The Need to Rebalance Federal Housing Policy, Affordability Worsening For Low-Income Renters

The nation’s housing policy is out of whack. We’ve focused for decades on policies to increase homeownership, and most federal housing dollars benefit families with relatively little need for assistance. When you count both direct spending and tax subsidies, about 75 percent of federal housing dollars support homeownership – though only two-thirds of households own homes. Overall, more than half of federal spending on housing benefits households with incomes above $100,000 (see chart).

Meanwhile, the nation’s lowest-income renters are far likelier to struggle to pay for housing– and their affordability problems are growing.

It’s time to rebalance the nation’s housing spending to help these low-income households.

A federal renters’ tax credit could take an important step in this direction, as we explain in a new paper. It would be administered by states, which would each receive a fixed dollar amount of credits and allocate them based on federal income eligibility rules and state policy preferences.

Such an approach would make it possible for more poor families to afford housing at a relatively modest overall cost. A renters’ credit capped at a total of $5 billion could:

Assist about 1.2 million of the lowest-income renter households;
Reduce each household’s rent by an average of $400;
Cut the number of very low-income households paying more than half of their income for housing by about 700,000; and
Lift 250,000 families out of poverty and lift four of five of the poorest families it assists out of deep poverty (defined as having income below half of the federal poverty guidelines).

It’s the right time to consider such a credit, as policymakers gear up for a potential tax reform debate, driven in part by deficit-reduction pressures and the scheduled expiration of President Bush’s income tax cuts at the end of 2012. That debate will likely consider how to restructure tax expenditures — a concept that policymakers in both parties appear to support.

Some heavy hitters have already started advocating for reforming homeownership tax deductions. The Bowles-Simpson and Rivlin-Domenici deficit reduction commissions and the Bush Administration’s Advisory Panel on Federal Tax Reform each proposed converting the mortgage interest deduction to a credit that would increase revenues and reach a broader share of low- and middle-income homeowners. And the Obama Administration, most recently in its 2013 budget, has proposed capping the value of the mortgage interest deduction and other itemized deductions for high-income taxpayers.

Those changes could make homeownership tax expenditures more efficient and raise added revenues to reduce the deficit. Directing a modest share of the savings to the renters’ credit could further improve the effectiveness and fairness of the nation’s housing spending.
The first installment of this blog series explained why it’s the right time to establish a federal renters’ tax credit. Today, we look at the affordability problems that low-income renters encounter.

Over the past several decades, the nation’s housing policy has focused predominantly on increasing homeownership — particularly for people who typically could afford to buy a home without subsidies. Meanwhile, low-income renters have increasingly struggled to afford housing.

More than 7 million low-income families without rental assistance pay more than half their income for housing, the threshold for being considered “severely cost burdened.” That number is up 42 percent since 2001 and is part of a long-term trend of worsening renter affordability (see chart).

Moreover, renters are far more likely than homeowners to struggle with severe housing cost burdens, even at the same income levels. Renters are more than twice as likely as owners to pay more than half their income for housing, according to Harvard University’s Joint Center for Housing Studies. While the rates of severely cost-burdened households among both renters and owners grew during the last decade, affordability worsened for a larger share of renters than owners. Among the poorest fifth of households — those with incomes below about $20,000 — a larger share of renters than owners are severely cost burdened.

At the same time that rents are rising, renter incomes are not. If these trends persist, current affordability problems for renters will continue or worsen.

When housing costs are too high, families lack sufficient income to meet other basic needs and are more likely to experience homelessness and housing instability — problems that harm children’s long-term health and development. The effect on low-income renters can be severe and enduring, as we’ll discuss in a subsequent post.

Supply shortages in some housing markets exacerbate the pressure on rents, making it important to address supply imbalances through policy tools such as reform of land-use regulations and subsidies for housing development. But the underlying problem is that many low-income renters cannot afford housing that meets current safety and acceptability standards. The most direct way to address this problem is through subsidies — such as the renters’ tax credit that we propose in our new paper — that help reduce the gap between market rents and the rent that low-income families can afford.

Tomorrow, we’ll take a closer look at how existing supports for low-income renters fall short.

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