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BEYOND THE NUMBERS A Qualitative Exploration of Affordability and Availability of Rental Housing in the Third Federal Reserve District: 2015 By Noelle Baldini June 2015 FED ER AL RE SE RV E BANK OF PHILADE LPH I A • C O MMU N I T Y D E V E LO PME N T ST U D I E S & E D U C AT I ON KEY DEFINITIONS E x tremely low income (ELI): households with incomes that are equal to or less than 30 percent of the median family income (MFI) in their region INTRODUCTION In February 2015, the Community Development Studies and Education (CDS&E) Department of the Federal Reserve Bank of Philadelphia released a quantitative report titled Affordability and Availability of Rental Housing in the Third Federal Reserve District: 2015.1 This report showed that across the Third District, there were more than 274,000 extremely low-income (ELI) and Ver y low income ( VLI): households with incomes that are 31‒50 percent of the MFI in their region very low-income (VLI) renter households for which affordable homes were not available in 2012. The report also noted that the problem had worsened in recent years: The number of affordable and available rental units per 100 ELI renter households declined from 41 to 33 in the Third District between 2007 Low income (LI): households with incomes that are 51‒80 percent of the MFI in their region Af fordable: a unit for which gross rent (i.e., rent and utilit y costs) is no more than 30 percent of monthly household income and 2012. Nearly three-quarters of ELI renter households and almost one-third of VLI renter households in the Third District spent more than half of their incomes on housing in 2012. Following the release of the report in February, the CDS&E Department interviewed a sample of key informants throughout the Third Federal Reserve District to further investigate the affordability challenges in the rental market. The goal of this qualitative research was to take a more in-depth look at the Af fordable and available: an af fordable unit that is either vacant or currently occupied by a household in the corresponding income level challenges and trends that were revealed in the quantitative analysis. This study presents the themes that emerged from interviews with experts from organizations including nonprofit and for-profit developers, housing authorities, community development corporations, and other housing professionals. Cost burden: gross rent exceeds 30 percent of monthly household income METHODS Study Sample To gain insights into the factors driving increased unafford- Severe cost burden: gross rent that exceeds 50 percent of monthly household income ability, unit scarcity, and rising demand in the rental housing market, the CDS&E Department contacted housing stakeholders who would be representative of the Third Federal Reserve District. Purposive sampling was used by selecting participants (from a database of housing professionals) who had previously interacted with the CDS&E Department. Stakeholders were Noelle Baldini* is a community engagement associate in the Community Development Studies and Education Department at the Federal Reserve Bank of Philadelphia. randomly selected from the database, although the selection process was iterative to ensure that the voices in the study represented the three states in the District — Pennsylvania, New Jersey, and Delaware — and could speak to the rural, urban, and suburban communities in those states. The sample also intentionally included key informants from the public, private, and nonprofit sectors who could provide a high- * The views expressed herein do not represent those of the Federal Reserve Bank of Philadelphia or the Federal Reserve System. The author thanks Keith Wardrip, Eileen Divringi, Sydney Taylor, Theresa Y. Singleton, Rosemary Frasso, and Allison Golinkoff for their comments, guidance, and collaboration. We would also like to thank all of the interviewees for their time and thoughtful insights. 2 Federal Reserve Bank of Philadelphia 1 Eileen Divringi, “Affordability and Availability of Rental Housing in the Third Fed- eral Reserve District: 2015.” Cascade Focus (February 2015), Federal Reserve Bank of Philadelphia; available at www.philadelphiafed.org/community-development/ publications/cascade-focus/cascade-focus_4.pdf. level overview of trends observed in the supply, funding, and demand for affordable housing throughout the District. Sixteen one-on-one and small-group interviews were conducted throughout the course of this project; in total, the perspectives of 21 interviewees are included in this analysis.2 renter income levels have stagnated or fallen, while rents continue to rise. Interviewees explained that that accessible jobs are either part-time or at income levels that are too low to allow people to rent affordably. Further, many of the interviewees voiced concern that there is a skills mismatch between job seekers and employment opportunities and that Analysis Two interviewers separately conducted telephone interviews that were recorded, transcribed verbatim, checked for accuracy, and entered into MaxQDA qualitative data analysis software. Using the software, interviews