Points made by this chart

Income-to-Rent-to-Value

Affordability Dynamics and its Policy Implications

The attached income-to-rent-to-valu e chart (PDF 3MB) mathematically displays and demonstrates the following points:

1. At 80% of median income, a family can usually afford a single-family home (if they can find the down payment[1]).

2. At 60% of median income (LIHTC cap), affordable rent (LIHTC caps) roughly approximate market in most places in America. (Strong supply-limited markets like Boston/ San Francisco have equilibrium rents above 60% affordability.)

3. At 30% of median income, affordable rent just barely pays operating costs. As a result, even if the owner is given the property, free and clear with no debt, the property is just able to cover its costs. Corollary: below 30% of median income, families face not so much a housing problem as a poverty problem. Related corollary: to house families below 30% of median income, by definition the government must provide them rent-paying income supplement (e.g. Section 8).

4. At the minimum wage, a single breadwinner earns about 21% of median income – obviously, this is below the minimum rental sustainability, and implies that minimum-wage breadwinners need income supplement to secure any decent housing.

5. The typical Section 8 recipient today (property-based or voucher, affordable or public housing) is in the range of 17-19% of median. Section 8 is thus predominantly a poverty-abatement (not elimination) program.

6. Section 8 is going predominantly to people without jobs.

· Elderly have a good reason for not having jobs but as they age, come increasingly to need other health-care-related services that arise slowly and are most efficiently provided at the property itself.

· Families who lack a full-time employee as their head-of-household typically have a family economic impairment (such as an unmarried head of household with young children) that represents a barrier to getting a job.

That being the case, owners who operate housing that is predominantly Section 8 and non-elderly are typically housing a population who predominantly face job barriers. Whether the housing is elderly or family, either way the owner typically performs invisible social work for which it is seldom recognized or compensated, and as a result the property's operating costs will be higher than a conventional property.

7. Once a property is rent-covenanted (that is, by contractual agreement) with rents that by formula or agreement are below local market rent, then it is a haven of affordability where income-supplement programs (e.g. Section 8) are guaranteed viable. But in supply-constrained markets, without rent covenant caps, income-supplement programs will not work.

8. When rents are above local market (e.g. the original forms of Section 8 production programs), the rents must be propped up with property-based Section 8 because otherwise there is no one in the target market who can afford them. Reversing this, before the government can reduce property dependency on property-based Section 8 subsidy, rents must be brought down to market or below.

9. The farther down rents are brought, the greater the affected constituency (below 60% of median) who can afford them out of their own pockets.

10. A property can break its cycle of Section 8 dependency only if the Section 8 could be discontinued or converted to vouchers without creating massive displacement or increased homelessness. This is possible only if the government can assure itself that there will be, in the local market, an adequate supply of rent-covenanted apartments into which the newly de-subsidized residents can move. Thus the subject property – the property whose Section 8 will convert to tenant-based – should have covenanted rents at affordable levels, and there should be new supply coming into the market that is also rent-covenanted. This marketplace imperative is the most powerful case for production programs oriented to capital-cost-buydown approaches, because only they create economically viable subsidy-independent housing.

11. Mark-to-market drives rents down to 60% affordability or below. Arguably, they should be driven lower still, so as to broaden the band of incomes for which Section 8 or income supplement are no longer necessary as a vehicle to secure affordable housing.

[1] The mathematics are predicated on renting rather than homeownership but for consistency affordability is calculated on rental basis. At 30% of income for shelter (mortgage plus costs of homeownership), the sustainable value is $74,000 (which would imply a $15,000 down payment and a $59,000 mortgage).