You Decide: How Can Affordable Housing Be Increased?

By Dr. Mike Walden

Our residence really sets the stage for much of our lives. Before getting married, I lived in five different apartments in a span of five years. The year would change, and I would change apartments, always trying to move closer to work and improve the quality of my residence. The first home my wife and I bought was a drafty 1,000 square-foot house far from work and with limited nearby shopping. With our larger and more accessible home today, we’re much happier.

In a limitless world, each of us would have a residence close to our work and to shopping and amenities, with modern upgraded space and in a pleasant and safe neighborhood.

But according to some studies, this ideal is becoming out of reach for more households. The percentage of disposable income spent on shelter by households has been rising in recent years.   If the cost of commuting to work is included, the numbers look even worse. With both housing prices and financing costs rising for prospective homeowners, steeper rents occurring for those not buying and pumped-up gas prices increasing the costs of commuting, housing affordability is on the decline for many.

For those with jobs in large cities, the news is even grimmer. As growth in big cities – including those in North Carolina – has outpaced growth elsewhere, the price of shelter has become increasingly costly. Lower income households can either live in smaller and crowded housing closer to their jobs in the city, or they can live farther away where prices and rents are lower but commutes are longer.

What are the options for fixing this and making housing more affordable for more people? As an economist, I look at the options in two categories – demand and supply. Focusing on “demand” means helping households afford the price of housing. Emphasizing “supply” suggests making changes to encourage an expansion in the amount of housing, which in turn lowers prices.

There are three “demand side” strategies that have been used to increase the affordability of housing. One is housing vouchers. Housing vouchers are financial assistance used to supplement what a household pays out of their own pocket for housing. Although traditionally designed for renters, they could also be used to help buyers meet their monthly mortgage payment. The vouchers have usually been funded by government, so their expansion would likely require more resources (taxes) provided to government.

Affordable set-asides are government-imposed requirements that housing developers set-aside, or reserve, a certain percentage of their units for affordable housing. The developer sets the set-aside unit’s rent – in the case of a rental unit – or price of the home – in the case of a purchased unit – at a level below what the developer could obtain without the requirement.  Developers usually make up the difference by increasing the rents or prices of the unrestricted units. So the other renters or buyers effectively subsidize the affordable housing units.

The third demand-side strategy is rent controls. Historically used in Northern big cities for rental units, rent controls do as the term implies – they limit the rent a landlord can charge tenants, thereby making the unit more affordable. Although logically simple, rent controls have a big downsize. By reducing the investment benefit of the housing, they discourage construction of new housing as well as maintenance of existing dwellings.

The encouragement of the construction and provision of new housing units is the objective of the “supply side” approach to affordable housing. The two main methods are subsidizing the construction of new housing, and changing regulations to encourage new – and often – different kinds of housing to be built.

Public subsidization of new housing means the government pays for constructing the units.  Because public funds are used, rents can be set at lower levels. There is also a private subsidy version of this strategy. Here a nonprofit group pays – through cash and/or the donation of members’ time – for the building of new housing. If rented, the rents are lower than if a for-profit company had built the housing. If sold, the sales price is also less than what would be charged by a for-profit group.

Some of the most interesting approaches to developing affordable housing have come through altering regulations. Specifically, the idea is to increase affordability by permitting higher density housing units and alternative living arrangements.

An example of the former is allowing owners of single-family residences to construct one or two rental units in their backyard. An example of the latter is rezoning areas to permit a return of boarding room houses. Popular in the last century, tenants in boarding room houses have their own room but share common areas like kitchens and baths. Critics say both innovations would alter the character of existing neighborhoods and exacerbate parking problems.

Our expectations of housing have changed over the decades. Long gone are the days of outdoor “privies” and lack of indoor running water and electricity – conditions my father was raised with.  Is it time we again redefine adequate and affordable housing, and if so, how do we obtain it? You decide!

Walden is a William Neal Reynolds Distinguished Professor and Extension Economist in the Department of Agricultural and Resource Economics at North Carolina State University who teaches and writes on personal finance, economic outlook and public policy.