were coded3 to identify themes that emerged regarding the affordability and availability of rental housing in the Third Federal Reserve District. available housing units are not located in areas where jobs are being created. Some stakeholders noted that there is insufficient transportation to access employment opportunities and that the cost burden on many renters would be even greater than the original study reported if it accounted for these high transportation costs. A priori codes were developed to correspond with interview “The extremely low-income have been underserved for question topics. Additional codes were developed after the quite some time … especially after the recession when initial transcripts were reviewed, and these were used to cat- so many people fell into lower-income jobs or found egorize comments regarding specific geography, household themselves unable to find any jobs at all.” type, population segment, and actors. This process allowed for the analysis and synthesis of large amounts of qualitative data that otherwise would have been difficult to manage. Twenty-five percent of the interviews were coded independently by two members of the study team and checked for intercoder reliability. After the intercoder agreement was reviewed, code memos were further developed to ensure that coding was done objectively by clarifying operational definitions. This rigorous and collaborative qualitative approach allowed the analysis to move beyond anecdotal insights. Code analysis through full and repeated immersion in the data led the Great Recession expanded the pool of lower-income households for which renting may now be the only feasible option. Most Informants agreed that interviewees mentioned that the declining homeownership rate because of foreclosures and the tightening of mortgage lending standards was also a major driver of the increased demand for rental units. These former or would-be homeowners exacerbated the continuously high demand from ELI and VLI renters, leaving many people with very limited choices for obtaining adequate housing. meaningful themes, which “Pressure from would-be homebuyers … staying in are explored herein. The views expressed in this report are the the rental market puts pressure on housing demand. perceptions and opinions of the key informants who were in- Housing demand meets that pressure with rising terviewed and do not necessarily represent the views of the rates, and so that kind of influences the affordabil- study team or empirically supported facts. Direct quotes from ity all the way down to what maybe traditionally had participants are shared whenever they help to support and il- been an affordable supply becoming less affordable lustrate summary statements. and going to someone who might otherwise have been to the identification of several a first-time homebuyer.” REASONS FOR INCREASED HOUSING COST BURDENS As previously mentioned, the original quantitative report found that lower-income renters in the Third District have become increasingly cost burdened. These findings did not surprise the key informants who were interviewed. The most prevalent explanation for this increased unaffordability was Some interviewees explained that, in urban areas, a com- pounding factor is that members of the millennial generation are increasingly interested in living in cities.4 This movement increases competition for low-cost units. In- formants based in more suburban and rural areas also shared 2 One respondent submitted interview answers via writing. The full interview guide is available in the online appendix at https://www.philadelphiafed.org/beyond-the-numbers. 3 The codebook is available in the online appendix at https://www.philadelphiafed.org/beyond-the-numbers. 4 The millennial generation includes those born between the early 1980s and the early 2000s. Community Development Studies & Education 3 younger people are staying in the rental market longer than in years past, contributing to the rising demand that increased cost of development along with shrinking subsidies. concern regarding the for rental housing throughout the District. “The constraint is absolutely a funding constraint, “The growth in this city … is primarily centered around and the fact that the multifamily industry has tak- young people who want to stay in an urban environ- en off to a degree on its own, that means that the ment where they have ease of access to amenities construction industry is building … So, a building is and entertainment. In addition to that, those young a building from a contractor’s standpoint. They’re not people have much higher rates of renting well into terribly concerned about who the occupant is, and their late 20s and early 30s than prior generations.” there’s not a lot we can take out of a building to make it significantly less expensive. So, costs are up, the While some interviewees felt that younger people were de- availability of funding is down ... most significant is laying homeownership because of student loan debt or oth- that dynamic — lack of low- or no-interest loans as er factors, others felt that these renters were not “waiting” to soft funding and a steady