Everything You’ve Always Wanted to Know About Low-Cost Housing But Were Afraid To Ask
The affordable housing sector is one of the most misunderstood segments of the real estate industry. Long-standing misunderstandings and undeserved stigma exist despite attempts by governments—from the federal to the local municipal level—to educate and enlighten both real estate professionals and communities about its benefits: The beliefs that cheap housing units would attract crime, alter the character of a neighborhood (either aesthetically or culturally), or diminish the value of nearby houses are all too common—and utterly false.
It is critical to de-mystify the affordable housing genre, particularly to dispel negative stereotypes about these homes and the people that reside there. It’s also crucial to demonstrate developers, investors, and communities how these sorts of real estate developments may not only provide lucrative commercial possibilities, but also improve and regenerate the neighborhoods and larger cities where they’re located.
The Difficulty Of Defining “Affordable Housing”
The exact definition of affordable housing is a source of considerable misunderstanding, which is unsurprising given that the standards vary depending on the city in which the development is located. The largest definition is provided by the government Department of Housing and Urban Development (HUD), which defines a “affordable residence” to be one that costs 30 percent or less of a household’s gross income (including utilities).
Affordable housing eligibility is determined by a family’s total income not exceeding 80% of the Area Median Income (AMI), which varies by area. In actuality, however, this is merely a rough approximation of a renter’s or buyer’s power. The National Low Income Housing Coalition publishes an interactive report every year that shows what pay is required per hour to purchase a “modest apartment” in various parts of the country; in many cases, this sum exceeds the 80 percent restriction.
A frequent misunderstanding is that all affordable housing is public housing, which was built, owned, and administered by the federal government from the 1930s until the 1970s (when President Nixon halted these projects) to address poverty and infrastructural concerns. Nowadays, affordable housing is more likely to take the shape of a specific number of units set aside in new development to be rented or sold at a lower price than market value, allowing those with lower incomes to purchase.
Why Is Affordably Housing Necessary?
People must be able to afford to live in the region where they work, to put it bluntly. Contrary to popular belief, the tenants of affordable housing units are typically hard-working city employees: firefighters and other emergency medical personnel, municipal service workers (such as garbage collectors), school and daycare staff, grocery store clerks, and other types of essential workers on whose labor we all rely—especially during the pandemic’s peak. Not only can these people not afford the expenditures of a long drive to work in a 24-hour metropolis like New York or San Francisco, but the city cannot function without their ability to get to their places of business fast.
In a broader sense, a market failure occurs when the only way to afford to reside in a given location is to spend more than half of your after-tax salary on housing. With housing costs outpacing incomes, a large portion of the population is regularly priced out of the areas where they live and work—especially in A-list cities—and the consequences of creating city centers that are only accessible to the wealthy will be felt not only in a loss of vibrancy and diversity in these communities, but also in a decrease in the quality and availability of businesses and services that these areas rely on.
Developers Have Opportunities
There are numerous resources available to help build these projects, including subsidies from third-party government organizations to assist with the total expenses of development and property insurance. For example, if a $30 million project has 30 units, the government may assist the developer by offering 30-40 percent of the cost as a forgivable loan at 0-1 percent interest. In exchange, the developer must agree to charge a specified number of units at a reduced rent (or a lower purchase price) by the same margin. Once in, management must submit documents demonstrating that the residents of these units are financially qualified to live there; otherwise, the loan arrangement would be nullified.
However, these agreements (combined with the need for affordable housing) ensure that these units are occupied and earning money, whereas market-rate units may sit vacant.
Hundreds of millions of dollars in subsidies have been set aside by state governments to mitigate the costs associated with mixed-income complexes, bridging the financial gaps that cannot be met by debt produced from the residents’ income.
Many communities have also established local schemes to subsidize the creation of affordable homes, such as inclusionary zoning. These subsidies, together with market demand, make developing houses with affordable units a risk that can be managed.
Consequences for Constituent Communities
Communities that invest in affordable housing foster diversity and inclusion, resulting in a more culturally diverse and sustainable environment. These towns benefit from a diverse workforce that not only provides essential services but also contributes to the local economy. Affordable housing supports revitalization, investment, and an infusion of new young families in many communities that need a “spark.”
Most importantly, affordable housing helps the most disadvantaged people and fills in some critical gaps in the market. Senior folks, students, people with disabilities (including veterans), and a variety of other groups, for example, struggle to find cheap housing that is conveniently situated and provides adequate amenities for an acceptable quality of life. Mixed-use developments yield a high rate of return while also providing a much-needed positive social benefit.
