Affordable Housing: What’s In A Definition?

There is an affordable housing crisis. We’ve been reading this often as we scan news stories to include in blog posts at affordablehousingaction.org.

It turns out that the term affordable housing is more than a bit slippery. Here we will talk about what it means and why it matters.

Affordable Housing Is … A Homonym?

A homonym is something that has multiple meanings, while maintaining the same spelling and pronunciation. If ever there was a homonym, it is “affordable housing”.

Currently, among other things, “affordable housing” means:

by group

• Housing for people on fixed incomes
• Housing at prices that don’t overburden the budgets of ALICE households
• Housing that is affordable for the workforce

by cost

• Housing that is priced at the average rent, or at 80% of average rent or at 120% of average rent

by income

• Housing that costs no more than 30% of a person’s income
• Housing that is affordable for people who earn less than the median income

First, we’ll look at how the three kinds of definitions (groups, housing cost and income) affect the affordable housing that is developed.

Groups

Housing for people on fixed incomes

What kind of fixed income? Perhaps a pension, or disability insurance, or social assistance. When income is fixed and housing costs go up, sooner or later, the housing becomes unaffordable. Incomes in this group tend to range downward from quite modest to extremely low. We have reported stories of people with fixed incomes who are living in communities with no rent controls and facing significant rent increases (100% is not uncommon).

Common themes in these stories are eviction for non-payment of rent and a fruitless search for something affordable elsewhere. The condition of the units (current and potential) commonly include faulty plumbing, dangerous wiring and pest infestations.

Often, the landlord’s goal is to tear down or renovate the units for tenants who can pay more. People on fixed incomes don’t make the grade because they have no more to pay with. People in this group are often excluded from affordable housing targeted to specific groups because they can’t afford the cost of the housing being offered.

ALICE households

ALICE stands for Asset Limited Income Constrained Employed. It is the brainchild of some United Ways in the United States. ALICE draws attention to people who are working and housing burdened in its report ALICE: The Consequences of Insufficient Household Income. Housing burdened means they are paying more than 30% of their income for housing. There are 350,000 ALICE households in Michigan alone, where rents are relatively low compared with New York City and San Francisco.

Workforce housing

Unlike ALICE, which uses data to determine who’s included, workforce housing seems to be defined by judgement. Workforce housing includes teachers, nurses, paramedics, fire fighters and police. It sometimes includes restaurant workers, cleaners and garbage collectors, but not necessarily. It includes people who receive six figure incomes (paramedics and police). In some communities, they are candidates for affordable housing due to high housing costs.

People who are homeless rarely feature in definitions of affordable housing or in the announcements of new units. For example, people who are homeless are not eligible for workforce housing. With the definition occupied by workforce housing, how does one speak out for “affordable housing” for people who are homeless when the term is already taken? Deeply affordable? More affordable? Truly affordable? What about “social” or “public” housing, which are different terms altogether, to distinguish it from “affordable”?

Housing Cost

Housing cost is the second example of a homonym used to define affordable housing. Definitions based on housing cost are linked to the current housing market. Respected authorities collect data and publish information about housing costs regularly.

The “anchor” for cost based definitions is median or average rent¹.

Affordable housing programs based on housing cost aim to create housing that is a proportion of the average or median rent.

Units that are part of housing cost programs require a subsidy. The average/median rent is based on the rents paid by sitting tenants. The rents of sitting tenants are based on what it cost the owner to build the unit (at the time it was built) and receive a profit².

Producing units at, or even below, the average will certainly help some people in the workforce who cannot afford to pay for available units (remember the people previously mentioned with the six figure incomes in workforce housing). However many who are currently housing burdened will continue to be cost burdened at these price levels. ALICE households are a good example, as many are housing burdened at the existing rent levels.

Income

Housing that costs no more than 30% of a person’s income

Income is the third way that affordable housing is defined. Definitions are geared to household income. Banks use 30% of a household’s gross income to decide whether to approve a mortgage. Social housing landlords use 30% of household income to establish rent charges in subsidized units. It is relatively easy to calculate.

Housing that is affordable for people who earn less than the median income

Specifying an income ceiling for a housing program, such as area median income³, aims at households at the lower end of the scale. Someone with an income above the median will have more to spend on housing than someone with an income below it. The farther a program dips below median income, the more it costs to provide a unit. A program that assists people with incomes ranging from 60 to 80% of the area median income is more costly than one targeted to people with 100 to 120% of median income. Regardless of the income level being assisted, the competition for units is high, as many as 100 applicants per unit. Lotteries are used to select the lucky occupants.

