News Archives InfoFax Affordable Finance Initiatives research mainpage <Back to Infofax Archive Page>

12/27/01: The following is an article that ran in the current edition of ShelterForce that all housing advocates should enjoy.

The Future of Affordability
Trends Nonprofit Housers Should be Watching
by: Eric S. Belsky, Executive Director of the Joint Center for Housing Studies at Harvard University.

Here are four major trends in affordable housing that will affect the work of nonprofit housers and community organizations in the coming years:
  • Affordable housing is being lost at an alarming rate.
  • Net movement out from the city continues, and many core city neighborhoods will suffer further divestment. Those that don't may instead face gentrification.
  • Low-income homeownership is on the rise, but it is precarious, vulnerable to changing economic conditions and predatory lenders.
  • Special needs populations are on the rise. Predictable changes in the age profile of the population will drive increases in young adults, seniors, and the disabled. The numbers of homeless and those at risk of homelessness are also poised to grow as the safety net weakens and the gap between minimum wages and housing costs widens.
Understanding these trends and planning around them will be the key to strengthening communities and meeting housing needs in the future.

Affordable Housing: A Vanishing Resource

Affordable units of all sorts have been disappearing for a variety of reasons, and on many fronts the picture will continue to worsen over the next several years.

By the rules of supply and demand, rent levels could have been expected to drop following the oversupply of market-rate multifamily rentals that emerged from overbuilding in the 1980s. However, the trickle-down didn't materialize. In fact, huge amounts of affordable rental housing were lost to rising rents on the one hand and abandonment on the other. Between 1997 and 1999, HUD estimates that the number of units affordable to extremely low-income renters (those who earn less than 30 percent of the area median income) fell by 750,000 units, or 13 percent. And higher-income residents who want to spend less than 30 percent of their income on housing are crowding out a growing share of the remaining affordable rentals.

The majority of affordable units are unsubsidized. Many of the owners of these market-rate units are at a tipping point: either they can and will raise rents above affordable thresholds, or they will be forced to accept lower rents than they need to properly maintain their properties. Lower interest rates have recently eased some of the pressure on rental owners, and a weakening economy will take the wind out of wage growth and income demand, at least in the short run. As a result, landlords have some breathing room. In a context of sagging demand, they are beginning to offer rent incentives, like a month's rent free, to avoid having to lower their regular rents. This, however, will be short-lived. Pioneers like the Community Investment Corporation in Chicago, the Community Preservation Corporation in New York, and the National Housing Development Corporation in Los Angeles have recognized the importance of focusing resources on opportunities to preserve market-rate units at the margins and are urging Congress to do the same.

The supply of public housing and directly subsidized private housing is dwindling as well. After three decades of net additions, the second half of the 1990s saw the loss of more than 175,000 assisted homes. Section 8 contracts on about 1 million apartments will be up for renewal in the next five years. If recent trends hold, landlords owning one tenth of these vulnerable units will opt out of the program in order to charge higher market rents. With short-term contract extensions now the norm and one-for-one replacement of demolished public housing no longer required and often not aimed for, the thinning of HUD-assisted stock appears likely to persist.

If these trends continue, the stock of housing affordable to extremely low-income renters - subsidized and unsubsidized - could be drawn down to only a few hundred thousand by the end of the decade.

Problems on the homeownership side, though not as severe, are also pressing. In 1999, about 3.1 million extremely low-income owners were spending more than half their incomes on housing as more of them consolidated other debts into their mortgages or had shrinking incomes. Incomes, especially in the bottom quintile, failed to keep pace with house prices in many areas in the 1990s.

Throughout the 1990s the loss of affordable units was somewhat mitigated by rising incomes, and there was a modest drop, from 4.1 to 3.5 million, in the number of people spending half their income on housing. History has shown, however, that some of the income progress made during a boom is vulnerable to reversal during a recession, so the housing situation could worsen significantly if the economy remains shaky.

Prospects for reversing the loss of affordable housing are dim. The hard-won battle to expand funding for the low-income housing tax credit and tax-exempt bond programs may slow the loss rate but will not stop it. Rapid income growth at the upper end of the income distribution will, as it has for decades, tilt the new home market towards the production of expensive units. With so many of the homes built in the past 20 years well out of reach of the poor, the urgency of adding to the stock is building. Making matters worse, in many places local zoning, subdivision, and code rules preclude modest homes at higher per acre densities from being built at all...

Direct additions to the stock as well as preservation of existing affordable units will continue to require subsidy. Simply put, it costs more to house those with extremely low incomes. (and in some places even those with incomes at the area median or higher) than they can afford to pay for it. Even if properties receive full capital grants to cover production, rents sufficient to cover the operating costs on new apartments would force extremely low-income households in most places to spend well over a third of their income on housing. Indeed, about one-quarter of extremely low-income households cannot even afford to cover utility costs, let alone debt service, operating costs, and a return to the investor.

Neighborhoods in Distress

Decentralization away from densely settled urban cores will continue creating problems for many urban neighborhoods. There has been some movement in the other direction, often hailed as a "return to the city." Thirty-one cities that lost residents in the 1970s or 1980s, starting gaining again in the 1990s. However, 16 of those would have continued to decline if it weren't for immigration and higher birth rates. As of 1999, for every three households moving back to cities about five left them for the suburbs. Even the boom in low-income and minority homeownership contributed to decentralization - the majority of both low-income and minority homebuyers purchased homes in the suburbs.

Falling demand in places left behind has resulted in selective neighborhood decline. Creating a vicious cycle, such decline feeds on itself. To arrest it we must preserve affordable housing, address vacant and abandoned property - contaminated and otherwise - and improve public safety, education, and sanitation services. That will not be easy, or cheap. Property values in weaker markets are often less than the cost of producing new housing, making private financing for preservation and production hard to come by.

