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How Much is Too Much to Pay for Affordable Housing?

rick with borderIf we sell homes that are €˜affordable’ to low-income households, how important is it that we also make sure that the actual families who move in aren’t paying too high a share of their income?

Affordable housing programs all have to concern themselves with two very different ways in which housing might (or might not) be considered €˜affordable.’ First, the price or rent has to be set so that it will be €˜affordable’ to some ideal target income level. For example, an affordable homeownership program targeting buyers earning less than 80% of Area Median Income (AMI) might set the €˜affordable’ price such that a family earning 80% of AMI would pay no more than one third of their income each month for housing costs, including their mortgage, taxes, insurance and any homeowner association fees.

But whenever the actual buyer of the home earns anything less than 80% of AMI, that same €˜affordable’ payment will work out to more than 1/3 of the family’s monthly income. If the buyer earns a lot less than 80% of AMI, the monthly housing costs, while €˜affordable’ relative to the market, might not be so easy to afford. In other words, a family can live in €˜affordable housing’ and still face a cost burden. Outside of public housing, it is rare for programs to charge families based on their actual income. Instead, in addition to setting affordable prices, most programs try to ensure that their buyers are not paying more than a reasonable share of their income.

Some programs want to see housing costs at or below 30% of income while others target 33% or 35%. While these specific thresholds seem somewhat arbitrary, there is widespread agreement that some standard for cost burden is both necessary and appropriate.

So when we compiled the data for the HomeKeeper Social Impact Report we were surprised to learn that nearly a third of the homebuyers in our dataset were paying more than 33 percent of their gross income toward homeownership at the time that they purchased their homes.

Housing Cost Burden

The HomeKeeper Hub now includes detailed data on more than 4,000 home purchase transactions from 52 long-term affordable homeownership programs managed by 38 organizations.

The HomeKeeper Hub Social Impact report addresses 26 different questions about the overall social performance of these programs. Against a backdrop of very strong results, the data on cost burden stands out as cause for possible concern. For the most part, this data paints a picture of programs that are surprisingly successful in bringing homeownership within reach of families who would otherwise be priced out. Across several economic cycles and in every region of the country, these organizations are succeeding in protecting public subsidy and keeping homes affordable as they pass from one buyer to the next.

We were curious about the reasons for high levels of housing cost burden. we were able to receive quick and clear responses to this finding for two reasons. First, the program administrators themselves are a key audience for the HomeKeeper Social Impact Reports. Second, users viewing the HomeKeeper report can click on individual data points and “drill down” to the underlying transaction data, and one further click will open their Salesforce account to the relevant homebuyer’s record so that they can make changes or explore further. Users confronted with this unexpected outcome can easily perform a “reality check” on their average and tell us if we were doing something wrong or if they were.

What we learned was that the problem resulted from a number of different situations that fell into three general categories:

  1. Some programs have been delegating the job of ensuring that purchases were affordable to mortgage lending partners. In the past, lenders had been unwilling to lend to buyers who would be cost burdened, but like so many other lending standards, this one was relaxed significantly in the early 2000s. In these cases, the impact report was doing its job and pointing out a possible failure on the part of the programs.
  2. Just as often, we found that complexities related to the entry of a household’s income (particularly related to income sources such as Social Security or child support) made buyers who actually were not cost burdened appear to our report to be paying a higher share of income than they really were. This was a failure of our data system to consistently capture all the relevant information.
  3. But after accounting for both of these cases, a large number remained in which programs appear to have knowingly allowed buyers to purchase even when their total housing costs exceeded the cost-burden standard. In some cases, this may have occurred because the families had been facing an even higher cost burden in their prior housing situation. HUD, for example, generally allows this kind of exception but we were surprised by how many buyers fell into this category. This is a failure of the standard itself. As housing costs have risen, families have become accustomed to paying far more than one-third of their income for housing, and what was once a rare exception has become something of the norm.

What do you think? Should affordable homeownership programs be more diligent about enforcing this standard? Or, given the variety of appropriate exceptions and the high share of households for whom the result is housing costs above 33%, is this still an appropriate standard? Should we collectively adopt a higher standard or instead look for another metric to evaluate whether buyers are taking on more than they can afford?

Share your thoughts in the comments below!

Comments

  1. Thanks for sharing this! It really is important that we are able to live in spaces that we can afford. If we don’t, then we run the risk of ruining our credit by falling into debt. I think that if you are in a tight financial situation, you should make sure to rent so that you don’t have a mortgage chaining you down as well.

  2. Tiffany Eng says:

    In cased you missed it, Bloomberg did an interesting piece title, “Housing’s 30-Percent-of-Income Rule Is Nearly Useless”

    http://www.bloomberg.com/bw/articles/2014-07-17/housings-30-percent-of-income-rule-is-near-useless

  3. Increasingly we need to look at Housing + Transportation Costs as a determining factor is what is affordable. Paying 40% of your income to housing can be well worth while if the transportation needs for that home is taken care of with access to public transportation and job connections. Transportation costs are going up faster than housing costs at this point so the combination of these factors should play a larger role in determining affordability.

  4. Rick Jacobus says:

    Great Point Eric. This is consistent with the idea that it is the standard itself that is broken. Lenders seem to have mostly moved to measuring total debt ratios instead of looking at housing debt alone which may make sense from the point of view of evaluating likelihood of defaults but if we are concerned instead about the burden on the family, the cost of transportation might be more relevant. Housing organizations don’t generally capture transportation costs on their applications but it is worth considering.

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