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Without affordable housing, the problems of homelessness will never be solved. High housing costs often put individuals and families at risk of homelessness when their incomes are too low to pay for housing plus other basic necessities. People fleeing domestic violence frequently find themselves back in violent situations because they can’t find affordable housing. People on fixed incomes find that rising housing costs outstrip their meager incomes. A high demand and a shortage of affordable housing make it even more difficult for people with disabilities, people with a history of substance abuse, and people with poor credit records to obtain housing.
For people needing temporary or seasonal housing, affordable units are in short supply.
Measuring Housing Affordability
People measure housing affordability by the ratio of household income to the cost of available housing. For more than a century, the recommended standard for housing affordability was that households should spend no more than one-fourth of their income for shelter expenses. This ratio dates back to the writings of economist Ernest Engel. Using analysis of a survey of Belgian working-class families conducted in 1857, Engle proposed an economic law stating that the ratio of a household’s income spent for housing is constant regardless of the household’s income. Engel’s law focused on food as the most essential expenditure within a household. Of necessity, food costs would vary depending on the number and age of people in a household and the ability to self-provision through foraging, hunting, gardening, or raising of livestock while the housing cost could remain constant even when household composition changed. The rule of thumb that emerged from this perspective was “one week’s wage for one month’s rent.” This ratio could be readily applied in decision making for minimizing risk in renting an apartment or granting a mortgage to a given household. This ratio remained the norm until the mid-1970s.
Critics of Engel’s economic law have proposed other measures of affordable housing. As early as 1868, other economists critiqued Engel’s work. Herman Schwabe, for example, published detailed research on housing expenditures within the household budget. His research on wages and rent indicated that as income rose, the percentage of income spent on rent fell. Schwabe proposed an alternative economic law stating that the poorer the household, the greater the proportion of income must be spent on housing.
More recent critics of Engel’s economic law note that over time, consumers’ shifting expectations regarding their housing have also affected household consumption patterns. They propose that the proportion of income spent on housing would have increased over time as other costs have decreased and as housing expectations have increased.
Focusing on income as the primary factor in determining housing cost burdens fails to account for variability in households. Housing costs affect households with equal incomes differently depending upon the size of the households. A household with seven members has different needs than a single individual for food, clothing, transportation, medical care, and other basic necessities. In 2001, the average annual expenditures from the Consumer Expenditure Survey found that one-person households spent on average $1,477 for food at home, while five or more person households spent $5,111. One alternative means of measuring housing affordability would take household size and composition into account and base a recommended budget guideline for housing affordability on actually household expenditures. The U.S. Bureau of Labor Statistics (BLS), for example, has established typical household budgets based on their annual Consumer Expenditure Survey. In 2001, the typical family spent about 33 percent of their gross income on housing, 11.2 percent for food, and 3.5 percent for clothing. The use of a housing affordability standard based on BLS budgets is in contrast to measures based on the Census Bureau’s Federal Poverty Threshold levels. Social Security Administration economist Mollie Orshansky developed the poverty threshold levels in 1963 and 1964 using the Department of Agriculture’s Economy Food Plan adjusting for family size. The limitation to affordability standards based on poverty levels is that these were not established as inclusive standard budgets of goods and services meeting minimum annual needs for a family of a particular size and composition. With the exception of food, acceptable standards for major consumption items were not available at the time the poverty threshold levels were established. Another recommended measure of housing affordability not only recognizes the household composition but also incorporates Schwabe’s economic law regarding income level. With the concept of “shelter poverty” as a basis, Michael Stone, a professor at the center for Community Planning and Public Policy at the University of Massachusetts in Boston, emphasizes the amount of money that a household needs to meet basic necessities and uses the residual of income less that amount as the affordable housing measure. Using this measure, some households may have a negative housing affordability; the cost of basic needs excluding housing may exceed their income. Under this measure, housing is unaffordable at any cost.
Although Stone’s shelter poverty measure does account for income level and variations in cost of other needs, it fails to address concerns regarding the cost of housing as the cause of the difficulty in meeting basic necessities. Another alternative, “burden of housing cost,” begins with housing costs to determine if the residual income following shelter expenditures is sufficient to meet other minimum household needs. It considers the impact of a proportional expenditure/income norm, such as an allocation of 25 percent of income for housing, and identifies households for which allocating the recommended percent of income find themselves unable to cover costs of other necessities. The burden of housing cost would then incorporate not only guidelines for household budgets based on size and characteristics of the household, but also the actual level of income.
