Affordable Housing

The term affordable housing addresses the relationship between the cost of providing adequate housing and a household's ability to pay. Housing affordability is measured as a percentage of income: [Page 7]Housing that consumes less than 30 to 40 percent of total household income is considered affordable. People at any income level can find affordable housing a problem, but it mostly afflicts poor and middle-class households since the private market rarely produces a sufficient amount of housing to meet their needs. As a result, governments often regulate housing and finance markets and provide subsidies to ensure that housing is affordable to households no matter their income.

In the United States, the U.S. Department of Housing and Urban Development has created a measure called the area median income (AMI) to determine who needs affordable housing. It is a relative measure of housing need and is calculated separately for metropolitan areas and families of different sizes. Most often, households with incomes less than 30 percent of the AMI are considered very low income, those with incomes 30 to 50 percent are low income, 50 to 80 percent are moderate income, and those above 80 percent are thought able to afford market rate housing. Because housing costs vary by locality, so also does afford-ability. In cities like New York City, it can reach 200 percent of the AMI.

The AMI has enabled governments to determine how many households need housing and to set guidelines for housing subsidies. Governments can provide subsidies to developers to produce additional housing units, or they can provide subsidies to individuals or building owners to make existing units affordable. Incentives for private developers include tax abatements, zoning changes, height allowances, infrastructure improvements, and financing assistance. Governments can also impose rent regulations that limit rental price increases.

In 1937 the federal government expanded its housing commitment by funding public housing construction, and in 1949 it established the goal of providing a “decent home and suitable living environment for every American family.” Between the 1930s and the 1970s, the federal government produced public housing for very-low-income groups. In the 1970s, it shifted from public production and ownership to strategies that used subsidies to make existing private housing more affordable and spur the creation of new affordable housing in weak urban markets. In the 1980s the federal government withdrew from housing production almost entirely and left affordable housing construction and management to nonprofit, community-based organizations. New financial intermediaries— organizations that directed capital from financial markets to communities—such as the Local Initiatives Support Corporation and the Enterprise Foundation emerged to finance inner-city and rural housing construction. Federal efforts turned toward creating tax incentives. The 1986 Low Income Housing Tax Credit, which provides tax benefits to private investors, has created much of the affordable housing in the past 20 years. Little of this housing is affordable to very-low-income households without additional subsidies such as housing vouchers. Unlike the subsidies provided for public housing, which were largely permanent, the private subsidies from the 1970s and 1980s are time delimited; that is, they are designed to expire and thus significantly reduce the stock of affordable housing.

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