Once upon a time, not so long ago, the American dream was to own a modest home in which to raise a family. This was more than a dream; it was an assumption, an expectation. Even the lowest-income workers aimed for and usually achieved, this dream. Not anymore. There is a tremendous last of affordable housing. Millions of our working families cannot even afford a rental apartment.
But that can change. I submit that we can double affordable housing assistance without increasing funding. We currently spend

$50 billion for affordable housing programs


$130 billion to assist non-low income households via tax deductions

Billions. That’s a lot of money. Where does it go?

1. Affordable housing.

Federal and state governments have literally hundreds of programs designed to provide housing assistance – $50 billion worth. This massive bureaucracy comes at a tremendous cost to efficiency, and it meets the needs of only a fraction of the very-low-income population. Plus, it drives up the costs.

2. Assistance for home-owners

We spend $130 billion to assist non-low- income households through mortgage interest and real estate tax deductions. $130 billion to home-owners when we have homeless families?

I’ve just finished reading a 2015 report by the Congressional Budget Office (Federal Housing Assistance for Low-Income Households). It looks at several potential policy changes to address the problem of affordable housing: revising the composition of the assisted population, adjusting tenant contributions to the rent payment on HUD’s voucher program, and repealing and/or replacing various programs. (Just repealing the LIHTC [Low Income Housing Tax Credit] program would increase revenues $42 billion over the next 10 years per the Joint Committee on Taxation.)

This CBO report is an analysis of various options; it offers no solutions. I propose an additional option, but first, we have to address the real issue.

The real issue:

In my opinion, these options do not address the underlying problem: the massive bureaucracy inherent in any government program. Layer upon layer of bureaucracy: administration, multi-tiered approvals, pages and pages of legislative rules and regulations, legal fees, accounting fees, compliance fees – and record maintenance into perpetuity. In one of my LIHTC compliance newsletters, the writer took over 350 words to explain “simply” which income limits to use to qualify a household. If it takes 350 words to tell me which year’s income limits I must use, it’s not simple. It takes attorneys, accountants, and compliance experts to understand the intricacies of each program. How many thousands of people are involved in every project? It’s very expensive to produce affordable housing. I recently read that the cost to construct a low-income housing tax credit unit is $250,000 – for one unit!! I suspect that same unit, market rate, would come in around $150,000.

My Proposal: Let’s dismantle the entire bureaucracy!

Let’s use the funds – from all sources – and provide assistance directly to the end user whose income is too low to afford a median-income rental apartment.

How many would qualify?
According to the CBO report, in 2014 the federal government provided about $50 billion in housing assistance to 4.8 million low-income households. But we have 20 million eligible households (those earning less than 50% of Area Median Income), so we still have 15 million very-low- income households that receive no assistance.

And what about those between 50% and 100% of median? Families earning $30,000 to $60,000 dollars? According to a 2015 report from Harvard’s Joint Center for Housing Studies, 20 percent of households earning $45,000–$74,999 (median area income range) were cost burdened in 2014.

The term “cost burdened” typically refers to those paying more than 30 percent of income on housing expenses, including utilities. In my opinion, that definition should be raised to 35 percent or 40 percent.

New System:

Now let’s design a system to provide funds directly to the end user– the household or person needing the assistance. Note that I said “directly.” Let’s cut out the middlemen. Let’s keep it simple. Basically, the recipient needs to prove his/her income, perhaps with an income tax return.

Households whose incomes are below national median income (adjusted for family size) will receive a stipend to supplement their incomes to the point that they can afford a median income rent (i.e. 30 percent of national median income.) This stipend will allow renters to go to any apartment in the country and rent whatever they want and wherever they want.

Assume national median income is $55,000. (In 2015, it was $55,775, per US Census.) Affordable rent for a median-income household of four is $1375 per month. ($55,000 /12 x .30)
So, let’s make sure every household can pay $1375 (adjusted for household size).

For instance, if the household earns only $40,000, it can afford $1167 without being overburdened. That household would receive a monthly stipend of $208. ($1375-$1167)
What if the household lives in a high-income area? Let’s take Dallas as an example.

Median income is $71,700, so median income rent is close to $1,800. This same household would have a choice: Stay in Dallas and pay an extra $450 out of pocket (The difference between national median rent and Dallas median rent) or move to a more affordable community. Again, it’s a choice.

The point is: instead of spending billions of dollars on bureaucracy and expensive production, give the money to the end users. Let them decide their own priorities. Proximity to work? Superior school system? Or maybe someone just likes a blue building. Whatever. The recipients may decide to spend more (or less) than 35% of their income on housing (like our Dallas household). That’s OK.

They can’t do that now with a HUD housing voucher. HUD restricts the amount they can pay, so they have no choice of lifestyle or location, or even the number of bedrooms, for that matter.

Employment- a very important issue

I’m talking here about low-income wage earners. There’s no employment requirement to receive HUD housing vouchers. In fact, the CBO report refers to studies that indicate receipt of a voucher reduces both household employment and earnings. About one-half of HUD’s housing voucher and public housing recipients are of work age and able-bodied, but only half of those count work as a majority of their income. Their other income comes from supplemental non-housing assistance.

In my plan, to receive the proposed stipend, households must show a willingness to work, preferably in a full-time capacity. But, per the report, the cost to wean recipients off housing assistance will cost about $10 billion. (more bureaucracy/administration?)
What has happened to common sense? Our voluminous legislative regulations, encouraged by special interest groups have us so tied up in “programs” that we are failing the working American family. There’s a lot of talk about adjusting programs, but I am talking about eliminating them.

Of course, my broad-brush vision is just that – a general concept. But it is based on my thirty-five years in the multifamily industry, as LIHTC developer, manager and now, investor. I think the number crunchers will show it can work. To get from here to there, however, will not be an easy task.

