ACE

Author: Jacob Pentz

  • The Low-Income Housing Tax Credit: Expanding the U.S. Housing Stock

    The Low-Income Housing Tax Credit: Expanding the U.S. Housing Stock

    The Low-Income Housing Tax Credit

    The Low-Income Housing Tax Credit (LIHTC) is the primary supply-side subsidy for affordable development in the United States, financing approximately 90% of the nation’s affordable housing annually. To receive tax credits, a proposed development must dedicate at least either 20% of its apartments to people who earn less than 50% of the area median income (AMI) or 40% to people who earn less than 60% of AMI. To be affordable, rent for those apartments must be no more than 30% of the target income level. 

    Development Process

    While the LIHTC does aid developers in financing affordable projects, tax credits are not guaranteed. States allocate tax credits through a competitive process that varies by state, and most states have many more applications than available credits. On average, one project out of five may receive an allocation of tax credits. Even when LIHTC credits are granted, taxpayers claiming the tax credits are usually real estate investors, not developers, and the tax credits cannot be claimed until the real estate development is complete and operable. This makes affordable development through the LIHTC a multi-year process after acquiring land, planning development, and applying for funding.

    How Efficient is the LIHTC Program in Expanding the Housing Stock? 

    While the LIHTC is the United States’ largest and most successful mechanism of affordable construction, economists speculate about its efficiency in growing the nation’s housing stock. For instance, a 2002 study found a high rate of substitution between current housing stock and LIHTC units, meaning that the total stock of housing ultimately remains the same while new LIHTC units crowd out an equivalent quantity of unsubsidized housing. Another 2005 study concluded that subsidized housing could increase the average quality of housing available to low-income people but would not have a lasting effect on the quantity or price of housing available to them. This raises the question of the LIHTC’s efficiency—are tax credits awarded to projects that could proceed, and be successfully developed, without the aid of tax credit financing?

    When non-marginal projects, or projects that could be built without LIHTC funding, are constructed, developers retain most of the subsidy, rather than pass it on to tenants. Despite being more affordable than market value, developers and landlords are still inclined to charge the highest “affordable” prices they can, often at or close to the maximum permitted by the program. Unlike subsidized housing in other countries, rents are not tied to the individual household income of the tenant, but are leased only to eligible households with enough income to afford the rent. Because housing demand is so high, they have no problem filling their units with tenants who can afford their prices. The issue of crowding out leaves those who need rent levels below the maximum price without subsidized housing. 

    How Could the LIHTC be Improved?

    The LIHTC program should be altered to ensure that it effectively and efficiently expands the United States’ housing stock, which is the program’s established purpose. To do this, federal, state and local governments need to ensure there are enough subsidy funds available to meet the need. It is also important to consider the types of projects to which governments and Housing Finance Agencies allocate credit. Figure 1 below illustrates the impact LIHTC credits have on the quantity and price of the housing stock when LIHTC credits are widely available, granted to projects that could proceed without the LIHTC (listed as inframarginal projects), and when they are granted to marginal projects.

    In Case 1, when tax credits are widely available to all investors, there is a downward shift in the supply curve, increasing the aggregate housing stock from H0 to Ht and decreasing the aggregate price. In Case 1, developers can access as many LIHTC credits as they want, and the government can grant credits to every developer that applies. 

    In Case 2, LIHTC credits are only granted to inframarginal projects, or projects that crowd out other unsubsidized affordable projects. In this example, only the projects up to Ht receive tax credits, but the aggregate housing stock is unchanged at H0. Thus, the tax credit finances projects that would have been built even without the subsidy. 

    Case 3 shows the impact of marginal projects receiving credits. Marginal projects are projects that would not be developed without the tax credit. When the associated portion of the supply curve shifts, there is an addition to the housing stock from H0 to Ht. While the stock of housing up to H0 is unsubsidized, the additional stock of housing beyond H0 is subsidized. In this case, revenue loss from the LIHTC results in a net gain in the housing stock, and the subsidy is passed on to tenants as reduced rent.

    Of the three scenarios, Cases 1 and 3 are examples of how the LIHTC can be used to expand the housing stock. Ideally, Case 1 is the best option as there would be no competition between developers for credits, and all affordable projects that are proposed could be financed and built effectively. However, because LIHTC credits are not widely available, Case 3 illustrates how selecting marginal projects can still result in a net gain in housing stock. 

    To solve the issue of marginality and crowding out, the government must keep track of net gains and losses of its housing stock, especially for low-income units. A national affordable housing inventory system is a way for the Department of Housing and Urban Development to account for its housing stock and measure the efficiency of the LIHTC. Additionally, inventory should be kept on the number of households on rental housing waitlists to determine demand at a given time. 