Although alternative measures of housing affordability such as shelter poverty and burden of housing costs are more accurate than a set ratio of expenditures to income, the practicality of implementing them is limited. For example, determining an adjusted housing affordability threshold level would require considerably more information and effort in identifying eligible families for housing assistance, increasing the cost of providing housing assistance.
Thus, people commonly employ a standard fixed housing affordability ratio when making policies and implementing programs.
The U.S. Department of Housing and Urban Development (HUD) has established a threshold level for housing cost burden based on a household paying 30 percent or more of its gross monthly income on monthly housing costs (rent or mortgage payments plus basic utilities including heat and electricity). The 30 percent cut-off point for housing affordability provides a straightforward measure of affordability and is an efficient measure for use in implementing federal housing programs. Using the housing cost burden level of shelter expenditures at 30 percent of household income or higher, the Joint Center for Housing Studies at Harvard University estimates, three out of every ten U.S. households struggle with housing affordability. In 2003, more than 14.3 million households were severely cost burdened, spending more than 50 percent of their incomes on housing.
The increase in the standard from 25 percent to 30 percent of household income as a reasonably affordable shelter cost occurred during the mid-1970s. Prior to that time, public housing residents were required to contribute 25 percent of their income toward rent, observing the rule of thumb for housing affordability. Federal budget deficits and political will at that time created pressure to reduce government costs. This pressure resulted in a policy change that shifted a greater proportion of housing assistance program costs from the taxpayer to the recipients, requiring program beneficiaries to contribute more of their incomes to rent. The decision to require households to contribute 30 percent of their income to housing was based more on an attempt to lower government costs of providing housing assistance than it was on actual household expenditures or recommended household management practices. The 30 percent housing cost burden measure has, however, become the standard for affordability and is used for both renters and home owners.
Measures Of Housing Affordability And Home Ownership
The measures of housing affordability discussed previously are directed primarily at estimating rent levels appropriate for low-income households and their eligibility for housing assistance. Current policy priorities are directed at making the dream of home ownership a reality for more and more households.
Providing home-ownership opportunities to lower-income households by adjusting the underwriting practices for residential mortgages is another way that the standard measure for housing affordability has changed over time. Conventional mortgage underwriting practices typically considered a 20 percent down payment for borrowers. In addition, borrowers were required to meet qualifying ratios that kept the mortgage principle and interest payment under 28 percent of income and total payments for long-term debts under 36 percent of income. Lenders today consider much higher ratios for underwriting mortgages using a system of credit scoring that includes employment stability and credit payment histories along with loan characteristics. Increasing the qualifying ratio for the mortgage principle and interest payment to as high as 40 percent of income increases the pool of potential borrowers substantially. One of the justifications for this increase is that many households manage to pay monthly rents costing more than 50 percent of their income, and they should have the opportunity to achieve the dream of home ownership.
The push to allow more people to own a home, deregulation of the banking industry, and the emergence of mortgage companies have led to an increase in unscrupulous lending. With the higher qualifying ratios, interest rates and loan terms are often adjusted to minimize the lenders’ risk of financial loss in case of loan default. Many ques-tionable lending practices are predatory, targeting loans with higher interest rates and less attractive terms to low-income neighborhoods and minority households. With a slowdown in the economy, the consequence of this shift in underwriting is beginning to be apparent.
Foreclosure rates are increasing, placing low-income households in precarious housing situations. They often lose the wealth built up in home equity, have poor credit ratings, and can be forced to relocate, increasing the risk of homelessness as they seek alternative housing in a market with rapidly escalating housing costs. Thus, the determination of a standard measure of housing affordability is linked to changing risk of homelessness for home owners as well as low-income renters.
Trends In Housing Costs
Refining the measure of housing affordability may contribute to more effective distribution of government housing assistance and a larger pool of potential home buyers, but it does not address the difficulty that households face in obtaining affordable housing presented by a rapid increase in housing costs. Although the Consumer Price Index (CPI) has limitations for direct application, it is often used to measure relative changes in consumer costs over time. For example, using the CPI, overall consumer costs were estimated to have increased by 3.8 percent between 1999 and 2000. This was the highest increase in a decade. A year later, the CPI was at the lowest rate in fifteen years at 1.6 percent. This fluctuation in consumer costs reflects economic shifts over time, but it fails to adequately reflect the way in which various costs changes affect household budgets. As indicated previously, housing is a major component of household budget requirements, and dramatic changes in the cost of housing have a direct effect on income available for other expenditures. For example, rent of primary residences increased 36.1 percent between 1990 and 2000. With the cost of renting increasing faster than incomes, a greater number of households are at risk of homelessness.
