NCSL State Legislative Report
Analysis of State Actions on Important Issues
Affordable Housing: Issues and Trends
By Cathy Atkins
November 2002
Volume 27, Number 18
In the past, housing issues, especially those directly concerning lower income individuals and families, have traditionally been dealt with by the federal government and local communities. Although, there may have been a state role in enacting legislation to authorize a community or region to address specific issues or provide state tax incentives for a specific endeavor, overall, states' roles were rather limited. This has changed during the past 10 to 15 years as the U.S. Department of Housing and Urban Development (HUD) has faced legislative and executive branch efforts to drastically reduce its budget, its roles and, even, its existence.
States have taken various approaches to housing issues, including, among others:
- Including affordable housing strategies in their comprehensive housing strategies;
- Issuing bonds to assist low- and moderate-income individuals purchase housing; and
- Giving incentives to nonprofit organizations that provide housing for low-income individuals and families.
Of course, as devolution has occurred at the federal level, these efforts have met with increased competition for state funds. This State Legislative Report highlights some trends that are occurring as states endeavor to ensure that affordable housing is available to residents.
What Is Affordable Housing?
At first glance, the answer to this question seems obvious. However, definitions of "affordable housing" differ depending upon the person who is giving the definition. At a Fannie Mae affordable housing conference held in Washington, D.C., in October 2001, at least three definitions were used by the panelists involved in defining affordable housing:
- 30 percent of household income;
- relationship between income and expenditure;
- 30 percent to 50 percent of household income.
Another perspective is that no percentage of income adequately defines affordability. It is a complex issue affected by demographics, economics and climate. While a healthy, single person or couple may be able to spend 30 percent to 50 percent of his or her income on housing and still be able to afford other necessities of life, such a scenario is not likely to be the case for a family, an elderly couple or an ill individual.
Other costs place additional burdens and claims on the available income. These costs can include location of the housing unit (e.g., very cold climate, very hot climate, high crime area, requiring a long car commute); energy efficiency and age of the structure.
For those who actually build the houses, lengthy and/or complicated permitting processes, building code requirements and design requirements increase construction costs. That increase generally is passed along to the purchaser. Although few would argue the importance of these efforts to protect the purchaser and the public, the effects of these requirements on costs cannot be ignored.
What States Are Doing To Develop Affordable Housing
State initiatives to address affordability can be broken into two categories: those directed to the purchase market and those directed to the rental market. Incentives or efforts in the former are directed to builders and developers, buyers and employers. Incentives for the latter are directed to landlords, builders, developers, tenants and employers.
Purchase Market
Builders and Developers. Most efforts states have taken to help developers create affordable housing involve some form of monetary incentive or quick permitting process. Monetary incentives include tax credits and lower permitting fees or impact fees if a certain number of affordable units are included in the project. Some states are considering a simplified approach to permitting, although this is easier in smaller states or where local entities do not completely control the permitting process.
Buyers. Approximately 28 states have approved the establishment of individual development accounts (IDAs). IDAs offer an innovative way to achieve two fundamental goals: to increase per capita incomes and to encourage investment. In this case, the emphasis is on personal investment, such as in education or home ownership, which sets a stable foundation for long-term employment plans that lead to higher-paying jobs. In an IDA, money an individual saves is matched by the state. The state uses funds from various sources (frequently involving Temporary Aid to Needy Families [TANF] money and funds from tax deductible contributions). During the period of time that money is being saved for a home, participants receive financial counseling and home-owning education (e.g., how to make basic home repairs). In some programs, participants take part in post-purchase classes to help ensure they are financially able to stay in the house.
About half the states have affordable housing trust funds. Money from these funds can be used in various ways. This may include assistance to low-income people to purchase a house or repair one they already own to ensure it remains habitable. The source of these funds varies from state to state but can include funds from the sale of unclaimed property, interest from real estate and legal escrow accounts, interest from rental property deposits and income tax checkoffs.
