Demand-Side Subsidies

Demand-side housing subsidies help low-income households rent housing in the private market. Unlike supply-side subsidies, which are attached to properties, demand-side subsidies are portable, and recipients can use them for any eligible housing. They are key elements of housing policy in most Western nations. In most of these countries, demand-side subsidies are entitlements, available to nearly all low-income households. In the United States, however, demand-side subsidies, like supply-side subsides, are severely rationed; far more households are eligible for assistance than receive them. Demand-side subsidies have been part of U.S. housing policy since the 1970s, and they now constitute the single largest rental subsidy program for low-income households.

Although demand-side subsidies, also known as tenant-based subsidies and as housing allowances, have been advocated in policy circles since the 1930s, the federal government did not incorporate this approach to housing assistance in its housing programs until the 1970s. In 1973, the government launched the Experimental Housing Assistance Program (EHAP) to test alternative designs for demand-side housing programs. The largest social science demonstration program of its time, the EHAP was established and operated in 12 cities by the government for 5 years. The government originally intended to use the program's findings to develop a permanent, national demand-side housing subsidy program. However, EHAP had barely started when the Nixon administration and Congress created the Section 8 program in 1974. This program included both supply- and demand-side housing subsidies. The [Page 123]supply-side program provided for-profit and nonprofit developers with a subsidy contract that would ensure the payment of Fair Market Rents (FMR) for units occupied by eligible households. The subsidy provided sufficient cash flow to cover debt service and operating costs for new and rehabilitated rental housing. The supply-side component of Section 8 produced about 850,000 rental units before the federal government ceased funding new housing developments under the program in the 1980s.

The Section 8 Existing Housing Program enabled eligible low-income households to rent apartments in existing buildings. Households paid 25% of their adjusted gross income (subsequently increased to 30%) on rent, and the government paid the rest, up to a certain limit. Programmatic details have changed over time, as has the program's name (in 1998 the program was renamed Housing Choice Vouchers), but the concept has remained the same. Eligible households pay 30% of their adjusted gross income on existing housing, and the federal government pays the rest up to a limit that is determined by the local area's Fair Market Rent (FMR). FMR currently represents the 40th percentile in a metropolitan area (or other designated housing market) of rental housing that has experienced a recent turnover in occupancy. In some high-cost markets, FMR is set at the 50th percentile. FMRs are based on the cost of two-bedroom apartments; FMRs for smaller or larger units are decreased or increased proportionately. In actuality, local housing authorities set the maximum eligible rent that can be covered by vouchers through a “payment standard,” which is a function of the FMR. Payment standards may range from 90% to 110% of the FMR. In addition, authorities may request permission from HUD to establish exception rents that exceed the maximum permissible payment standard. If a renter wishes to live in an apartment or house that costs more than the payment standard, he or she may pay the difference between the actual rent and the payment standard, provided that total rent payments do not exceed 40% of his or her gross income (i.e., any additional rental payments must not exceed 10% of gross income). Although FMRs are usually set at the metropolitan level, and housing authorities usually establish a single payment standard for their entire jurisdictions, they may calibrate payment standards to market rents at the neighborhood level, increasing them in more expensive areas, decreasing them elsewhere.

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