    To measure the LIHTC’s efficiency and its impact on enabling affordable development, it must be determined whether credits are being granted to marginal projects or projects that could proceed without the program. If tax credits are awarded to marginal projects and these projects do not crowd out other affordable housing, then the LIHTC succeeds in solving the affordable-housing problem. Thus, the program’s effectiveness relies on the ability of state housing authorities to select marginal projects.

    Examining the applicants who fail to win credit awards may provide important insights to this. Do those who seek to build affordable housing still do so without tax credits? Do those who receive credits use them to make their units more affordable than they otherwise would be?

  • Zoning Policy and Affordable Housing

    Zoning Policy and Affordable Housing

    High housing costs and inadequate supply are not a natural outcome of market forces, but the result of policy choices. In the U.S., public housing development relies on private developers who are bound by restrictions on the location, size, and funding for new projects. Zoning laws determine the purposes for certain lots of land, and ultimately where new developments can be built. Each zone’s purpose and rules are determined by local governments, making zoning an essential factor in the creation of affordable housing. 

    Context

    • The Faircloth Amendment of 1937 sets a limit on the number of public housing units a Public Housing Agency owns, assists or operates, with federal funding. The current limit was established in 1999 in reaction to the perceived failure of the public housing program. PHAs are organizations that oversee and maintain public housing complexes. They often do not reach their Faircloth limits due to a lack of federal funding.
    • An economically efficient housing market should have high-density housing near public transit and in areas with good schools, low crime, etc, as a high number of units on an expensive lot of land results in a lower cost per unit and can accommodate more households. 

    Inclusionary Zoning

    Zoning laws can be helpful in creating opportunities for affordable development and economic mobilization. Inclusionary zoning requires and incentivizes a certain percentage of units in new developments to be affordable, and ties the development of affordable housing to the development of market-rate housing and guarantees that benefits are accessible to households along a range of incomes. Projects that implement inclusionary zoning near public transit and job centers can expand economic opportunity for low-income households. In addition, local zoning regulations can enable vulnerable communities to push back against projects that would harm them, such as urban renewal or highways.

    Exclusionary Zoning

    On the other hand, zoning laws can also be socioeconomically exclusive and societally inefficient. Those in favor of zoning reform argue that changing the rules of housing development to require moderately priced housing in high-opportunity areas is essential for more equitable, resilient, and thriving communities. For instance, zoning that does not mandate affordable development in high-value areas, especially places with good transit, leads to higher costs of living for the lowest-income households. This also causes negative externalities such as worsened traffic and harmful environmental impacts. 

    Impact on Developers

    In many cases, zoning is a barrier for developers who want to create affordable housing. When left to local jurisdictions, cities tend to only subsidize projects in specific areas where the need for affordable housing is most significant. This limits location options for developers who want to use housing subsidies, such as the Low-Income Housing Tax Credit, which is essential to the development process. Local governments also have complicated development processes that favor community preferences over affordable expansion which prevent low-cost, high-density development, especially in affluent neighborhoods with high land values. In desirable markets, developers are often faced with community opposition to new development or rezoning. In the end, the high costs associated with land acquisition and construction make catering to affluent renters the best opportunity for developers to make a profit which has caused affordable development to be neglected in many U.S. cities.

    Impact on Homeowners and Renters

    When restrictions force affordable housing away from high-value land areas with good transit, high economic opportunity and low crime, poorer households are kept from advancing economically. Limited housing near job centers leads more workers to undertake long-distance commutes, which is infeasible as many households may not own cars. Many low-income workers rely on public transportation, which is not accessible away from city centers. Exclusionary zoning practices such as redlining have also caused racial and economic divides in cities.

    Reflection Questions

    • How can local governments balance the preferences of their community with inclusive practices?
    • How can your community include and promote more affordable development?
    • How can federal, state, and local funding ease the affordable construction process for developers?
  • Austrian Social Housing

    Austrian Social Housing

    Social housing accounts for 48% of housing in Vienna and 25% of housing in Austria. Austria’s social housing system began with “Red Vienna,” a Marxist program established in 1918 that began a period of mass housing construction, public education, and public healthcare. Vienna’s city government owns and manages 220,000 housing units which represent 25% of the city’s housing stock. The city also controls 200,000 units that are built and owned by limited-profit private developers but developed through a city-regulated process. 

    Housing Communities

    Social developments include various housing types to ensure housing accessibility for people of all backgrounds and income levels. Most complexes include typical subsidized rental housing for lower-income workers, ownership-focused homes for families, apartments reserved for refugees, and low-cost housing for students. Many also include amenities such as shops, restaurants, kindergartens and daycare centers, office spaces, and leisure facilities which enhance the quality of life for residents and encourage social integration, creating prosperous communities.

