Housing Affordability: The Growing Low and Middle Income Crunch

The scarcity of affordable housing is a concern across most of America today. And it’s not just a problem for low-income earners anymore. Housing affordability issues are creeping up the income scale, reaching the middle-class in many areas. The causes include high land values, low wage growth, rising home prices, density restrictions, and overall economics that constrain the supply of low-to-moderately priced housing. The lack of affordable housing is now reaching rental apartments where rents have risen dramatically over the past several years.

As rent growth continues to outpace income and wage growth, the amount of cost-burdened households continues to rise, and may increase by as much as 25% by 2025. This would result in over 14 million workforce housing renters across America putting half of their paycheck to rent payments each month. Cities are increasingly cash-strapped and have few options to drive more affordability. Without innovative solutions to help reduce the burden on low income workers, many more Americans will face tough housing decisions in the coming years.

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Two recent articles from Bisnow chronicle some of the affordable housing issues present across America and what cities are doing to limit or resolve them. The first article from Dees Stribling interviewed Habitat Affordable Group Senior Vice President, Charles Hamer, about steps he and his company are taking in order to work with the City of Chicago to combat the affordable housing crisis. The second article, by Jon Banister and Miriam Hall, outlined the issue of affordable housing on a broader spectrum across the United States. Banister and Hall believe that the middle class is at risk of following a similar trajectory to that of lower income families, where rising housing prices are causing severely strained financial conditions. Our summary of the highlights from these articles follow:

Why Do We Have A Housing Affordability Problem?

  • Since the Great Recession, the US has seen an incredible economic resurgence, yet two fundamental economic metrics are diverging: wage growth and housing prices. Wages growth is low and has fallen significantly behind rising housing prices. This has caused more Americans to stretch when purchasing or renting a home or apartment.

  • Since 2008, the construction of Class-A apartments asking the highest rents has dramatically outpaced the addition of Class-B and Class-C apartments. This has increased the access to housing for high-income earners and decreased options for middle and lower income earners.

  • High property taxes are making it extremely difficult for developers to build affordable and mixed-income housing. As higher taxes create much more risk for investors and developers, they are less likely to commit to creating affordable housing solutions.

  • Tight zoning regulations and NIMBY-ism prevent higher density developments and keep high-cost, single-family homes in low density areas from being re-developed. This increases the cost of housing due to the high land cost included in purchase prices.

  • Developers point to myriad issues including the price of land, rising construction costs, limited tax incentives, and lender financing requirements.

  • Although not the sole determinant of rental rates, a key contributor is the debt service requirements set by lenders. A common misconception is that the property owners set rental prices; while technically true, banks and lenders contribute by dictating the underwriting terms required to borrow money. These requirements necessitate high rents to reduce the risk to lenders.

Due to these issues, and many others not mentioned above, increases in rents are set to continue. The National Low Income Housing Council recently released figures that suggest renters across America must earn around $21.21 per hour to afford a modest two bedroom apartment; however, the average national hourly wage is $16.38. Nearly half of all US renters spend over 30% of their income on rent while 25% of US renters are spending over half of their income on rent. For low-income earners requiring workforce housing, this situation is described as moderately or severely cost burdened and can be crippling to their stability. This trend will continue and is likely to increase.

What Cities like Chicago are Doing

Some of the measures being used by cities like Dallas, Chicago, Los Angeles, and Denver are outlined in the two referenced articles and include:

  • Focusing resources specifically on the creation and preservation of affordable housing for individuals and families between 60% and 120% of the area median income.

  • Some groups are organizing to promote higher density, mixed income buildings that can defray some of the high-cost of land and construction for low income rentals.

  • Looking for ways cities can work with other taxing authorities to reduce the risks associated with property taxes in the area. This could be done by capping real estate taxes on affordable housing at specific percentages of gross income to protect tenants, owners, lenders, and investors.

  • Partnering with or contributing land to developers to build affordable units on city-owned land that is currently vacant or under-utilized.

  • Expanding housing trust funds to provide rent assistance to low income renters.

  • Providing density bonuses for new developments that set-aside a portion of the total number of units to low income residents, ranging from 0%-120% of AMI.

  • Creating real estate tax exemptions for projects financed by low-income housing tax credits.

  • Utilizing Opportunity Zones that provide up to a 25-year post-construction real estate tax exemption for developments with a minimum percentage of affordable units.

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