increase in competitive move into homeownership; rather, they were construction costs.” choosing to rent instead of transitioning to homeownership, which was the norm for many households with means in recent decades. “So, if we’re [going to] think about how rental mar- Expensive labor contracts were one type of cost frequently mentioned. Some interviewees believed barriers to achieving scale also contribute to higher costs. kets should be developed and rehabbed in this city, we also have to look at … the trends from a social “Affordable housing developments tend to be smaller and economic stance. Rental housing may not just be than conventional … if you look at tax credit deals, what was formerly sort of bridge-housing into home- for instance, approved in Pennsylvania, probably the ownership and then moving out to the suburbs. It may largest one might be 100 apartments. One hundred is be sort of a permanent part of how we house peo- small in terms of scale on a conventional multifam- ple in the city in the future. So, what does that look ily. So these things … exacerbate situations because like and how do we make sure that residents of all there’s no ability to achieve benefits and advantages incomes have access to housing and to communities of scale in doing many of these developments.” that have amenities and entertainment?” BARRIERS TO NEW DEVELOPMENT Though the lack of funding was regarded as a major barrier to increased production, several developers mentioned that The qualitative report noted that the number of affordable and program inefficiencies have made them wary of pursuing available rental units per 100 ELI renter households declined available subsidies. Application processing speed, lengthy re- from 41 to 33 in the Third District between 2007 and 2012. porting requirements, and perceived competition (e.g., for Low One informant explained the current conditions in his com- Income Housing Tax Credits) were all listed as factors that have munity by saying, “One of our best low- to moderate-income deterred several developers from applying. Affordability require- developers finally started construction on a 60-unit apart- ments were also discussed. Some stakeholders argued that short- ment complex targeted at workforce and low-income folks. er affordability periods would allow developers to realize revenue And those 60 units hit one-third of 1 percent of the market appreciation, thus incentivizing development, while other stake- share that needs to be built here.” From both the quantitative holders were concerned about the preservation of affordability analysis and qualitative data gathered through key informant and quality after the affordability term concluded. interviews, it is apparent that growth in supply has lagged that of demand, but what are the barriers to increasing the supply of low-cost rental units? A lack of funding in the form of public subsidies to keep costs low and units income restricted was the most frequently discussed barrier to new development. Developers expressed 4 Federal Reserve Bank of Philadelphia In many communities, affordable rental housing still evokes a negative stigma that makes neighbors opposed to new development. Local community opposition was not shared among all interviewed, but the majority of stakeholders did mention that a lack of political will — at the local, state, and federal level — was a major impediment. “Just personally, it’s very troubling that housing has Lastly, both nonprofit and for-profit developers of subsidized slipped so far on the national agenda. There is seem- housing cited ingly little understanding as to the magnitude of the competition for land as an impediment to new development. problems that are faced by families of very low- and extremely low-income in terms of acquiring shelter.” “It comes down to the basic economics of, if there is a parcel of land available and you don’t have municipal Other stakeholders noted that the lack of political will to pri- help getting it or you don’t have an inside track to get oritize affordable rental housing was rooted in the contrasting it, well, the guys [who] are going to buy it and build goal of reviving homeownership. on it are the market rate guys, and they’re going to provide ‘luxury housing’ broadly defined, and they’re “Most cities have adopted a ‘we don’t want any more rental housing’ attitude. They want homeownership to going to charge $2,000 a unit for it a month.” return. They want to get back above 50 percent own- HOUSING QUALITY ers as opposed to 60 percent renters in most commu- When discussing single-family market rate rental units, many absentee landlords are failing nities where we do business. They’re really trying to interviewees mentioned that turn around that trend of moving to rental housing to address quality issues, such as leaking roofs and pipes, mold, because a lot of that housing is controlled by people lead paint, and structural damage. Some stakeholders voiced con- outside the community. And they want folks to have cerns regarding the impact of budget cuts on rental in- a stake in the community, and homeownership is one spections, while others confirmed that increased