Who Can Afford Affordable Housing?

With more than 1.8 million housing units subsidized since the Low Income Housing Tax Credit (LIHTC) was introduced in the Tax Reform Act of 1986, the LIHTC has become the primary vehicle by which low-income rental housing is developed across the United States. In “Can They Afford the Rent?  Resident Cost Burden in Low Income Housing Tax Credit Developments,” Anne Williamson finds that residing in a LIHTC development does not guarantee housing affordability for low-income tenants, even when such tenants receive additional support via the Housing Choice Voucher (HCV) program.

Housing generally represents the largest expenditure in a household budget. Cost-burdened households—that is, households spending in excess of 30% of their gross income on housing—are at greater risk of having inadequate financial resources to purchase food, clothing, healthcare, childcare, transportation, and other necessities.

LIHTC is a tax credit program to stimulate the development of affordable housing. To qualify, a developer must either make at least 20% of their units affordable to households earning 50% of the area median income (AMI) or make at least 40% of their units affordable to households earning 60% of AMI.  Property owners are then responsible for setting rents based on the income restrictions attached to each unit. This approach is a marked departure from previous federal housing programs where rent is determined by tenant income.  As a result, the LIHTC can cause some tenants to experience housing cost burden despite living in subsidized housing.

Section 42 of the Internal Revenue Code mandates that LIHTC developments accept HCV holders.  The HCV program gives preference to extremely low-income households, and provides a direct payment to the landlord of the difference between 30% of the tenant’s gross income and HUD-determined Fair Market Rents (FMR) for the area.  Even so, this methodology still allows for the possibility of housing cost burden, since the FMR may not reflect actual market conditions or the tenant may choose to reside in a more expensive property.  Furthermore, changes in a tenant’s income after leasing a unit may increase the cost burden.

Indeed, Williamson finds that participation in the HCV program does not necessarily prevent cost burden. While 91.2% of LIHTC tenants without vouchers are cost burdened, 34.8% of voucher holders are cost burdened as well.

Despite the housing cost burden, the LIHTC remains popular and has strong political support.  Moving forward, Williamson urges policymakers to explore policies to reduce the incidence of cost burden. Since the majority of LIHTC households have incomes at or below 40% of AMI, Williamson identifies a potential mismatch between income restrictions and rent levels and tenants seeking subsidized housing.

Recently, state housing finance agencies have had some success in securing additional LIHTC units for tenants earning below 50% of AMI by imposing additional income restrictions on developers.  Additionally, the Obama Administration has proposed enforcing an average income restriction of 60% of AMI within each LIHTC development.  This would foster greater opportunities for mixed-income development since developers must counterbalance higher-income units with lower-income units.  However, success may be limited since the majority of LIHTC households do not earn more than 40% of AMI, presumably because higher-income households favor alternative housing opportunities such as single-family homes.

In all, LIHTC appears best equipped to serve households earning between 50 and 60% of AMI, but leaves lower-income households cost burdened.  LIHTC provides enhanced opportunity for extremely low-income and very low-income HCV holders, though cost burden remains a concern.