In the future, it will become increasingly vital for community groups to market the assets that a community has to offer and to attract businesses and working families back. A few organizations are leading this trend. The Initiative for a Competitive Inner City, a nonprofit founded by Harvard Business School professor Michael Porter, an expert on competitive strategy, has been demonstrating that retail demand exists in inner city areas. The Social Compact, a coalition of business leaders who joined together to promote inner city investment, has produced a methodology designed to identify and assess the market assets and strength of inner city neighborhoods.

On the other hand, the households that are moving back into the city are going somewhere. In the 1990s, prosperity and lengthening commute times led to gentrification in certain low-cost neighborhoods in places like Atlanta, Chicago, San Francisco, New York, and Boston. Many of the last bastions of affordable housing were lost. As commuting distances grow and increasing premiums are placed on downtown accessibility, this pattern is likely to continue. In these areas, the need to create a supply of housing with long-term affordability restrictions will be most urgent.

Vulnerable Homeowners

After an unprecedented period of growth in the number of low-income and minority homeowners, it has become more important for community groups to focus on supporting homeowners. Between 1994 and 2000, the number of minority owners surged by more than 3 million and the number of low-income owners (those earning 80 percent or less of the area median income) by about 3 million. The number of Hispanic homeowners rose fully 39 percent, African-American homeowners 24 percent, and low-income homeowners more than 10 percent.

But the new homeowners are vulnerable. Thanks to the growth in subprime and low-down payment lending, many of them achieved homeownership on thin equity cushions and blemished credit. In both 1999 and 2000, fully 16 percent of homebuyers with conventional loans put 5 percent or less down on their homes, up from just 3 percent in 1990. Between 1993 and 1999, subprime lenders' share of the refinance market swelled from less than 1 percent to 17 percent. But subprime lenders are making home purchase loans too, especially in low-income and minority neighborhoods. Between 1993 and 1998, the share of home purchase loans originated by subprime lenders rose from less than 1 percent to 5 percent in high income neighborhoods, but swelled from 1 percent to 9 percent in low-income areas and from 2 to 14 percent in minority neighborhoods. At the same time, concerns over the quality of FHA appraisals and widespread predatory lending abuses in low-income and minority communities have been surfacing. Taken together, these unsettling developments suggest an increasing risk of default and foreclosure.

Housing providers must be on heightened alert for the first signs of default and take swift pre-emptive measures to avert them. Ultimately, the best defense against unfair lending practices is a strong offense. That means counseling borrowers before they purchase a home or refinance their mortgage to ensure that they can handle their payments, and that they get the lowest priced credit they qualify for. It also means pressing to open up prime market channels to low-income and minority communities. Freddie Mac estimates that somewhere between 10 and 35 percent of subprime customers actually qualify for lower prime lending rates.

Growing Special Needs Populations

Demographic trends and recent policy shifts spell increases in some of our nation's most vulnerable populations. Over the next ten years, the number of at-risk teenagers will level off, though at high levels. But young adult population growth will turn from negative to positive, and the number of people over 75 will grow. Growth of the young adult population will boost demand for first-time homeownership programs and for job training. As seniors live longer, the number of people with disabilities will grow. And the still-large numbers of at-risk youth will add to the demand for youth-oriented programs.

Meanwhile, the widening gap between the cost of housing and what even working families can afford could drive up the number of homeless, as well as the number of families in untenable housing arrangements - doubled and tripled up with friends.

In response, housing groups must strive to work with others to offer their neediest clients a complete package of supports. For seniors, this will entail working with local home health care providers and senior centers, developing assisted living and congregate care communities, and helping seniors maintain and modify their homes. Home repair and modification can be accomplished by helping seniors tap their home equity. But that also means defending senior citizens from unscrupulous contractors and predatory lenders. For young adults and those moved off of welfare, reaching out will require working with providers of job training and job search services, and often providing child care.

Helping the chronically homeless will take a truly multifaceted approach that spans many traditionally isolated channels of assistance. Over the longer term, it will require temporary housing and expansion of affordable housing, because homelessness for many is narrowing to a problem of bridging the gap between meager wages and expensive rents.

Strategic Directions

In sum, community groups will be put to the test over the next decade. In addition to the strategies suggested above, community groups may want to consider the following strategic directions.

First, community groups should master the art of making the case for the importance of housing. Evidence is growing that without affordable housing and safe communities, education and workforce development suffer. Therefore, producing and preserving affordable housing must be job one. To persuade others, community groups will have to make the case in the press, through trade associations, and to public officials that housing needs are great and that the failure to meet them erodes the fabric of communities, places children at greater risk, and undermines self-sufficiency efforts. By arguing that urban revitalization takes pressure off open space and sprawl, community advocates may mobilize broader support for revitalizing depressed city and suburban neighborhoods. But groups must be ever vigilant that what they wish for does not exacerbate problems by sparking gentrification. Gentrification without adequate set-asides for below-market rentals and ownership opportunities will only spell trouble for low-income communities.

Second, housing providers may want to reach beyond housing. If it takes a village to raise a child, it takes more than housing - as fundamental as it is - to build communities. Some can branch out by creating subsidiaries to provide additional services, some by linking with established service providers. Still others can join coalitions pressing for better schools, policing, and sanitation. Though the fractured approach to federal, state, and local assistance will impede such efforts, their importance is not in doubt.

The work of community groups has been a beacon of hope in tough times before. Anticipating what's coming up can help them make that beacon as strong and as bright as possible.