Filtered, As Opposed to Naturally Occurring, Affordable Housing

Published by H. Blair Kincer, Michael Novogradac on Tuesday, December 19, 2017 - 12:00am

In recent years a new term emerged: naturally occurring affordable housing (NOAH). The term may lead some to think of Mesa Verde cliff dwellings built in naturally occurring features.

However, a more precise term is necessary because, taken in its literal sense, there is really no such thing as ‘naturally’ occurring affordable housing. Using the term “naturally occurring” is problematic as it is weighted with the implication that it is ubiquitous and a possible emergent order solution to our housing crisis. This discussion will explain why the use of the word “natural” is challenging and it should be replaced.

An article in Urbanland defines the concept of NOAH as, “…housing that is affordable without being supported by public subsidies such as low-income housing tax credits.” This makes sense, but without subsidies, how do affordable housing options occur in markets without market derived affordable housing?

Calling it “natural” implies a laissez-faire solution to the affordability crisis that simply is not happening. A possible unintended implication of the term is the conclusion that market forces can and will solve the nation’s housing crisis. Those active in the affordable housing community know this is impossible. 

Some point out that NOAH is typically a class B or C property, considered to be in less than ideal condition or a subpar location. This competitive disadvantage results in the market pricing such an apartment less than a superior product, thereby making it affordable to a larger population. Economists refer to this market phenomenon as filtering. (For example, see a recent paper by Vicki Been, Ingrid Gould Ellen and Katherine O’Regan of NYU for an excellent analysis of the ability of filtering to address affordable housing needs.) “Filtered affordable housing” is a superior term for affordable housing that occurs without the use of subsidies.

To be clear, this type of affordable housing is most often present in markets where significant disinvestment is occurring. These areas are typically markets with economic dislocation as a primary characteristic. Tenants in these areas face diminishing opportunities. Apartment units in Manhattan or in San Francisco are not becoming affordable to low-income households through greater additions to supply. Relying on filtered housing means that areas with the greatest growth will have the least affordable housing additions. Areas with the least economic vitality will be the only option for those in most need of opportunity.

The term “filtered affordable housing” communicates that the supply of affordable housing is affected by market forces. This alternate term conveys several aspects of the phenomena that are not “natural,” including:

Unintentional – The market filters housing, and those properties that are poorly maintained and located in economically stunted areas become affordable. This process is not a reflection of demand but of physical changes and external forces. Areas with poor economic growth, aging infrastructure and a lack of investment are commonly fertile producers of affordable housing. But, the tenants would benefit from living closer to jobs and economic opportunity. Thus, while the housing is at a price point that is affordable to lower income households, this housing will unintentionally reduce economic opportunity, lengthen commutes and invite concentration of economic strata. This does not meet demand where the need is greatest. It does not offer a replicable or comprehensive solution. 

Non-ubiquitous – While demand for affordable housing is ubiquitous, filtering is infrequent and random in placement. This filtering of supply is not a response to demand factors (if it were, those tiny apartments in Manhattan in deplorable condition would not be priced so high.) It occurs in an infrequent and random pattern driven by physical attributes, management decisions and market externalities. It does not naturally occur in every market.

Transitory – For every example of a 1970s garden style property affordable to those in the lower income brackets, there’s an example of older housing in San Francisco that has “filtered-up” to those in high income brackets. Further, the lack of restrictions allow for currently affordable properties to ride a wave of gentrification, resulting in the possible displacement of existing households.

Each of these terms highlight the role that chance plays in addressing the housing needs of lower income households. New housing supply at market levels, or for high-income cohorts, does not happen by chance. Capitalistic forces provide housing to those with ample means. However, those waiting for a “natural occurrence” are really at the whims of arbitrary, capricious and unpredictable “market filtering” forces. As such, the term “filtered affordable housing” reflects reality better than naturally occurring affordable housing. The term “filtering” is often used in economic literature, giving added resonance to its use in this context.

For the market to filter housing into affordable levels an externality must come into play. A property owner either neglects the asset by failing to maintain or update it appropriately or the surrounding market suffers economic hardship. In either case, neglect and economic malaise are not natural. They are symptoms of broader problems that natural occurrences cannot solve. Using this more appropriate term would allow the affordable housing community and policy makers to have a more informed conversation about the most efficient means of providing affordable housing.