective than trying to replace existing habitable private market units with newly built subsidized units costing 10 times or more what it would cost to upgrade the private market units—and still have to provide vouchers or operating subsidies to the new subsidized units.

For me, a universal housing allowance should be the most important national housing policy goal for affordable housing advocates, with nothing else even coming close. And with some serious thinking, we should be able to come up with a model that will both be more cost-effective and work better to improve housing quality and opportunity for poor and near-poor families than the current voucher program.

Clearly, subsidized housing—LIHTC or otherwise—has one big advantage over housing allowances in that it can be permanently affordable housing. I don’t underestimate that. Back in the 1970s places like Seattle or Boston didn’t look that different from St. Louis or Cleveland today. Clearly, what we have—unless there are compelling reasons to the contrary—should be preserved. And this is where the discussion ties back into gentrification, and its relatively gradual, modest course in places like Cleveland. The most new subsidized housing, as well as acquisition of private-market housing for conversion to affordable housing, should happen in those areas where gentrification is taking place. That way, we can not only increase opportunities for low-income people who will move into those units and preserve those opportunities for those who already live in those areas, but also create a long-term pool of affordable units in neighborhoods where the market is likely to continue to rise.

But we also need to acknowledge that the great majority of the affordable housing problems that people in these cities face has little or nothing to do with gentrification, but with poverty and the fundamental imbalance in the low-income housing market.


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