Individuals also receive home buying incentives via the traditional interest deductions on income tax and, in many cases, an income tax deduction of property taxes paid.
Buyers and Employers. Both states and localities have begun to consider employer assisted housing (EAH) programs. These are of particular interest in states with very high-cost areas or low-density housing markets. Currently, Minnesota and New Jersey have instituted such programs. Employers receive incentives from the state to develop affordable housing for employees. The structures can be either rental or purchase homes.
As part of its smart growth initiative, Maryland instituted its "Live Near Your Work" program. A primary tenet of this program is that a person can afford to spend more on housing costs if he or she does not have to spend much money to commute. If successful, this program should reduce sprawl, traffic congestion and air pollution and also redevelop urban areas and place them back on tax rolls. The U.S. Department of Housing and Urban Development (HUD) also has a similar program that allows a person or family to qualify for a higher mortgage if they are able to walk to work or can rely on cheaper public transportation.
Programs for Professionals. Many professionals-teachers, fire fighters and police officers-find themselves unable to buy a home in the areas they serve because their salaries do not qualify them for a sufficient mortgage. To help counter this, Maryland has a program providing a 5 percent mortgage interest rate for teachers. New York City provides 100 percent financing for municipal police. HUD also has similar programs: "Officer Next Door" and "Teacher Next Door."
Rental Market
Landlords and Developers. Most of the financial incentives for landlords and developers include tax breaks, quicker approval processes and exemption from or lower impact fees for affordable housing. In addition, states are examining methods for keeping landlords involved in various types of Section 8 assistance programs. There has been a shift from project-based Section 8 assistance to tenant-based assistance vouchers. Vouchers are beneficial because they allow tenants the opportunity to choose where they live and to pay more for housing if they desire). However, they also present problems because property owners often are unwilling to accept Section 8 vouchers due to several factors:
- Better open rental market conditions, including low vacancy rates and higher rents, especially as the economy in general has improved.
- Changes in the Section 8 program, such as payments for property damages caused by tenants and increased responsibilities of property owners in maintenance that add to the cost of the unit. HUD no longer covers payments for tenant-caused damages. The owner must recoup the money from the tenant. However, this often is difficult.
- Rents capped by HUD at amounts less than open market rents. Recently in Denver, for example, the average two-bedroom apartment rented for more than $650 per month, no utilities included. Yet, in one unit where tenants receiving Section 8 assistance resided, the rent was capped at $575 with heat paid.
Assuming that states want to provide incentives for affordable housing, what can they do? Some examples follow of recent state action. The Washington Legislature enacted a law to create a task force to address financing housing for low-income senior citizens and people with disabilities. The task force is to explore alternative financing techniques for the development and renovation of housing developments. Virginia passed legislation to provide a tax credit for individuals or corporations that rent dwelling units to low-income tenants. The Texas Legislature directed the Texas Department of Housing and Community Affairs to assume responsibility for cooperation in the preservation of government assisted housing. Oregon enacted legislation to provide for financing of low-income housing through the approval of bonds. The state also allows the Housing and Community Service Department to finance mixed commercial or residential facilities.
Renters. Several states provide some form of tax deduction to renters to compensate for some or all rent paid. Indiana, for example, provides an income tax deduction of up to $2,000 per year, while Michigan provides a deduction of up to 10 percent of rent paid per year. New Jersey requires a landlord to rebate to the tenant a portion of any property tax rebate on a unit. Other states use formulas to determine the amount of a deduction or rebate that is given to the renter.
What's Next?
The entire housing issue is complex, and affordability is a complex subissue. Affordability affects moderate and lower income individuals and families and how they can use other funds for food, clothing, education, medical care and transportation. States have adopted a variety of approaches, all of which involve some cost to the state at a time when state budgets increasingly are strained. Although no one initiative will work for all states and no effort completely addresses the problems, the examples included in this report offer some ideas for consideration.
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