Affordable Housing

Affordable Housing: An Investment in Society

Tuesday, June 23, 2020

By: Robert J Meulmeester, MRICS

Before the pandemic and recession started, affordable housing was already in high demand despite a sub-4% unemployment rate. In fact, high demand was driven by chronic income inequality exhibited with a 0.485 Gini Coefficient for the US in 2018 per the US Census Bureau. The Gini Coefficient is a commonly used measure ranging from 0 (perfect equality) to 1 (complete inequality). Income inequality has been rising steadily since 1967 when the Gini Coefficient was around 0.390. Recessions typically give a boost to the Gini Coefficient. It is not unlikely to end up with an even higher Gini Coefficient within the next year or two. Notably, the US exhibits an overall higher income inequality compared to other, overall similar western developed nations. Specifically, Europe has a 0.307 Gini Coefficient indicating less inequality.

The income inequality is further illustrated by more than 53 million low-wage workers, comprising over one third of the US labor force, with a median hourly wage of $10.22, or median annual earnings of $17,950 excluding certain groups such as students and self-employed people according to Low-Wage Workforce from the Brookings Institution as of November 2019. Nearly half of this group works in retail sales, food preparation, building cleaning, personal care, construction, or driving which were all significantly impacted by the pandemic. Moreover, half of low-wage workers are primary earners or contribute substantially to family living expenses. Some 30% of low-wage workers live below 150% of the Federal poverty line (about $36,000 for a family of four) whereas the maximum affordable housing cost is determined at 30% of household income by the US Department of Housing and Urban Development.

According to The Gap – A Shortage of Affordable Homes by the National Low Income Housing Coalition (“NLIHC”) as of March 2020, over 10.9 million of the nation’s 43.7 million renter households have extremely low incomes and may only afford a monthly rent of no more than $644. Meanwhile, HotPads Rent Report for the 3^rd quarter 2018 indicated a $1,500 median apartment rent nationwide. Only 7.3 million rental homes are affordable to extremely low-income renters, assuming households should spend no more than 30% of their income on housing. This supply leaves an absolute shortage of 3.6 million affordable rental homes for these extremely low-income renters. The result is that such low-wage worker households become severely cost burdened and are often forced to make impossible choices between shelter and food, healthcare, education, and other basic needs. Also, these low-wage worker households are more likely to comprise of minorities further emphasizing the racial divide within the US.

The NLIHC acknowledged that rental rates affordable for the lowest-income households typically do not cover the development costs and operating expenses of new housing. New rental housing, therefore, is largely targeted to the higher-price end of the market. In the end, public subsidies are needed both to subsidize the production and operation of affordable homes for the lowest-income renters and to provide rental assistance that low-income families can utilize to afford rental housing in the private market. Arguably, ample availability of affordable housing reduces stress for such households which may help increase their opportunities in society leading to overall economic enhancements. At the same time, these economic enhancements limit future social unrest which has become more common throughout the US.

Certain existing programs like Low Income Housing Tax Credits and even Opportunity Zones as well as local real estate tax abatement programs incentivize some affordable housing development. It is not unlikely that construction cost and land prices decrease due to the pandemic and recession which may further benefit future affordable housing development. Coincidentally, investors should expect less price volatility in affordable housing which reduces risk as opposed to the higher housing segments. Similar to crises in the past, perhaps there is a distinct possibility that this pandemic will force markets and lawmakers to direct their focus to improve the affordable housing supply thereby creating a low risk investment opportunity while repairing inequality which will ultimately benefit society at large.

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