Chapter 2 -- Continued

Finding 5:

The most serious housing needs are concentrated among households with the lowest incomes.

• The vast majority of renter households with worst case needs have extremely low incomes. The incidence of worst case needs falls sharply as income increases.

It is the poor who cannot cope with America's robust, market-driven system of providing housing -- unless they receive help from publicly funded housing assistance programs. Worst case housing needs are defined as severe housing problems among unassisted very-low-income renters, renters with incomes below 50 percent of area median. The Federal preferences for housing assistance that have been suspended in recent years -- and will almost certainly be repealed by pending housing legislation -- have the effect of targeting assistance to a yet lower income group, those with incomes below 30 percent of area median. In place of the Federal preferences, new housing legislation will reserve some units for this extremely-low-income group. It will also allocate assistance to other households with incomes of up to 80 percent of the area median.

The total number of renter households with severe or "priority housing problems" in 1995 includes the 5.3 million very-low-income renters with worst case needs. Another 565,000 renters also had priority housing problems, but they had incomes above 50 percent of the area median. As exhibit 16 shows, over two-thirds of renter households with severe housing problems have incomes below 30 percent of area median, which is approximately the official poverty threshold. A startling 42 percent (2.4 million) of renters with severe housing problems have incomes below 20 percent of the area median. Almost 63 percent have household incomes that fall below Federal poverty cutoffs that, it must be remembered, are not adjusted for geographical differences in incomes.⁷

Almost 70 percent of unassisted, extremely-low-income renters have worst case housing needs. As soon as a household's income rises above 30 percent of area median income -- to between 31 and 40 percent of median -- the likelihood that the household has severe housing problems is only one in three. In the group just above the very-low-income cutoff but eligible for units produced by HOME and the Low Income Housing Tax Credit (51 to 60 percent of area median income), less than 7 percent have priority problems. Less than 5 percent of those in the group between 61 and 80 percent of median have severe housing needs (see exhibit 17). Yet legislation under consideration by Congress would take from this group up to 65 percent of households newly admitted to public housing and 60 percent of those newly receiving tenant-based Section 8 assistance (see exhibit 5).

Not only are priority needs concentrated at the bottom of the income ladder, but most very-low-income renters have some housing problem, even if it is not a priority problem. In marked contrast, as income increases above the very-low-income cutoff, the probability of encountering other housing problems, which most often include paying between 31 and 50 percent of income for housing, drops rapidly.

• The public housing and Section 8 programs have historically been well targeted to the income groups most likely otherwise to have acute housing needs.

Public housing and the tenant-based Section 8 program currently direct about three-fourths of assistance to extremely-low-income renters, those with incomes below 30 percent of the area median (see exhibit 18). The project-based Section 8 programs also are remarkably well targeted to those who otherwise would be most likely to have acute housing needs, with 70 percent of units occupied by extremely-low-income renters.

Since 1974, the basic income ceiling for Federal housing assistance has been 80 percent of the area median. Since 1981, however, mandatory quotas have directed assistance in each program to households with incomes below 50 percent of median: 75-85 percent of the assistance for public housing and project-based Section 8 (depending on the age of the project) and essentially 100 percent of the assistance for tenant-based Section 8. The deeper actual targeting of these programs, in which 70-75 percent of residents are extremely low income, is a result of several factors. One is the practice of "Federal preferences" enacted by Congress in 1978 and 1981 but not implemented until 1988. Federal preferences put households with worst case needs ahead of others on waiting lists for assisted housing.

Federal preferences were controversial from the start because of a belief that they would lead to an excessive concentration of poor and nonworking families in particular housing projects. Exceptions intended to encourage greater economic diversity or income mixing within projects were enacted in 1992 and 1994. Then, in 1996, Congress suspended mandatory Federal preferences for one year. That suspension has been extended by subsequent appropriations laws, and the Federal preferences will almost certainly be repealed by new housing legislation. The program information shown in exhibit 18 dates from February 1997 for public housing and tenant-based assistance and June 1997 for project-based assistance. It probably reflects very little change resulting from the suspension of Federal preferences starting in 1996, since it takes time for program administrators -- and, particularly, public housing authorities -- to adopt new policies. In addition, the turnover rate for public and assisted housing is less than 15 percent per year, so for some time aggregate program data will reflect old policies.

Waiting list preferences are not the only reason for the deep actual targeting of rental assistance programs. A particularly powerful factor is the calculation of the household's share of rent at 30 percent of household income. Relatively higher income households may find more attractive housing at 30 percent of their income than they could find in the assisted housing projects for which they might apply, particularly when those projects are located in relatively undesirable neighborhoods. Percent-of-income rents probably have been more important than the Federal preferences in the heavy use of housing assistance by those with incomes below 30 percent of the area median. Indeed, even before the Federal preferences were implemented in 1988, public and assisted housing programs were used primarily by households with extremely low incomes.