Christopher Finlay is Chairman/CEO of Lloyd Jones Capital, a private-equity real-estate firm that specializes in the multifamily sector. With 35 years of experience in the real estate industry, the firm acquires, manages and improves multifamily real estate on behalf of its institutional partners, private investors and its own principals. Headquartered in Miami, the firm has operations throughout Texas, Florida and the Southeast. For more information visit: lloydjones.wpengine.com.

Thank you, Harvard.
Once again, Harvard’s Joint Center for Housing Studies has published a brilliant paper on the status of rental housing. This study supports what we have been saying for the past couple of years– but says it much better than I can. I thought I would share some of the findings relevant to the multifamily investment community and add my two cents. (You can ignore my two cents, but do read the study. It is very interesting.)

Among the findings:
Renter Households Number Almost 43 Million (Out of 116 Million Households)

  • Renters now represent 37% of all households, the highest number since the mid-1960s.

That’s a lot of renters, and they need decent housing.

Rental Demand is Broad-Based

  • Income: Renters in the top income bracket grew by 61%. In fact, households with incomes of $100,000 or more accounted for 18% of the rental growth from 2005 to 2015.
  • Household size: Single-person households or married couples without children represented half of the growth.
  • Age: The number of renters aged 50 and over grew 50% in the past ten years. In fact, Baby Boomers (50+) represented the largest share of rental growth.

In fact, households of all generations and all income levels have created an increasing demand for rental housing. We now have 43 million renter households in America. And Millennials – the typical, young, first time renters – are still living at home – 25 million of them! Add that to the current 43 million. On top of that, Baby Boomers are predicted to occupy another 12 million rental units in the coming years. That’s a huge pent-up demand! These are astonishing rental housing demographics. And the study suggests that growth in the adult population alone will increase these numbers.  

Investors Are Seeing Strong Returns

  • Annual returns grew to 12% in the 3rd quarter of 2015. Historically they have averaged 9.5%.
  • Cap rates are down to about 5 percent, the lowest since the housing bubble.

And this is why Lloyd Jones Capital advises caution when investing in multifamily real estate assets. There is too much capital chasing too little supply. You have to be very careful not to be caught up in the real estate buying frenzy. And be sure you have a seasoned operator who can manage the investment asset.  From personal experience, we know the importance of dedicated property management to the success of any project, which is why we have worked very hard to create the finest management arm in the industry.

Housing Affordability is a New Challenge

  • Housing costs are up 7% in real terms since 2001; median renter household income is down 9% in real terms.
  • “Burdened renters” (those spending more than 30 percent of income on housing costs) now number 21.3 million, half of whom are severely burdened (spending 50% of income on housing costs).
  • There are 11.1 million extremely low-income renters (30% of median income) and only 7.2 million units affordable to them.

There’s a lot of new multifamily rental construction, but it is only for high-income renters. The very-low-income renters have at least some assistance. It’s the middle-income American workforce that lacks a supply of quality housing.

Federal Assistance Falls Short

  • Since its inception in 1986, the Low Income Housing Tax Credit (LIHTC) Program has added or preserved more than 2.2 million units. (However, many affordability periods will end between 2015 and 2025 which could jeopardize affordable housing options.) This program provides affordable housing to households earning less than 50% or 60% of median income.

This sounds good, and the LIHTC units are typically well constructed and well maintained. As a developer of approximately 40 LIHTC communities throughout the US, I know the program well. However, what began with great intentions during the Reagan era, has subsequently been diluted by all the layers of bureaucracy and special interests. Now, in fact, the cost to construct a LIHTC property can be double that of a market rate, Class A property.

  • The United States Department of Housing & Urban Development (HUD) has programs, including the voucher assistance, which cover very-low-income households (those earning less than 50% of median income). But real funding for those programs remains below 2008 levels. And the average wait time for a voucher is 23 months.

I have some suggestions here, but will leave the details up to those who understand the HUD housing programs better than I. There are a lot of programs for the very poor. But what about the American workforce that also struggles to find affordable housing? These households don’t have all the assistance that is available to the very low income households. If you took all the money poured into various programs, including LIHTC, and applied it directly to vouchers, I suspect households would be moving out of bad neighborhoods and into safer communities. First, I would expand the voucher program. I would include households above the “very low-income” levels (50% of median income). I would give the low-to-middle income earner some financial assistance, and then let the household choose a neighborhood. Right now, the household is limited by the maximum rent HUD decides is appropriate, and often that is not high enough to meet the asking rent in a nice property. Let the voucher holder contribute to the rent. Let the voucher holder decide priorities. It might be worth being “burdened” in order to live closer to work or in a highly rated school district.
Again, at Lloyd Jones Capital, we are a real estate investment firm that is addressing this issue with our American Workforce Housing Fund. Through this fund, we are acquiring C and C+ properties in good neighborhoods. With modernization and upgrades, we can give these communities amenities similar to those found in Class A properties. And the rental rates remain affordable.
In summary, this is fascinating information regarding the multifamily real estate sector. The Joint Center for Housing Studies of Harvard University does an exceptional job compiling and presenting the data. The study is full of interesting charts and facts. At Lloyd Jones Capital, we have been saying these things for the past couple of years as we follow trends in cap rates, occupancy rates, etc. We are grateful to Harvard for supplying the quantifying support. You can find the complete study with abundant charts and data here.

Christopher Finlay is Chairman/CEO of Lloyd Jones Capital, a private-equity real-estate firm that specializes in the multifamily sector. With 35 years of experience in the real estate industry, the firm acquires, manages and improves multifamily real estate on behalf of its institutional partners, private investors and its own principals. Headquartered in Miami, the firm has operations throughout Texas, Florida and the Southeast. For more information visit: lloydjones.wpengine.com.