A common way to assess trends in income affordability over time is to compare income with the cost of living. Income has not been keeping pace with the cost of living at least in Canada, the United States or England. Furthermore, incomes are becoming less stable, especially in lower paying jobs. There is also a trend at the lower end of the income scale to more part time work. So, today’s 30% may not be the same next month or six months from now.

The trend is based on a comparison of income with the general cost of living. The cost of living includes the cost of transportation, food, clothing, medical expenses and housing. In an area where housing costs are rising faster than the cost of living, incomes may actually be losing ground faster than the comparison of income and cost of living.

All this suggests that the number of households living in housing that is affordable is trending downward over time. The data from ALICE project confirm this, in the communities participating in the project. The appearance of workforce housing as a group suggests that the situation is reaching higher and higher into the income ranks.

Okay, there’s more than one definition. Why does it matter?

Income as a definition is transparent and includes everyone who is affected. Why, then do we have so many definitions in use?

Definitions shape the affordable housing program that is delivered

When an affordable housing program uses the definition of workforce housing, the cost of assistance per unit built will be different than one that uses the definition of ALICE households or people on fixed incomes. There may also be differences in the size of the units and the mix of units provided. The space for supports for one group could differ from another.

When an affordable housing program is based on market housing prices, a unit delivered at 120% of median rent will require less subsidy than the same unit at 80% of the median rent. The definition determines the amount of subsidy that will be required per unit.

In an affordable housing program that uses an income based definition, the cost of assistance per unit will be based on the size and mix of units being delivered. Programs for larger households will require more assistance per unit than someone living on their own. The cost per person of programs with larger units may actually be less than when units are occupied by one person.

Definitions set the criteria for measuring the success of the program

A program has to do what it says it will do. If a program is to deliver units for ALICE households and it housed people who were homeless instead, it could not be considered a success, even though it would be a tremendous achievement.

A program can be successful even though it helps only a few of the people who could benefit from it

An affordable housing program can still be successful, even though more and more people are having more trouble finding affordable housing. The success is determined through the number of units delivered and the definition of who is being helped.

Final Thoughts

We need hundreds of thousands of units that don’t strain people’s budgets, especially for people with extremely low and/or fixed incomes. Instead, tiny amounts of affordable housing that is affordable to narrow groups are being added to the housing market with great fanfare. Continuing in this way will simply deepen the crisis.

So, let’s be transparent about the size and scope of the problem. The groups of people who are affected illustrates the scope of the problem. However, unless we use 30%, not everyone with an affordability issue will be included.

Post Script

We really can’t leave this topic before pointing out that many of these housing programs provide affordable housing (however defined), for a specific period of time, ranging from 10 to 40 years. The program is tied to the length of time the subsidy is provided. Owners and landlords are obligated to provide affordable units as long as they receive the subsidy.

What happens when the program ends?

Owners and landlords are no longer obliged to charge an affordable rent. The subsidy that was the incentive to charge an affordable rate vanishes. The owner/landlord can charge what the market will bear. In hot markets, the difference between the affordable level and the market level can be substantial. The owner/landlord benefits from this difference.

Tenants in affordable housing programs pay an affordable rent for the duration of the program. The rent stays affordable because the program obligates the landlord to charge an affordable rent. When the program ends, the obligation to charge affordable rent also ends. The rent rises to market rates. Rent increases of 200% are not uncommon. They are utterly unaffordable for seniors and others on fixed incomes. Many face becoming homeless.

Time limited programs are helping people who need affordable housing in the short term. What we really need are programs that will provide affordable housing for a long time.

1. Median rent is the mid-point of all of the rents in a defined area. In an area with 101 units, the median rent is the rent of the 51st unit, when the rents are ordered by amount (lowest to highest or highest to lowest, it doesn’t matter).

   Average rent is the result of the total rents collected divided by the number of units. The average rent in the same area with 101 units would be determined by adding up all the rents and dividing by the number of units.

2. In units where there are rent controls, the rate at which rents increase is geared to the cost of living. In a hot market, the rent a sitting tenant pays may be below the rent a landlord can charge for a vacant unit.

   Rent controls geared to the cost of living are intended to ensure that the landlord’s costs and profit are covered. In a hot market, the landlord could charge a new tenant a rent that is higher than the one paid by a sitting tenant. Developers who build new units in today’s market must charge a rent that will cover the cost of building the unit and a profit. When it is not possible to build new units and receive a profit for the average/median rent, a subsidy is needed to cover the difference.

3. Area median income is the mid-point of the all of the incomes in a defined area. The area can be as big as a whole country and as small as a census tract. Rules about confidentiality and sample size may limit publication of information from smaller areas. Income information can come from tax filer or census data.