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Unfair Market Rents: How Inflation Is Skewing FMRs

"Fair market rents" are set by HUD and used to determine how much federal assistance programs will pay toward rent. But with rental costs rising so rapidly, they aren't keeping up.

Image by iSock user Cemile Bingol

HUD provides eligible families with tenant-based vouchers, which may be used to rent any home a family finds that meets program requirements. When market rents increase rapidly and fair market rents do not keep pace, more landlords are charging rents that the vouchers don’t fully cover, making it harder to find a place to use them. Image by iSock user Cemile Bingol

When Samantha Brown of Community Housing Partners starts planning an affordable housing project, some of the key numbers that figure into her calculations are the area’s fair market rents, or FMRs.

Fair market rents are established by HUD and are supposed to represent somewhat less than the midpoint of what it costs to rent a home in a local housing market. FMRs dictate the rents that vouchers will cover, and how much rent an organization like Community Housing Partners is allowed to charge its subsidized low-income tenants.

Based in Virginia, Community Housing Partners (CHP) has about 6,000 units across the mid-Atlantic and Southeast, many of them built with Low-Income Housing Tax Credit (LIHTC) funding and supported by rents partially paid with project-based vouchers.

When Brown, CHP’s vice president of development, assembles financing for a new multifamily development or a building rehab, lenders want to know that future rents will cover the debt payments CHP is taking on to pay for labor, materials, and other expenses. Brown and her colleagues have made many successful deals over the years, but lately they’ve been running into serious headwinds. A severe labor shortage, soaring inflation, and a boost in interest rates have driven up their costs, but the federal FMRs have not been keeping up.

“It’s really been in the last six months, like, all of a sudden, boom!” Brown says. “We were seeing rising costs, but the rise in interest rates has just … been the double whammy, along with the increase in construction costs. That’s really impacting our ability to … close deals that are already in process.”

For the past two years CHP had been preparing to build housing in North Carolina that was funded with 4 percent LIHTC credits, but last month the organization all but abandoned that strategy because interest rates have increased too quickly compared to rents, she says.

Low or inaccurate FMRs can also affect low-income families directly. While builders like CHP use rents from project-based vouchers to support their financing, HUD also provides eligible families with tenant-based vouchers, which may be used to rent any home a family finds that meets program requirements. When market rents increase rapidly and FMRs do not keep pace, more landlords are charging rents that the vouchers don’t fully cover, making it harder to find a place to use them.

“From the tenant perspective, it restricts housing access and may steer the tenant towards substandard housing and higher-poverty neighborhoods, because the subsidy level is so low and closes the door to what HUD calls ‘high-opportunity neighborhoods,’ where maybe there are quality jobs, reliable public transportation, and high performing schools,” says Deborah Thrope, deputy director of the National Housing Law Project.

In urban areas with hot real estate markets, public housing agencies and affordable housing providers have long struggled with low FMRs. But now widespread housing shortages, changing living patterns, and rampant inflation have made the subsidy rules more of a challenge across the country, says Eric Oberdorfer, director of policy and program development at the National Association of Housing and Redevelopment Officials.

“What we’ve seen, especially I’d say coming out of the pandemic where you have a lot more people who are working remotely, you have a lot of people that have left urban areas to other smaller and more rural communities, we’ve seen pretty significant rent increases in places where that really hadn’t happened before,” he says.

He points to booming areas in the Pacific Northwest and the West like Boise, Idaho; and Reno, Nevada, as among those where rapidly rising costs have swamped FMRs.

“They’re really facing some of these concerns with FMRs that existed in the past but maybe didn’t exist as widespread as they do today,” Oberdorfer says.

Updating Old Data

The misalignment of federal guidelines with on-the-ground rents stems from HUD’s reliance on relatively old data when calculating the next year’s fair market rents.

For its multi-step FMR-setting process, the agency starts with the Census Bureau’s 5-year American Community Survey (ACS), pulling out rents that are at the 40th percentile in their local markets. It then makes a series of adjustments using rent figures from the 1-year ACS based on people who have recently moved, an inflation rate from the Consumer Price Index, and a trend factor that projects subsequent inflation.

Collecting, processing, and publishing the census data takes more than a year, at which point calculations begin for the following year’s FMRs. Fair market rents are therefore largely based on three-year-old market data that is adjusted by an inferred inflation rate. For example, the 2022 FMRs were based on the 2019 ACS data.

Voucher holders usually pay about 30 percent of their income toward rent, with the rest coming from the voucher, up to an amount called the “payment standard.” If a unit’s rent exceeds the payment standard, the tenant has to pay the difference as well.

Public housing agencies, which manage housing vouchers, are typically allowed to set payment standards for their areas at between 90 and 110 percent of the local FMRs. They can issue a greater number of less expensive vouchers, or a smaller number of larger ones that make it easier for the voucher holders to find units. If market rents are low compared to the FMR, it makes sense for public housing authorities to reduce the payment standard a bit. When rents significantly exceed official FMRs, as now, a higher standard becomes necessary for vouchers to be usable.

HUD provides a few ways for housing agencies to exceed the basic rent and subsidy limits. They can request permission to set their payment standards at 120 percent of FMR, and this year, in response to the pandemic, HUD has temporarily allowed public housing agencies to do so more easily. Waivers are also available for tenants with disabilities, for emergency housing, and for certain other situations. If an area’s FMRs are significantly lower than local market rents, a state or local housing agency may also petition HUD to update the base numbers for its area.