Costs of purchasing an existing home have also increased. The U.S. Census reported that in 2000 the average home sold for $177,000. The cost of home ownership simply prices many people out of the market. At the same time, increased rent levels limit their options.
The costs of operating and maintaining a home affect housing affordability. Utility costs have risen as well. Between 1990 and 2002, the cost of natural gas—the heating fuel for more than half of all metropolitan homes in the United States—increased 42.5 percent. Electricity costs increased 16.6 percent during the same twelve years. The rising costs of maintaining a home affect housing affordability for all households, regardless of whether they are renters, home buyers, or even people who own their home mortgage free.
Housing costs are not, however, constant. Variation in housing markets by location dramatically affects housing affordability. Regional variation in house price, utility costs, and rent levels for available units is significant. According to the National Association of Homebuilders, the average sales price of an existing home in the Elkart-Goshen, Indiana, metropolitan statistical area was $111,000 in 2002. At this price, 94.9 percent of homes for sale were affordable to prospective buyers with earnings at the median area household income. In comparison, the average sales price of an existing home in Salinas, California, was $319,000. At this price, only 7.7 percent of homes for sale were affordable to prospective buyers with earnings at the median household income of $53,800 (with the area median household income for Elkhart-Goshen at $59,300). Even within a local housing market, submarket variation exists across neighborhoods and among various housing units based on the type, size, condition, and amenities.
Rising costs of residential construction are one reason for the increased cost of home ownership. In 2000, the U.S. Census reported that the average cost of a new single-family home was $207,000. In 1990, the average cost of a new single-family home was $149,800, whereas an average new home cost less than $80,000 in 1980. One explanation for the increase is that the cost of construction reflects market demand. The square footage of new single-family houses continues to increase, and the trend is toward including more amenities, ranging from three-car garages to a second kitchen for entertaining. Increasing market expectations have extended beyond quality construction and energy efficiency, contributing to the rapidly escalating cost of housing.
Standardizing construction costs to square-foot costs reveals the increased expense of land, materials, and labor that also affect housing affordability. Regulatory barriers, reviews, and construction code requirements also increase costs. Policies that require excessive lot sizes increase not only the cost of land per house but also costs for provision of utilities, streets, and services. Manufactured homes are often considered a more affordable housing alternative. The square-foot cost of manufactured homes is less than that of conventional homes; however, the cost of obtaining a suitable site and setting up a manufactured home can make the overall cost less affordable.
Trends In Household Income
Because housing affordability is determined not only by the cost of housing, but also by household income, income trends have a direct effect on housing affordability. The typical household in the United States today finds that its income has not kept pace with the cost of housing. Those people working at low-wage, insecure jobs are particularly vulnerable to becoming homeless. The Low Income Housing Coalition (LIHC) calculates a “housing wage” as the income that a full-time worker needs to be able to afford a basic two-bedroom apartment. Using the 30 percent housing cost burden measure and fair market rent levels used by the U.S. Department of Housing and Urban Development when establishing housing assistance payments, the wage level for affordable two-bedroom apartments in every state in the nation far exceeds the minimum wage.
The U.S. Census in 2000 reported the disparity in income distribution across the country. Income distribution is such that the 20 percent of households with the highest income in 2000 obtained 49.7 percent of all earnings while those households in the bottom 20 percent had a 3.6 percent share of earnings. Not only is there a disparity in distribution of income, but also the Economic Policy Institute reports that wages for workers with earnings at the bottom 10 percent of households found that their income fell by 9.3 percent between 1979 and 1999. Furthermore, between 2000 and 2001, the number of unemployed workers in the United States increased by 2.2 million.
Availability Of Affordable Housing
The availability of affordable housing is affected by trends in construction, demand for existing housing units, and the demolition of substandard dwellings. In general, construction of multifamily rental units has declined since the 1980s, when tax policies shifted away from benefiting individuals investing in affordable housing development. Low-income housing tax credits were created as a source of capital for constructing multifamily units. Low-income housing tax credits have been used to finance mixed-income developments, resulting in a limited increase of affordable housing units.
