Is subsidized housing creating affordability?

It's a frequent complaint of subsidized housing residents: affordable housing isn't. Politicians might claim new subsidized units are keeping a neighborhood affordable, but those units are, in actuality, no cheaper to live in than the building next door. Often, they're more expensive. In order to rent a so-called "affordable" unit, you need a well-paying job or a Section 8 voucher.

Despite this, subsidized housing development is routinely justified as necessary to protect struggling neighborhoods. Without more subsidized units, it's said, low-income families will be displaced, driven out by market-rate rents they just can't afford.

Both these narratives can't be true at once: either subsidized housing keeps neighborhoods affordable, or it doesn't. So which is it?

The low-income housing tax credit program (or LIHTC) is the nation's single largest housing subsidy. Most subsidized housing projects over the past several decades have involved some level of tax credit investment. Landlords operating tax credits buildings are requested to submit detailed occupancy data to HUD, Although this data isn't perfect, it provides a fairly detailed look at who is living in subsidized tax credit units, and what they're paying.

The graph below includes 398 Twin Cities LIHTC projects in operation in 2015, accounting for about 27,000 units. The horizontal axis is the average rent in each project's census tract, and the vertical axis is the average rent paid by families in each project, as a percentage of the tract average. If a project is above 100 percent, residents are paying higher rent than their neighbors do, on average. (Click to enlarge.)

What this graph shows is that many LIHTC projects, particularly in Minneapolis and Saint Paul, actually charge average rents that substantially exceed neighborhoods rents. This is especially true when those projects are located in lower-rent (and typically lower-income) areas.

These projects are not the exception - they're the rule. About 60 percent of Minneapolis and Saint Paul LIHTC units are less affordable than the neighborhood in which they are situated - approximately 8,050 of 13,370 units.

While there are also above-market LIHTC projects in the suburbs, the problem is less pronounced: 4,570 of 13,600 units, or 34 percent. (It should be remembered, however, that affordable housing in the suburbs tends to be located in somewhat higher-rent census tracts than in the central cities.)

Anecdotally, this reflects the complaints of subsidized housing tenants. But the breadth of the problem ought to disturb housing activists. The implication of this data is that well over half of the housing tax credits spent in the central cities produceno additional affordability in their neighborhoods.

We shouldn't mince words here: if the purpose of the tax credit program is to create housing that's cheaper to rent than what already exists on the market, it is failing. In fact, in Minneapolis and Saint Paul, the aggregate effect of this housing is to make neighborhoods more expensive to live in.

This failure is not universal. In higher-rent (and thus higher-income) neighborhoods, LIHTC rents are significantly lower than market rents. In these areas, tax credit development is providing affordability where it did not previously exist, opening up these neighborhoods to residents who may otherwise be unable to live there. That, in turn, can expand economic and educational opportunity for those tenants. But there is little coordinated effort to pursue LIHTC development in affluent neighborhoods, and, at present, the majority of tax credits units are located in low-income areas.

Interestingly, there appears to be little correlation between neighborhood rents and LIHTC average rents. The graph below shows the same data as above, but use the absolute rents for both projects and neighborhoods, instead of displaying the former as a percentage of the latter. Projects above the line are charging average rents above neighborhood rents.

Not only are plenty of higher-rent buildings located in low-rent tracts, but a handful of extremely affordable buildings are located in comparatively expensive tracts.

Given the apparent failure of LIHTC development to make low-income neighborhoods more affordable, what is the justification for conducting subsidized development in these places? A handful are frequently offered, but none are very convincing.

First, newly developed subsidized units are usually of higher quality than older market-rate units, especially in poor neighborhoods. But if the goal is improving the quality of the housing stock, there are cheaper and more direct ways of doing so than subsidizing large new projects -- such as regulation, inspection, and rehabilitation.

Second, subsidized units developed in low-income areas still increase the absolute amount of affordable housing in the region, at least in the short term. But of course, the same can be said when those units are sited in higher-income areas. Besides, concentration of poverty can result in reduced neighborhood density and increased vacancy rates, so the long-term effect may be to simply replace an older affordable unit with a newer one.

Finally, there's the most-commonly-cited benefit of affordable development in poor neighborhoods: economic development. Some research has hinted that LIHTC developments can improve property values in poor neighborhoods by bringing in new, wealthier tenants.

However, those conclusions are disputed, and our own work suggests these economic benefits are, at best, minor and essentially undetectable. One reason for this may be that the vast majority of LIHTC tenants in low-income areas receive rent assistance, meaning that the bulk of the rent is being paid by housing agencies directly to the apartment owners. Families receiving rent assistance are typically quite poor. Thus, while this arrangement may well enrich the landlord, there isn't a noticeable increase in overall neighborhood wealth.

But beyond all of this, there's a deeper concern about the appropriate role of housing subsidies. Given that housing funding is scarce, shouldn't we use it to make rents cheaper? Even if comparatively expensive units do confer economic benefits to the surrounding neighborhood, there is something very backwards about using affordable housing money to build those units. After all, there are easier ways to get the private market to produce market-rate apartments than paying for them -- usually fully -- with public funds.

Shouldn't the main purpose of affordable housing subsidies be ensuring that low-income families can find affordable rents in places they otherwise couldn't? But if it is, how does one defend current policy?