What Is Affordable Housing?

When we hear the term “affordable housing” we often think of “low-income housing”. But the two terms are not in fact the same. Low-income housing is housing aimed at those with lower income levels, while affordable housing refers to housing that is “affordable” for a given income level.

The US Department of Housing and Urban Development (HUD) defines affordable housing as housing that costs less than 30% of your income. Thus, what’s affordable for one person is not affordable for the next person. What a particular person considers affordable depends on their level of income.

Reports are published with charts that show the median income for an area (known as Area Median Income or AMI). These charts then show what a family should be able to afford based on their income level. In 2021 for example, the AMI in San Diego County for a family of four was $95,100. Using HUD’s definition of what’s “affordable” a 4-person family should not pay more than 30% of that $95,100 in rent. That comes out to $2375 per month. Similar calculations can be made for people earning less and for households of different sizes.

Using this data, local municipalities can tell developers what the maximum rental rates are for housing that’s intended to be “affordable” to someone making 80%, 60%, 40%, etc of the AMI.

Incentives of Quantity and Density

To increase housing for low-income individuals and families, governments often incentivize builders. For example, in the case of an apartment complex, a municipality may require fewer parking spaces which means more space can be allotted to actual apartments. The municipality may also allow builders to make the units smaller.

With fewer parking spaces and/or smaller apartments, building owners can bring in more tenants and thus more money. In the world of real estate development, this is a concept known as density, or the number of units allowed in a given area. Think of it this way… instead of charging a few people a lot in rent they can charge a lot of people a little in rent.

This is why retail stores like Wal-Mart are able to succeed. They can afford to charge lower prices because they have so many customers. By comparison, a small mom and pop neighborhood store can’t compete with those prices. They have fewer customers and so they need to make their profit by charging more per person.

As an example, let’s say you sold sweaters. Each sweater costs you $10. If you sold ten sweaters at $11 each that would earn you a profit of $10 ($1 per sweater). But what if you couldn’t sell ten? If instead, you knew that you could only sell one, but still wanted a $10 profit you would sell that one sweater for $20. Your profit is the same either way, but you have to charge more when you have fewer customers.

Supply and Demand

As long as there is more demand for housing than available housing, the other apartment complexes, those not offering “affordable rates”, can continue on as normal. But, if there were suddenly more apartments than people looking for apartments, then those higher rental units would have to charge less in order to compete.

The same density principle also applies when we talk about single-family housing. In many parts of the country there are regulations that require housing lots to be a certain size. This means that with a finite amount of land available only so many homes can be built.

Thus, if you’re looking to buy a house in the Bay Area for instance, and zoning regulations are effectively limiting the number of houses available, there will be more competition amongst buyers for a limited number of houses and prices will go up. In other words, even though developers want to build more housing, if they can’t, prices will stay high.

Conclusion

Many people move into a neighborhood because they like its charm. But if we don’t allow for more construction, if we don’t build more housing then the next person or the next family won’t be able to afford to live in that neighborhood. The people that live there currently can continue to live there as long as they can continue to afford their property taxes, but as housing prices (for apartments or houses) increase, new would-be residents will be priced out.

This means that people will often have to commute greater distances. Cities are where most of the jobs are, but if you can’t afford to live in the city itself your only option may be to live further away from your job. Longer commutes lead to greater stress levels, lower employee retention rates, and less available personal time. Longer commutes also contribute to environmental pollution.

Thus, we need to be willing to balance the desires of current residents who enjoy their neighborhood and who may be afraid of it losing its charm with the addition of more housing that addresses the needs of the larger population and the environment.