Renovation of housing and demolition of deteriorated units have reduced the U.S. housing stock that was considered substandard to less than 1 percent. At the same time, the number of homeless households has increased. Because less costly housing is often older and of lower quality, the trade-off for improved housing stock has been more expensive housing. In the process of upgrading housing quality, basic shelter options such as rooming houses, residential hotels, and other single-room occupancy alternatives were eliminated. Supply-and-demand economics results in the cost of housing exceeding reasonable affordability for low-income households. Preservation of affordable housing stock is essential. The real spending by owners of rental units fell at a 2.7 percent average annual rate between 1992 and 1999.
Deferred maintenance has a deteriorating impact on the long-term availability of affordable housing. Long-term lack of maintenance results in deteriorating buildings and eventually in the need to demolish substandard units. Beyond the shift in housing stock toward more costly housing, federally subsidized housing is being lost. In order to capitalize on higher prevailing rents, private owners have opted out of rental assistance programs or prepaid mortgages that required a unit to be available for low-income tenants. This shift has resulted in a loss of more than 90,000 affordable housing units. According to the Joint Center for Housing Studies at Harvard University (2000), 10 to 15 percent of the remaining project-based, assisted units with contracts expiring in the future may become market rate units.
Recent federal policies to deconcentrate racial minorities and persons in poverty by demolishing large-scale public housing projects further limit available affordable housing. Federal policy no longer requires a one-for-one replacement of demolished units, and under a policy priority to subsidize mixed-income development, fewer than one-third of the replacement housing units are for low-income households. A number of federal policies have created a net loss of affordable housing units, especially for low-income households.
Location As A Factor
In making the link between the lack of affordable housing and homelessness, one must consider the location of affordable housing and the impact of location on individuals and families. Housing markets are commonly based on locational factors. Housing units located near community amenities such as good schools, parks, and transportation access are priced higher, whereas those located in environmentally unsatisfactory areas or remote areas without employment opportunities or transportation access are frequently priced lower. Yet, the cost of getting to work, the availability of a job that pays a livable wage, and the need for a safe place to raise one’s family or retire well are all linked to location. The failure to provide affordable housing to keep pace with rapid economic development often results in an affordable housing shortage. In areas with natural amenities, tourism and second-home development often result in increased jobs but can have the unintended consequence of increasing pressure on housing affordability. Construction of high-end homes raises the value of existing homes, and the shortage of lower-cost housing affects the housing affordability across an entire area. Workers are forced to commute longer distances from affordable housing. Employers are forced to deal with a less reliable labor force as workers commute longer distances. Families doubling up to afford the limited available housing live in overcrowded and/or substandard housing and face a greater risk of domestic violence and increased likelihood of homelessness.
Housing Discrimination And Housing Affordability
Further worsening the problems that people have in finding affordable housing is not having access to housing. Discrimination differentially impacts households of families of color, those with more children, and those with disabilities in terms of housing affordability. Not only are these households more likely to have lower incomes, but also they confront barriers to the affordable housing that is available.
Racial and ethnic minorities are a growing proportion of U.S. households. The Joint Center for Housing Studies estimates that by 2010 nearly three out of ten households will be headed by minorities. These households affect home ownership demand; they are also the households targeted for questionable lending practices and therefore are at a greater risk of foreclosure, affecting their continued housing stability.
Impacts Of Housing Affordability
Lack of affordable housing is directly linked to homelessness. As the availability of affordable housing declines, the rate of homelessness increases. We cannot address the problem of homelessness without addressing the problem of lack of affordable housing.
Trends in household incomes, housing costs, construction, and demolition of housing indicate that concerns about housing affordability will continue to escalate. Strong public policies, private sector commitments, and public support are essential to lessen the affordable housing shortage.
At the same time, people are using a number of creative alternatives to address the lack of affordable housing. Communities are becoming aware of income factors that affect housing affordability and are promoting new job growth at more livable wages. People are reviewing regulatory barriers to construction of affordable housing across the country and establishing alternative policies. Builders are exploring the use of more affordable and sustainable building materials and techniques. People are scrutinizing policies regarding the demolition of public housing without replacement. People are implementing state-level policies that target housing development funding to areas of economic growth. People are studying mortgage lending practices and policy recommendations. We can hope that afford able housing will soon become a measure of community well-being.
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