Why We Are Bullish On Affordable Housing Right Now
The lack of affordable housing in the U.S. has gained increasing attention since the 2008 Recession, and while policymakers continue to work towards a long-term solution, the process for funding and implementing new policies has proven in many cases to be convoluted and insufficient thus far. In fact, due to funding limitations, more than 3 in 4 low-income American families who need rental assistance do not receive it.
As forecasted demand continues to grow for this essential real estate class, investors can play a role in filling this need while potentially benefiting from affordable housing’s relative stability and attractive risk-return profile.
Below is an explanation of what affordable housing entails, along with three key reasons why we think now is the time to consider investing in affordable housing.
What is Affordable Housing?
Affordable housing provides cost-accessible housing for members of society with limited income, particularly for low-income households, students, seniors and people with disabilities. Funding traditionally comes from state or local governments, although the private sector has assumed an increasingly larger role, and this support can take on multiple forms ranging from public housing and rental assistance programs to emergency housing.
On the other side of the equation, property owners receive tax credits if they construct or rehabilitate units for affordable housing, or use a percentage of their property as affordable housing. However, despite the importance of affordable housing, development costs are oftentimes too high for builders to construct new apartments intended for relatively low rents without government subsidies, which has led to the current nationwide shortage of affordable housing units, particularly in densely populated coastal cities.
Section 8 Housing
One of the most ubiquitous affordable housing programs in the U.S. is Section 8 Housing, which helps lower-income families afford a home by paying a subsidized portion of the market price for rental units. The program is funded by the federal government via the Department of Housing and Urban Development (HUD) and administered by local public housing authorities (PHA).
Section 8 subsidies come in the form of a tenant-based voucher program whereby the program issues subsidies in the form of vouchers to qualified households to be used to pay all or a portion of the household’s housing costs. The PHA pays the voucher amount for an eligible household directly to the rental property owner, and if the total housing costs are more than the voucher amount, then the household must pay the difference. To be eligible for this program, a household must have an income that is 50% or less than the area median income in addition to additional requirements, and households generally pay no more than 30-40% of their monthly income toward their rent share.
That being said, what are the main reasons why you should consider investing in affordable housing?
1. Purchasing power is stagnating at the lower end of the economic spectrum
Even though unemployment was steadily decreasing prior to the COVID-19 outbreak, consistent wage income growth has been elusive over the past several decades, and the gap between the wealthiest and the less fortunate in society is widening as the top earners continue to pull away from middle- and low-wage workers.
A study by the Foreign Policy Institute found that from 2000 to 2019, wage growth was strongest for the highest-wage workers and that slow wage growth and rising inequality has been the norm over the last 40 years. Furthermore, the data show not only rising inequality through the 2000s, but also the persistence—and in some cases worsening—of wage gaps by gender and race.
Source: Foreign Policy Institute analysis of EPI Current Population Survey Extracts (2020)
While the housing market has generally recovered in tandem with the overall economy since the 2008 Recession, this broad upswing has masked the uneven nature of the recovery and the fact that many consumers have been left out in the cold.
As a result, with the middle and-lower class being squeezed out by stagnating and at times declining purchasing power, many households who previously could afford homeownership or more middle-market rentals have been priced out as nominal costs continue to climb. For many renters, affordable housing has increasingly become the primary choice in an ever-shortening list of options.
2. Affordable housing demand increases during periods of economic turmoil
From an investment standpoint, affordable housing is historically characterized by better occupancy rates and less volatility than market-rate units. Furthermore, during periods of economic recession affordable housing rents typically remain more stable and are not adjusted downwards as much relative to most price-sensitive options such as Class A rental units. With COVID-19 seeing resurgences across many parts of the country, the attractiveness of affordable housing has grown even more pronounced. According to the Urban Land Institute, before the outbreak approximately 8 million people in the U.S. were already severely cost burdened (paying 50% or more of their incomes for housing), with little ability to absorb a financial shock of this magnitude. As of April 2020 this number is estimated to have increased by 1.5 million severely cost-burdened renters, and while this figure has yet to be updated, the past few months have seen a continued increase in the proportion of permanently unemployed workers.
Furthermore, a greater share of low-income homeowners and renters are working in industries that are more vulnerable to the COVID-19 shock. As a result, low-income homeowners may struggle more to sustain homeownership once the forbearance period is over, and many low-income renters are likely to lose the financial ability to become homeowners.
And while there are concerns about the ability for lower and-middle income households to pay rent as the pandemic deepens, these demographics are common recipients of multiple forms of government relief, and given the direct government subsidies paid out to affordable housing landlords and property owners. As a result, affordable housing may be an informed and calculated investment choice in the context of the current economic crisis.
3. Affordable housing improves social mobility
The most direct, fundamental benefit of rental assistance is to enable families to afford decent, stable homes, and the effectiveness of rental assistance in reducing housing instability, overcrowding, and poverty has far-reaching implications for society at large. However, while the multifaceted, positive impacts of cost-accessible housing on a household’s wellbeing have long been known, the ongoing pandemic has laid bare the prevailing disparities in how certain demographics of society are affected by economic distress.
As the U.S. awakens to our nation’s uncomfortable racial and economic realities, it’s increasingly clear that expanding rental assistance and helping more assisted households to live in higher-opportunity areas would extend the benefits described above to many additional households. With 60% of non-disabled working-age recipient households including at least one worker and the majority receiving assistance for less than three years, it’s clear that given the opportunity most people are actively striving to work their way out of the lower income spectrum.
Therefore, while social welfare has not traditionally been a primary motivator steering investment decisions, the current economic environment offers a potential opportunity for investors’ financial interests and community well-being to dovetail seamlessly.
While it is imperative that legislators enact policies to ensure that low- and moderate-income individuals have access to high-quality and stable housing, the truth is we should not wait for top-down, large-scale solutions to begin working towards more cost-accessible housing solutions across the U.S.
As a result, we believe there are a variety of compelling reasons for real estate investors to consider investing in affordable housing now. And while there are no easy solutions to the economic challenges some individuals and families are faced with, investing in affordable rental properties can serve to benefit those who need it most while serving as an effective part of a defensive investment strategy.
As always, iintoo’s team of Licensed Investment Specialists is available to discuss your investment goals and provide more details on our private placement commercial real estate offerings.