inspections way to do that.” have led to improved quality of rental units in their community. Stakeholders agreed that it is difficult to successfully produce “The city’s budget cuts and the reduction in personnel new affordable housing units without the support of local in licenses and inspection really impacts the issue municipalities. From providing gap financing through low-in- of quality and also having enough inspectors to ade- terest long-term loans to creating public-private partnerships quately take a look at all the rental units coming on aimed at reducing or eliminating the cost of land, some local market, so that’s a problem.” municipalities were described as key actors in the development of affordable housing. However, local municipalities can also be a hindrance to development, and several local regulatory burdens were mentioned as obstacles to increas- Informants also shared that many rental properties lack energy- efficient upgrades, and the resulting higher-than-necessary utility costs are typically passed along to the renter. ing the supply of affordable rental units. Hefty municipal fees, slow processing of licensing and permit requirements, difficult “The issue is the lower the income, usually the less knowl- development approval processes, zoning impediments, and edgeable the consumer is about housing issues and their strict building codes were all provided as examples of regu- rights as tenants. And so they tend to be taken advan- latory burdens that can eat up project capacity and resources. tage of, and they tend to be pushed into the lower-quality housing in the less desirable neighborhoods. And unfor- “Developers get discouraged because of the problems tunately, what you also have is [that] those units are not that come with trying to push through a development. energy efficient, which then pushes the operating costs Even if you had all your money in place, you still have of that apartment up through the roof. And the landlords to go through all these processes to get to the other are pushing that cost on to the tenants. So, in addition to side. And you have to talk to four different people, and being burdened by higher leases for lesser-quality prop- you have to deal with all the various rules and regu- erties, they’re also carrying the additional burden of out- lations, and it’s very time-consuming and expensive. dated utilities and poorly insulated doors and windows.” And then everybody has [his/her] hand out for fees … So, there should be a way to streamline some of this The conversations were drastically different regarding the when people are trying to do good for the city and quality of income-restricted units. Unlike the situation that provide affordable housing.” was described for most single-family units, interviewees suggested that state housing agencies and local housing author- Community Development Studies & Education 5 ities are, for the most part, ensuring that sites benefiting from sense and eventually leading to conflicts with some federal subsidies are being kept up to code and generally in of our lease policies.” good condition. Exceptions do exist, however, in places where capital necessary to meet basic maintenance and repair needs for the aging housing stock. The issue of aging properties in need of rehousing authorities lack the habilitation was prevalent throughout all of the interviews and was repeatedly mentioned as the top perceived threat to the existing supply of affordable units. THREATS TO THE EXISTING SUPPLY OF SUBSIDIZED UNITS insufficient capital for rehabilitation of the aging housing stock was noted as the As mentioned previously, primary threat to the existing supply of subsidized units. Another perceived threat was the rising popularity of investors buying up housing, both affordable and market rate. “And then, there’s the affordable housing stock that was produced over the last multiple decades — much “There are a number of people [who] are buying afford- of which has fallen into disrepair. Some of it has been able housing now who are not committed to it long maintained at an adequate level, but we have thou- term, and they’re really yield buyers just looking for sands of housing units that were originally financed cash flow, and so the increasing demand of people to by HUD [U.S. Department of Housing and Urban Devel- just buy affordable housing for the cash flow means opment] that are in the market that are in deteriorat- that there could be challenges both in terms of pre- ing condition and need substantial rehab.” serving that and opting out of the program when they want — as well as just how they operate it and the Another quality concern expressed about multifamily units was overcrowding. Although primarily caused by shortages in the supply of affordable units, overcrowding, in some cases, was also attributed to renters’ backgrounds that prevented them from obtaining suitable housing. A poor credit history, a foreclosure, or a record of incarceration can leave a prospective renter with very limited choices. level of quality.” Several stakeholders also expressed concern that housing assistance payment (HAP) contracts will not be renewed. HAP