The Evolving Challenges of Affordable Housing

Dr. Sam Chandan sits down with Arthanais Williams, Managing Director for Affordable Housing at Arbor Realty Trust. Dr. Chandan and Director Williams discuss the current landscape and history of affordable housing finance, distinctions between the formal Affordable housing sector and naturally occurring affordable housing, and the persistent challenges facing the industry.

Affordable housing has long played a key role in underpinning dynamic local economies, and its importance has only grown during a uniquely challenging year. The pandemic has exhausted income-constrained household finances, only deepening a housing needs gap felt across US cities, both big and small. In a recent episode of The Urban Lab, Arthanais Williams, Managing Director of Affordable Housing at Arbor Realty Trust, one of the nation’s leading multifamily mortgage lenders, details the differences across the sector and the role lenders play in bridging supply and demand.

In its most basic form, the federal government defines housing as affordable when a dwelling can be obtained for 30% or less of a household’s income. However, for decades, housing costs (including market rents) have accelerated more quickly than average incomes. For renters on the lower end of the income distribution, and especially those in high-cost markets, the supply availability of market-rate units that meet the affordability guidelines ranges from limited to nonexistent. Thus, programs that oversee the formal capital-A Affordable housing sector set restrictions based on local area median-incomes. According to Williams, the formal sector is "any housing that has an affordability restriction, either taking the form of a rent restriction or an income restriction—which limits the amount of income that a household living in a particular unit can earn in order to qualify for that unit."

While local governments and stakeholders often dictate land-use policies within a given locality, the regulations that define Affordable Housing finance arrive from the IRS tax code. "We are limited by incomes at 60% of area-median-income (AMI)," says Williams. "Those restrictions are put in place in order to incentivize developers to create this housing." Meanwhile, "naturally occurring" affordable housing arises when normal market rents are at levels low enough that the formal definition is met without policy intervention. Despite incentive structures, the federally established 60% AMI threshold has an imbalanced impact across metros. In a high-income area such as Manhattan, rents that are priced based on 60% of the local median income may still be unattainable for many income-constrained renters, while the high fixed prices of other day-to-day necessities strain wallets at the bottom to a higher degree. Area-by-area discrepancies complicate policy-effectiveness and leave many of the nation's most vulnerable households left behind.

Beyond the governing structure, there is often an incorrect perception that housing affordability is strictly an urban problem. Initially, housing policies established in the 1940s provided local governments the resources to build Affordable housing where they saw fit. The result was a concentration of these properties in urban centers. “When the federal government built and managed housing, that’s where the bulk of the Affordable housing was built," says Williams. However, over time, rising land costs and migration patterns rerouted the concentration of new construction. “Most people when they think of affordable housing, they think of urban cores—, but actually Affordable housing is everywhere… The suburbs, the exurbs, and even rural, you will find Affordable housing with restrictions in order to address a housing need within that particular jurisdiction.”

As housing demand grew in the second half of the 20th century, addressing supply primarily through the public sector became increasingly complex and inefficient. Thus, beginning in the 1970s, the Department of Housing and Urban Development (HUD) began to pivot away from its role on the supply-side of housing and towards addressing demand-side concerns, using vouchers and other forms of subsidies to spur development. This manifested in the 1986 tax-code, which established formal rules and incentives for the sector federally, opening the door to a future where private financing was the new norm. That shift became the catalyst for Affordable housing’s growth into the suburbs and beyond, where developers could find cheaper land and lower input costs, thereby raising profits.

The new paradigm has yielded uneven results. In the nearly four decades since the introduction of private-finance into the sector, the pace of construction has accelerated; however, a significant supply-gap in affordable housing still persists today. "There are definitely positives… in that, you've seen more efficiencies in the marketplace in terms of construction of more than what the federal government could provide on its own. But overall, the incentives that are created [are] still not meeting the overall need," says Williams. "We're still at a deficit of about 7M units needed in the affordable housing space to meet overall demand".

The forces constraining this supply are complex, according to Williams. “It’s all of the above” when asked which factors are primarily responsible for the shortfall. “It’s a combination of factors. Population growth overall; economically, wage growth has been outstripped by cost-of-living increases. We’ve had recessions, [the move] away from a manufacturing-based to a service economy—all of those factors play into why we are at a deficit”.

Williams and his team at Arbor Realty Trust are familiar with both the challenges and opportunities present in today’s Affordable housing market. With licenses to underwrite mortgages backed by Fannie and Freddie, Arbor and its market-peers lenders help locate these projects and serve as a lynchpin between agencies and developers. “For Arbor, it’s just a natural outgrowth of the platforms we’ve already built here… it’s also consistent with our mission," he says. "We believe that everyone in America deserves a clean, safe, affordable housing unit, and so this is just a natural outgrowth of our business platform, but also our mission."

Still, he recognizes the shortfalls of the market's current model and acknowledges that additional policy considerations may need to be made by the federal government to address them. "If we can establish a baseline value for the tax credits, I think that would go a long way in helping move a lot of transactions forward," noting that developers are often left with less to invest in renovations when acquisition prices are so high, as they are in the current environment. Traditionally, municipalities have stepped in to help provide such soft financing to developers, but in light of the pandemic, such funding is simply out of reach for most local governments.

Other policies to consider helping the deficit, says Williams, are inclusionary housing requirements for development projects and up-zoning, which would allow for more density in areas with constrained land availability. "It makes sense… Market efficiency says that you should build up to what the market can support, but when we do that, people on the lower end of the spectrum are normally left out from an affordability standpoint," he explains. "So, if we are going to grant the approvals for a market-rate development, having an inclusion of affordable units interspersed— it just makes good policy in my perspective."

For more information about the Urban Lab podcast and Dr. Sam Chandan, please visit samchandan.com/urbanlab. Follow Dr. Chandan and the Urban Lab on Twitter at SamChandan and UrbanLabPodcast.