In a real estate market where many people still battle with underwater mortgages, foreclosure, and the month-to-month struggle to make their payments, the need for affordable housing has never been more important.
In a recent analysis published by Trulia Trends earlier this November, it was found that housing affordability for middle class buyers is worsening as affordable options decline. In October 2013 62% of homes for sale met Trulia's affordability definition while that number dropped to 59% in October of this year as the study found.
In many markets around the country, barriers like cost and project size impede the development of affordable rental housings.
The Demand for Affordable Housing is Huge
A statistic from 2011 shows that there were only 6.9 million rental units affordable to the 11.8 million extremely low-income renters. Amazingly this supply gap grew by 34% in the decade between 2001 and 2011. Even now this gap continues to increase.
Because governmental support for affordable housing across the country lags behind the need, it becomes even more important to develop options for low-income renters as effectively and cost-effective as possible.
“Bending the cost curve will enable developers to deliver additional affordable rental homes and help jurisdictions provide more housing choices, meet the growing need for affordable rentals, and ensure that individuals and families across a range of incomes have a place to call home within the community,” says “Bending the Cost Curve: Solutions to Expand the Supply of Affordable Rentals” a report released in early 2014.
The Urban Population Boom
Less than 100 years ago only 20% of people in the world lived in an urban area. Now for the first time in human history, more than half of the world population lives in a city. This unprecedented boom in urban population growth is not being met by the supply affordable housing for low-income people.
As more people move to cities seeking job opportunities, the need for affordable housing will continue to increase. It has been difficult for city, state, and national governments to proportionately keep up with this growth as they continue to react to the problems rather than implementing systems to fix it.
Traditional Public Housing and Section 8
Already under financed, the government's rental assistance programs for low-income populations are in need of a boost. With nearly 9 million households on the brink of homelessness in 2012, more support is needed.
For the two different Section 8 programs, rents are subsidized in privately owned properties. These programs are invaluable to more than 5 million low-income households across the country. Without these programs, they would have no place to call home.
Since 2008, the number of households qualified to participate in these government programs has increased significantly. Compared to 2007, 8.5 million or 43% more low-income families without any governmental housing assistance paid more than 50% of their incomes in rent in 2012. To pay rent, they needed to cut back on food and medical care costs. This then makes it more challenging for their children to be successful in school.
Governmental Programs to Encourage Affordable Housing
A highly successful program that the US government implemented that increases the supply of affordable housing nation-wide is the LIHTC Program.
The LIHTC Program is an indirect Federal subsidy that is designed to finance affordable housing development for low-income populations. Enacted in 1986 as part of the IRS tax code, the LIHTC Program is designed to incentivize private market real estate developers to invest in affordable housing. Syndication of tax credits for project equity in combination with an attractive developer fee has incentivized private developers to construct more than 1.7 million housing units to serve low income individuals using the low-income housing tax credit.
Each state is allocated a certain amount of housing tax credits by the Federal government depending on the number of residents in that state. It then becomes the state's responsibility to allocate the credits through a competitive process that gives priority to projects that serve the lowest income families and that are structured to remain affordable long term.
Overcoming the Affordable Housing Challenges
Developers and real estate investors face several challenges when they decide to create affordable housing projects.
One challenge is that inflated land costs, high legal fees and escalating construction costs are not scalable to the smaller affordable housing projects proposed. While a typical market-rate multifamily project may be 150+ units, an affordable housing project is typically 50 – 80 units. For example, legal costs of $150,000 are more scalable to the 150 unit project at $1,000 than the affordable project at $3,000 per door.
“Drivers of cost come at all points in the development process and are deeply intertwined, but the need for more affordable rentals compels us to take on the challenge of understanding the drivers and work to mitigate them,” says Lynn Ross, executive director of the Terwilliger Center.
Another challenge is that there is a limited allocation of tax credits per year. In Colorado, CHFA allocated $11.8 million of annual tax credits to 13 separate projects in 2014. There was a total of 44 total applications between the two submittal rounds. The government has released some recent legislation that looks hopeful for the increase of affordable housing. In October, the IRS released the LIHTC allotment per state. Although the numbers are similar to 2014, the government did increase allotment to account for inflation.
The need for affordable housing keeps growing every year. As more of the world's population moves to urban locations seeking opportunity, the need for low-income housing will be on the rise. Fortunately, developers are utilizing the LIHTC tax credit to create affordable housing projects across the United States. In addition, new legislation needs to be implemented that will make it easier for developers to initiate projects of different sizes.