In March, for example, HUD announced that the 2022 FMRs for 12 areas—and thus the value of vouchers in each area—would be revised from HUD’s previously announced figures. The areas include Transylvania County, North Carolina, and metropolitan areas of Abilene, Texas; Boston, Massachusetts; New York; and Portland, Oregon, among others. In each case, the designated public housing agency for the area had paid for a survey of market rents and submitted the data to HUD.

“To actually adjust the FMR itself is more difficult because agencies have to submit survey data showing that rents are higher than what the FMR is based on,” says Will Fischer, senior director for housing policy and research at the Center on Budget and Policy Priorities. “That is an expense, they have to spend money on doing a survey of local rents … There are some agencies that do it, but it’s a burdensome process and there’s a lot of places where it doesn’t happen.”

Fine Tuning with Small Area FMRs

Fair market rents can also be out of line with market conditions due to geographic variation. In a large jurisdiction, such as major metropolitan area, using a single set of FMRs can lead to subsidies being too low for some pricier neighborhoods. At the same time, they may be higher than market rates in less costly sections of the city, potentially wasting scarce federal funds.

Those variations have been addressed in large part by Small Area FMRs, which were piloted in 2011 after HUD settled a lawsuit alleging that metro-wide FMRs were keeping voucher holders of color out of white neighborhoods with higher rents. Small Area FMRs are based on ZIP code, rather than metropolitan areas or rural counties, and thus reflect neighborhood rents more accurately.

Small Area FMRs have been mandatory in 25 metro areas since 2018 and may be optionally adopted in other urban areas. Public housing agencies in metro areas may also set payment standards at 110 percent of the Small Area FMR in particular ZIP codes without having to ask HUD for approval. Since the Small Area FMRs may be substantially higher than the area’s FMRs, this option gives agencies considerable flexibility in matching local market rents.

Tushar Gurjal, policy adviser at the National Association of Housing and Redevelopment Officials, says Small Area FMRs are useful tools for helping low-income people move to low-poverty areas, although they don’t solve every problem. Vacancy rates may be very low in desirable areas of densely populated cities, making it difficult to find an apartment even with Small Area FMRs. Meanwhile Small Area FMRs tailored to low-cost neighborhoods may result in subsidies that are too low to incentivize many landlords to take vouchers, making even those areas unaffordable for voucher holders. Small Area FMRs are best used selectively, Gurjal says.

“If you have a big geography and you know there’s a few neighborhoods that have lower concentrations of poverty, you can set the Small Area FMR there without necessarily lowering the other ones, and this helps you ensure that people are still able to find units,” Gurjal says. “It is a good idea . . . but we just have to be careful in the application to make sure we’re not creating adverse consequences sometimes.”

Trying Out Private Data

The National Association of Housing and Redevelopment Officials and other advocacy groups have in the past recommended that HUD change its methodology to achieve more accurate fair market rents, for example by using more up-to-date rent data from commercial sources, or by allowing housing agencies to set their payment standards at 120 or 130 percent of FMRs without asking for special permission.

Public housing agencies already cite private rent surveys when they petition for higher FMRs, but HUD has resisted calls to base its own annual calculations on private-sector data, which may not reflect the full housing market. However, the disruptions caused by the pandemic have recently led the agency to consider changing that policy, at least temporarily.

HUD’s proposal, published in July, was prompted by the Census Bureau’s announcement that it will not release 1-year ACS data for 2020 because the pandemic impacted the usual data collection process. HUD instead wants to use 5-year ACS data of rents paid by people who moved in 2019 or 2020 and update it with private data sources. The agency also wants to use private data to calculate the inflation factor in limited instances. For its 2023 calculations HUD wants to use data from Zillow, Moody’s Analytics, RealPage, CoStar Group, CoreLogic, and ApartmentList Rent Estimates.

While these sources “do not cover the entire U.S., may not be individually representative of the rental market, and cannot be used to directly compute FMRs, they may be useful for discrete components of the calculation,” the agency says. Comments on the proposal must be submitted by Aug. 12.

HUD notes that FMRs are used in several programs aside from vouchers. The agency uses them to determine rents for some project-based Section 8 contracts and for the Moderate Rehabilitation Single Room Occupancy program; rent ceilings for the HOME Investment Partnerships program and the Emergency Solution Grants program; the primary rent standard for the Housing Opportunities for Persons With AIDS program; maximum awards for Continuum of Care recipients and maximum rent for property leased with Continuum of Care funds; and public housing flat rents.

Affordable housing advocates note that as FMRs and the resulting subsidies increase, HUD’s budget must eventually grow as well. Gurjal says Congress should boost the agency’s Housing Choice Voucher program to meet those rising costs and to cover the millions of eligible families and individuals who are not receiving housing aid because of insufficient funding.

The voucher program currently subsidizes housing for about 2.3 million households. In his 2023 budget request, President Joe Biden proposes boosting its budget by $6.4 billion to $32.1 billion to renew existing vouchers and add another 200,000 households.

“It will be an additional cost to the program as the FMRs are increased. That is an issue because we’re going to be spending more but housing the same number of folks, because of the rental price increases,” Gurjal says. “We also would like to see a large expansion of the voucher program, ideally, so that everyone who is qualified for a voucher is able to receive it and is able to find a unit.”

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