    Development Process 

    Austria’s social housing development process is rooted in adequate public funding and a competent and dedicated limited profit sector. To initiate new projects, cities buy land in areas deemed desirable near transit, job centers and schools, soliciting proposals from private developers who want to build and own the housing complexes. Cities then sell the land at an affordable price and grant the developer a favorable loan with a low interest rate and an extended repayment period to ensure the financial viability of the project. To keep up with demand, the Austrian government builds thousands of new social housing units each year which mitigates rent fluctuation and keeps prices in an affordable range.

    Rental Terms

    Social housing programs provide their residents with financial support and daily amenities which promote long-term occupation and social integration. For instance, residents’ rent never increases from their initial agreement, regardless of if their income levels increase, and they are never required to move out. This alleviates the cost-burden and financial pressure that often comes with home rental, making housing accessible for all people in Austria. As a result, many higher-income residents choose to remain in subsidized housing rather than purchase more expensive homes, promoting mixed-income communities with people from a variety of backgrounds. The desirability and affordability of Austria’s social housing encourages more residents to stay in public housing regardless of their income level or social status.

    Financing

    Austria’s social housing is financed by all parties involved in the projects to ensure that the financial burden does not fall too heavily on one sector. It is important to note that Austria’s housing system is effective because of the nation’s strong voluntary sector and its commitment to a social obligation. For instance, municipalities are legally encouraged to contribute to social housing by providing land for affordable prices, eliminating land acquisition costs for builders. Developers receive low-interest, long-term loans from housing banks whose purpose is to raise money for social housing. New construction is also partially funded by a fixed proportion of income tax, corporation tax, and “housing contributions” paid by Limited Profit Housing Associations which include public and private builders and housing cooperatives who own and operate about 700,000 units each. Housing cooperatives are associations that involve tenants, builders and municipalities who plan developments together, negotiating lot locations, financing, and construction layouts. Around one third of Austria’s total subsidies go to LPHAs and cooperatives, but altogether, 80% of all new constructed housing units are co-financed by the public which alleviates the government’s financial burden. On a ten year average, 51% of all completed projects are built by private individuals, 28% by housing associations, 19% by private housing developers and 2% by municipalities. This system is effective because of the adequate private and public funding for each sector. 

    What can the United States learn?

    Public housing policy in the United States lags far behind Austria as no federal sector exists to actively plan and build desirable public housing. For instance, in 2019, 42% of public housing properties finished their last construction before 1975, and a 2010 HUD-sponsored assessment of the nation’s public housing capital needs determined that approximately $21 billion was needed for unmet maintenance and repairs. This financial burden is left entirely on the federal government, whereas Austria acquires funding LPHAs, housing banks, and municipalities together. 

    The United States provides homeowner and renter assistance in the form of Section 8 housing vouchers, and almost all public housing is built through the Low Income Housing Tax Credit, a subsidy for private developers. Unlike Austria, however, public housing accounts for less than 1% of the U.S.’s total housing stock compared to Austria’s 25%. In addition, the U.S. provides no security for its residents; tax-credit properties are only required to remain affordable for thirty years, meaning landlords can raise rent prices out of the affordability range of their tenants as they wish, after the property is thirty years old. The United States has no mechanism for collecting adequate funding for housing, does not communicate with municipalities for sufficient land, and leaves nearly the entirety of financing up to developers who prioritize their own profits over creating affordable housing stock. 

    What keeps the United States from being able to provide long-term affordable housing is its lack of correspondence between private developers and local governments, which is rooted in a lack of a social obligation for affordable construction. Local governments are not active in creating a dialogue between prospective tenants, Public Housing Associations, and developers, allowing developers to continue to drive home prices up. Even when private developers use LIHTCs in an affordable project, they are faced with strict zoning restrictions and minimum funding leading many to prioritize higher-end construction for profit and skimp out on affordable units. In contrast, a 2013 article in Governing magazine states that “the Viennese have decided that housing is a human right so important that it shouldn’t be left up to the free market.” The U.S.’s capitalistic housing market encourages homeownership for those who already have strong financial backgrounds but leaves behind those who don’t. While the majority of those in U.S. public housing are cost-burdened, meaning they pay more than 30% of income on housing, Austrian city governments regulate rent so that none of the residents pay any more than 20% to 25% of their household income on housing. Alleviating the financial burden of housing allows residents more money for basic necessities such as healthcare, child care, and food, promoting more prosperous, equitable, and healthy communities. 

  • Jacob Pentz, Colorado College

    Jacob Pentz, Colorado College

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    Jacob is from Sudbury, MA, and is a rising junior at Colorado College. He is majoring in Economics and interested in public economics and policy. Jacob also plays tennis for Colorado College.