contracts are used to keep units in some private- ly owned multifamily rental properties affordable, and expiration of these contracts would mean a further decrease in the supply of affordable units. “We do a lot of income-restricted affordable housing, which has rules against overcrowding. When people “The threats include the expiration of housing assis- break those rules they’re violating the lease, and one tance payment contracts for a number of nonprofit of the most frequent lease violations we see is the organizations that have developed housing. And even presence of an extra household member that techni- some of the private developers had these 15-, 20-year, cally overcrowds the unit or introduces someone who some 30-year housing assistance payment contracts, wouldn’t otherwise be on the lease. We see it among and a lot of them are expiring over the next five years. our senior housing units … when you watch carefully And so it’s going to be a coin toss … in terms of getting you find that there’s a … son or daughter who visits these units reviewed, certified, and reissuing these [his/her] elderly parent often, and then you realize HAP contracts. So, if you lose your HAP contract, you that [he/she] is actually staying there … coming late have no choice but to make the units market rate, at night and leaving early in the morning and that’s which then is going to eliminate the people who need sort of an interesting method of overcrowding or a the affordability.” different access to housing that we see among the senior population. But that goes on within the non- POTENTIAL SOLUTIONS senior housing population as well, which is often an Additional Funding Sources adult sibling — a boyfriend or girlfriend or friend- Interviewees were asked to discuss successful programs or friend, where there’s just a lot of pressure for people potential policy solutions to address today’s rental housing who have found a place to live to extend that housing affordability challenges. Many were concerned that available opportunity to others who may be in need — maybe funding is being split between the competing needs for reha- to defray costs or maybe just to be helpful in a good bilitation and new development. Given this difficult funding 6 Federal Reserve Bank of Philadelphia environment, several stakeholders focused on strategies to attract additional funding for affordable housing. One stake- increased real estate transfer tax on homes being sold more than once in a short time could holder suggested that an become a new source of funding. Zoning Inclusionary housing requirements, or municipal planning ordinances that require a percentage of units in new developments to be affordable for low- and moderate-income households, were a proposed solution for increasing the sup- While some focused on policy solutions to increase the amount of funding for affordable housing, others suggested private capital could be used to address these concerns. One informant believed that social impact invest- that ment strategies targeting union pensions and local university ply of affordable rental units. Several interviewees explained, however, that such requirements could be difficult to enforce and may lead to political contention. Other stakeholders felt that zoning should be less restrictive to promote mixed-use, mixed-income development. endowments could attract local wealth that has a vested in- “Just to sum it up here — mixed use, mixed income, terest in neighborhood revitalization. A nonprofit real estate and mixed housing type. What we call ‘smart growth’ investment trust (REIT) was given as another example of an quite frankly is what we’re really trying to achieve be- innovative strategy being used in other regions to attract cause if you have those three things put together, all private capital to support the availability and affordability of of a sudden now you can start chiseling away at that rental housing. A nonprofit REIT, such as the pilot led by the cost factor of what it costs to build and what it would Housing Partnership Network,5 could use private investments cost to sell or rent.” to acquire rental units and to keep them affordable as rents in the broader community rise. Homeownership Maximizing the Impact of Existing Funding When discussing the use of available funding, some interviewees felt that, to see the most impact, municipalities should address rehab needs through a cluster approach that involves targeting the work geographically, block by block, Some interviewees felt that, if done responsibly, loosening mortgage lending standards and increasing the availability of homeownership counseling to promote homeownership could play a role in reducing the demand for affordable rental housing. versus one-off rehabs throughout a city. Several informants “I think part of the answer has to be to look at banking also voiced the need for more action to be taken to ensure regulations that are decreasing the number of people that municipalities receiving HOME Investment Partnerships who can own homes. If some of that [were] loosened Program (HOME) funding or Community Development Block up, I don’t mean things that are excessively