Invisible affordable housing
By David A. Smith
4 min read
For want of a database, a valuable inventory is being lost.
The absence of any meaningful quantitative analysis of America’s “natural” rental stock – properties designed to be rentals (D2Rs) – is preventing policy makers/designers from identifying, creating, and implementing programs that would cost-effectively expand the nation’s reliable affordable housing supply.
My company’s work for the Urban Institute’s Housing Finance Policy Center has found that fewer than one in six of America’s 38.8 million renter households (under 5.5 million) live in Regulated Affordable Rentals (RARs). Instead, most reside in market-rate units that can be divided into luxury high-end rentals (HERs); middle-income rentals (MIRs), the largest segment, with rents just above affordable levels; and naturally affordable rentals (NARs). The last, while unregulated with no government funding, are priced similarly to their local RAR competition, yet are virtually invisible to researchers and policy makers.
Though RARs are 15% of the stock, they consume perhaps 90% of America’s affordability resources and an even larger share of policy analysis. Yet the biggest affordability losses are being suffered not in the observed RARs but in the invisible NARs. In those places where the NAR inventory is most needed – cities with growing economies – the amount of this product appears to be steadily shrinking. Not only are affordable apartments being lost, their absence propels rents higher and makes production of new affordable housing even more costly. ut while many have observed this problem, no one is addressing it. Vastly divergent metropolitan economies and housing ecosystems have big gaps in available housing delivery options, with affordable housing production thwarted in some communities by exclusionary zoning or other barriers. As a result, America has a hodgepodge of state and even metropolitan-level housing policies rather than a truly national housing policy.
Housing needs studies can cloud this issue because they seldom distinguish high rent costs from very low renter incomes, even though these different root causes require different policy solutions:
- Poverty challenges: income support. People too poor to afford lower-rent housing (whether RAR or NAR) need an economic boost from income support tied either to the household or to the property.
- High rent challenges: more NARs and RARs. People in markets with unaffordable rents need additional production of RARs (or NAR to RAR conversions).
Unfortunately, we know embarrassingly little about the NAR inventory. Is it half the size of the RAR inventory, or twice as big? Why are we losing NARs? Why aren’t we gaining them? Plausible theories are:
The properties may be under-managed, with rents deliberately held at or below market by owners (many small-scale occupant-landlords) so they can be pickier in choosing residents (i.e., low-turnover, low-maintenance, low-management-headache households).
- The properties may be under-financed, perhaps because of the lack of suitable financing products (e.g., loans for properties with 2-49 apartments) with minimal regulatory burdens for small owners.
- The properties may be under-facilitated, with few entities public or private targeting them for acquisition/rehab or preservation.
When it comes to housing, a wise government acts counter-cyclically to address “market failures,” help those poorly served by the private sector, and promote long-term affordability. Doing so requires timely, granular market information. We’re failing this goal today. If we knew about NARs just a tenth of what we know about RARs, we could design and advocate for programs that motivate the conversion of NARs and MIRs into RARs, in either of two ways:
- NAR → RAR via financing. While NARs have some flexibility, RARs do not. Properly structured favorable financing could make converting a NAR into a RAR desirable for either the current owner or for a mission-oriented buyer.
- MIR → RAR via financing plus subsidy. To convert a MIR into a RAR requires not just an affordability restriction but also a rent reduction. So some modest subsidy or tax incentives would need to be added on top of possible financing tools.
We study what we value. And we value what we study.
This natural unconscious human feedback loop is a self-reinforcing cycle of ignorance versus concentration. Ignorance about NARs and MIRs means that we can’t create programs for them. Meanwhile, our hyper-awareness of RARs creates political demand for more RAR funding rather than for the “best” funding, and continued support for status-quo programs rather than programmatic innovations and evolution.
For want of a database, an inventory is being lost – perhaps irreversibly. Quantitative analysis of the unsubsidized D2R inventory to locate and understand NARs and MIRs is long overdue. Let’s get at it.
David A. Smith is Chairman of Recap Real Estate Advisors, a Boston-based real estate services firm that optimizes the value of clients’ financial assets in multifamily residential properties, particularly affordable housing. He also writes Recap’s free monthly essay, State of the Market, available by emailing dsmith@recapadvisors.com.