However, some public and assisted housing projects are found in highly desirable locations and can attract relatively higher income households, even when they must pay 30 percent of their income as rent. Already there is a group of public housing projects that largely exclude the poor. Those projects identified as "high end" in exhibit 20 have fewer than 20 percent of their occupants with incomes below $10,000 per year. As the table shows, such projects are particularly likely to be located in low-poverty neighborhoods. Almost two-thirds (63.5 percent) are in census tracts with fewer than 20 percent of persons living in poverty, while only 35.4 percent of more typical projects are in these low-poverty locations.

Furthermore, recent legislation encourages more widespread use of "ceiling rents" for public housing. Ceiling rents permit public housing authorities to charge a maximum rent that is less than 30 percent of income to make public housing projects more competitive with private market alternatives and to help projects retain working tenants as residents when their incomes rise.

Where opportunities to serve relatively higher income families exist, public housing authorities (PHAs) and owners may take advantage of them. Many PHAs would prefer to serve relatively higher income households as Federal budget reductions increase the prospect that PHAs will have less money for public housing operating costs. A change in program rules enacted in 1996 permits PHAs to keep some of the additional rental income that can be charged to such residents of public housing.⁸ Furthermore, serving relatively higher income households may reduce management and administrative problems and thereby reduce costs.

When housing assistance is tenant based, the program's maximum subsidy, or Fair Market Rent (FMR), can have a powerful influence on whether the program is used mainly by the poor. FMRs are calculated and published by HUD to make available 40 percent of the rental housing in an area that passes basic health and safety standards and has turned over recently. In many locations, this means that families with incomes close to (or above) the very-low-income limit of 50 percent of local median income would receive a small enough subsidy that they do not have a strong incentive to join the program. (The FMR minus 30 percent of their income is a small amount.)

However, the House version of the pending public housing authorization bill (see exhibit 5), would not only permit families with incomes up to 80 percent of the area median to receive tenant-based assistance, it would also permit the subsidy standard to be set at 120 percent of the FMR. This would on average make 75 percent of U.S. rental housing affordable under the program and make the program attractive to relatively higher income families.

Given all these factors -- the attractive locations of some public and assisted projects, ceiling rents, incentives for PHAs to increase public housing rental income, and the possibility of higher FMRs -- the actual targeting of housing assistance to the neediest households could erode substantially over the next decade. To prevent this from occurring, the laws governing the public housing and Section 8 programs should include explicit income targeting rules that direct a substantial portion of housing assistance, overall and in each housing project, to the lowest income groups.

Congress has refused for the past four years to appropriate funds for additional units of the type of housing assistance most easily focused on extremely-low-income households -- tenant-based rental assistance. Because of the subsidy formula (FMR minus 30 percent of income), tenant-based assistance can make housing affordable to the poorest families. Because the subsidies are used throughout the rental market, income mixing is not needed within the group of families that receive tenant-based assistance.

• The current programs that produce affordable rental housing -- HOME and the Low Income Housing Tax Credit -- can serve extremely-low-income households at affordable rents, especially when combined with tenant-based rental assistance.

Current housing policy includes two programs -- HOME and the Low Income Housing Tax Credit -- that produce affordable housing. Affordable housing is distinguished from assisted housing by the use of flat or fixed rents instead of rents that vary with a household's income (see exhibit 4). Generally, rental projects developed under HOME and the tax credit must set the flat rents at a level no higher than 18 percent of the area median income for the size household that would be expected to occupy units of different sizes (one, two, or more bedroom units). At the maximum allowable rent, the units are affordable at 30 percent of income to households with 60 percent of area median income. However, residents pay the flat rent regardless of their actual income.

Rental projects developed under HOME and the Low Income Housing Tax Credit are occupied by families with a range of incomes, including extremely low incomes. But most households with extremely low incomes served by HOME and tax credit rental projects fall into one of two categories: They also have tenant-based assistance, or they have high-rent burdens, as shown for HOME in exhibit 21.

An evaluation of the Low Income Housing Tax Credit by the General Accounting Office, completed in early 1997, suggests that 39 percent of households occupying tax credit units also receive a rental subsidy to make the housing truly affordable to that family. The average income of these households is at 25 percent of the area median, compared with 45 percent of median for renters of tax credit units that do not also receive a rental subsidy.⁹

7. See exhibit 1 for the relationship between percent-of-median income levels and poverty thresholds.

8. Changes in governing legislation and program rules in 1996 permit PHAs to take actions to attract and retain working families by removing what were perceived to be work disincentives created by the percentage of income rent structure. By law, PHAs were permitted to adjust income used for rent calculations so that new earned income was not counted in the rent calculation for 18 months, and then phased in over a 3-year period. By regulation, HUD has given PHAs much greater freedom, permitting them to exclude all or part of the earned income of a family, or of an individual in the family, when determining overall income of the family for eligibility or rent determination purposes. A PHA takes some risk in adopting either the statutorily authorized adjustment to income or the regulatory exclusions from income, since any net loss of rental income would not be offset by increased operating subsidy payments.

9. United States General Accounting Office, Tax Credits: Opportunities to Improve Oversight of the Low-Income Housing Program, Report 97-55, Washington, DC, March 1997, pp. 136, 141, and 146.