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Policy Points: More Hard Evidence the Rent is Way Too High (And that we need LIHTC and HUD funding)

Published by Peter Lawrence on Wednesday, January 1, 2014

Journal cover January 2014   Download PDF

Before we look at the “America’s Rental Housing: Evolving Market and Needs” report that the Harvard Joint Center on Housing Studies (JCHS) released in December, there is an update on the federal budget legislation that was a modest congressional achievement to end 2013. Before the House recessed for the holidays, the two Budget Conference Committee chairs, House Budget Committee Chairman Paul Ryan, R-Wis., and Senate Budget Committee Chairwoman Patty Murray, D-Wash., announced an agreement on fiscal year (FY) 2014 and FY 2015 discretionary spending levels. The committee chairs wrote it as the Bipartisan Budget Act of 2013 (BBA), so the agreement has the force of law. The House and Senate passed this legislation by wide bipartisan margin, easing fears of a government shutdown, and likely easing the budget and appropriations process for next year.

The BBA sets the FY 2014 discretionary spending limit at $1.012 trillion, replacing $45 billion in sequestration cuts that would have occurred without the bill. The cap is $46 billion less than the spending level set by the Senate FY 2014 budget resolution but $45 billion more than the level set by the House FY 2014 budget resolution. For FY 2015, the BBA sets the spending limit at $1.014 trillion, replacing $18 billion in sequestration cuts that would have occurred. The $45 billion in FY 2014 sequestration relief would be divided equally between defense and non-defense discretionary spending. BBA sets FY 2014 non-defense discretionary spending at $492 billion, and defense discretionary spending at $520 billion. BBA also sets F Y 2015 non-defense discretionary spending at $493 billion and defense discretionary spending at $521 billion.

The BBA includes dozens of specific budget savings provisions totaling approximately $85 billion, including increased federal employee retirement contributions, an increase in Transportation Security Administration (TSA) fees on airfare, and extending health-related sequestration cuts on the mandatory side of the budget through 2023. None of the savings provisions affect housing or community development. Even with spending increases, the bill generates $23 billion more revenue in FYs 2014 and 2015 than it spends; this difference goes to deficit reduction.

With the agreement on the FY 2014 spending level, the House and Senate Appropriations Committees can begin negotiations on final FY 2014 appropriations, likely leading to an omnibus bill that will incorporate spending for all 12 subcommittees, including the subcommittees that fund the U.S. Department of Housing and Urban Development (HUD) and Treasury. All federally funded agencies, including HUD, Treasury Department and U.S. Department of Agriculture (USDA), are currently funded at the FY 2013 post-sequester funding level of $986 billion by a continuing resolution (CR) that expires Jan. 15. However, before the program funding levels can be negotiated, Congress needs to set the spending allocations, officially known as the 302(b) allocations, for the 12 appropriations subcommittees. I expect House Appropriations Committee Chairman Hal Rogers, R-Ky., and Senate Appropriations Committee Chairwoman Barbara Mikulski, D-Md., to set those allocations before the end of the year.

If leadership spreads the increase in spending authority evenly, the Transportation-HUD (THUD) appropriations subcommittee would receive about $5 billion more than the initial House FY 2014 THUD bill, but $5 billion less than the Senate FY 2014 THUD bill. While that positive development on the budget front is welcome, we have so much ground to make up with the nation’s rental affordability challenges, as the JCHS report shows.

For the first time since such data were collected, the JCHS report documented escalating rents combined with significant erosion of renter incomes and flat production have led to the point where in 2012 more than half of all U.S. renters – more than 21 million households – spend more than 30 percent of their income on housing. The 30 percent of income standard is widely regarded as the dividing line between an affordable and unaffordable housing cost burden. This represents a doubling of the percentage of cost burdened renters since 1960 and a 12 percent increase over the past decade.

The report also found that the problems overburdened renters face come at a time when rents are increasing, their income is declining, and the share of Americans who rent is rising rapidly. Between 2000 and 2012, the real median rents increased by 6 percent while the income of renters dropped by 13 percent. Rates of renting are at their highest in more than a decade for all age groups and at their highest for those aged 25 to 54 since recordkeeping began in the 1970s. What is the result of this increased cost burden? The report notes, “The disturbing finding is the main place [renters] are cutting back on spending is food and transportation. They also are cutting back on health care spending and retirement savings.”

What caused this dramatic deterioration? The report notes the foreclosure and financial crisis of 2008 and 2009 played a big role in displacing millions of homeowners, reversing the long upward trend in homeownership, and pulling capital out of housing finance. High rates of unemployment also have forced many former homeowners and those would-be buyers who cannot afford homeownership to turn to the rental market. Furthermore, banks have tightened credit considerably to the point where some would-be buyers cannot get a mortgage, or at least not an affordable one. The biggest challenges are with low-income renters. Nearly half (46 percent) of renters have incomes below $30,000, including 22 percent with annual incomes below $15,000, which is roughly equivalent to earnings from full-time work at the minimum wage. By comparison, only 30 percent of all households have incomes that low. As the number of low-income renters has grown, the likelihood of finding quality, affordable units has diminished.

In 2011, 11.8 million renters with incomes of about $19,000 competed for just 6.9 million apartments affordable at that income level, a shortfall of 4.9 million units. However, when you consider that 2.6 million higher income renters are residing in those 6.9 million affordable rental homes, and some of the remaining affordable stock is structurally inadequate, inventory shortage is even more shocking.

So what can we do about this? First, do no harm to existing production. What is underlying that existing affordable rental housing production? The low-income housing tax credit (LIHTC). As JCHS puts it: “The Low Income Housing Tax Credit program has been the primary source of funding for both development of new low-income housing and preservation of existing subsidized properties since 1986.”

Furthermore, it notes, “In considering which tax expenditures to rein in [in tax reform], it will be important to recognize the LIHTC program’s exceptional track record and its unique role in adding to the affordable housing supply.” And it called the program “one of the most successful efforts on record in terms of sound financial performance and delivery of good-quality rentals.” At an event for the report’s release, HUD Secretary Shaun Donovan urged attendees to fight for the preservation and expansion of the LIHTC to tackle the rising challenge of rental affordability. After admitting that HUD largely ignored it for years, Donovan noted the LIHTC is becoming more central to HUD’s work addressing rental affordability challenges. HUD’s signature preservation initiative, the Rental Assistance Demonstration (RAD), largely depends on the LIHTC to finance the preservation of public housing and various other legacy rental programs. He added that Treasury and HUD are working together closely in the credit’s administration, jointly devising budget proposals to enhance it. Following Donovan, Michael Stegman, counselor to the Treasury Secretary for Housing Finance Policy, said the LIHTC plays a “foundational role” in building and preserving affordable housing, noting its design features that align incentives to reliably provide and maintain affordable housing over the long term.

But even more importantly, Stegman also made explicit a Treasury position the industry has inferred over the years. Without going into detail, he said that the administration’s “business tax reform proposal will preserve and enhance the LIHTC.”

That’s welcome revelation to start 2014.

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