loosening Grant Program (CDBG) funding are it up, but some of the requirements are quite onerous, held accountable for impediments to fair housing addressed in their required Consolidated Plans.6 “That being said, there are very affirmative steps I believe HUD could take in terms of demanding that block grant communities, communities that secure HOME do, in fact, take concrete steps to reduce the cost of producing these regulatory burdens … HUD 5 and I think there has to be an increase in homeownership to have an impact.” Other stakeholders felt that, at the federal level, there needs to be a rebalancing of housing policy and associated re- sources rather than policies and programs that favor homeownership over rental housing. has ... done virtually nothing to enforce and demand “We have these production programs, but the clear that municipalities who seek this kind of funding are emphasis in this country has been on homeownership held accountable for trying to improve opportunities — incentivizing homeownership, financing homeown- to produce housing.” ership … and if you want to address these kinds of Source shared by interviewee: A. D. Pruitt and Dawn Wotapka, “Nonprofit Firms Form REIT,” Wall Street Journal, April 28, 2013; available at http://online.wsj.com/article/ SB10001424127887323528404578451023072622486.html (accessed April 5, 2015) 6 See the HUD Exchange resources on the Consolidated Plan Process for more detail; available at www.hudexchange.info/consolidated-plan/consolidated-plan-pro- cess-grant-programs-and-related-hud-programs/. Community Development Studies & Education 7 issues, then we need a strong rental housing policy, and we need resources put [in]to rental housing like what’s put into for-sale houses. If you look at the amount of money that’s put into the mortgage interest deduction to help subsidize for-sale housing — the entire rental housing program is insignificant compared to that.” This report represents an effort to connect community development research produced by the CDS&E Department with the local knowledge and expertise embedded in community development practitioners working throughout the Third Federal Reserve District. The interviews on which this report was based validated some preconceived explanations for the challenges in BEYOND HOUSING Many interviewees believed that successfully tackling the rental housing affordability challenges addressed in this research requires a holistic CONCLUSION approach that extends beyond housing policy. From education reform to increased wages to economic development centered on local job creation, there were suggestions for how policy could improve opportunity for lowerincome populations. “Somebody once said to me, there’s no such thing as a housing problem. There’s an income problem. That fundamentally the reason that we have a housing problem is because we have poor people. If we solved poverty, then we wouldn’t need housing programs.” the rental housing market but also presented some interesting insights from the field. For example, hearing about the impact of the foreclosure crisis on rental housing demand and supply was anticipated. However, learning about overcrowding, specifically in subsidized units, adds value to the quantitative analysis, which did not identify overcrowding as a common problem in the District’s rental housing stock generally. Areas for further exploration became apparent through the course of this analysis. Though interviewees provided important information regarding the quality of rental units in the markets they serve, there seems to be an opportunity and need for further qualitative research that directly engages tenants around the quality of their rental units. Additional research is also need- While key informants who were interviewed described a variety of potential solutions, they all agreed that the challenges faced in the current rental market are urgent. The need for collaboration, a unified voice, and an integrated approach to addressing these issues was shared. As one informant stated about the strategy in his city, “You’re not going to solve a 40-year poverty ed to fully understand the relationship between the types of owners and the quality of units. Likewise, the sample size for this analysis was too small to yield meaningful conclusions regarding the similarities and differences in rental housing challenges across rural, suburban, and urban communities, and more research would be required to draw out these nuances. crisis in this city overnight, but at a minimum, you can make better strides if we can figure out a comprehensive policy to address these high-need communities.” THE THIRD FEDERAL RESERVE DISTRICT The Federal Reser ve Bank of Philadelphia ser ves the Third District, which covers eastern Pennsylvania, southern New Jersey, and Delaware. The Bank’s Communit y Development Studies and Education Depar tment suppor ts the Federal Reser ve System’s economic grow th objectives by promoting communit y development in low- and moderate-income communities and fair and impar tial access to credit in underser ved markets. COMMUNITY DEVELOPMENT STUDIES & EDUCATION www.philadelphiafed.org/community-development