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November 2017

Unsubsidized affordable housing "becoming extinct"

FreddieMac logoWashington was one of seven states that experienced a "significant drop" in its percentage of affordable housing units, according to a new analysis by Freddie Mac Multifamily. That report found the number of apartments deemed affordable for very low-income (VLI) families across the U.S. fell by more than 60 percent between 2010 and 2016.

"Affordable housing without a government subsidy is becoming extinct," stated David Brickman, executive vice president and head of Freddie Mac Multifamily. Another official who commented on rapidly diminishing supply of units deemed affordable to VLI households said it's a trend that is worsening.

Researchers attributed the growing problem to a combination of increasing rents and stagnant household incomes. They believe it could worsen if actions are not taken to increase the supply of affordable units commensurate with the increasing demand from lower-income renters.

Earlier studies concluded the widening supply gap was the result of growing demand and rising costs of land and construction. The recently-released report by the government-backed mortgage financier is the first to compare rent increases for specific units over time.

Freddie Mac officials estimate a shortfall of around 400,000 housing units, "even when taking single-family starts into account.

Freddie Mac's latest report was based on a new approach to analyzing affordability. It compared loads that Freddie Mac Multifamily financed multiple times between 2010 and 2016.

In the first financing, 11.2 percent of the total number of underlying rental units across the U.S. were categorized as affordable to very low-income households, defined as having incomes no greater than 50 percent of area median income (AMI). At the second financing, rents had spiked so significantly that just 4.3 percent of the same apartments were categorized as affordable to VLI households. That equates to more than a 60 percent drop.

In Colorado, the percentage of units classified as affordable to VLI plummeted from 32.4 percent in 2010 to 7.5 percent in 2016. During the same period, Washington had a 72.5 percent drop, from 4 percent of units in the VLI category in the first financing to 1.1 percent in the second financing.

Other states Freddie Mac identified as having significant drops were Arizona, Georgia, Nevada, North Carolina, and Texas. In California and Florida, the poorest households were already shut out of the rental market before the period covered by the report.

The report noted most new construction of multifamily housing generally serves high-income renters. The authors also said Freddie Mac and Fannie Mae, another government-sponsored enterprise with a similar mission, significantly reduced its role in financing multifamily housing after the Great Recession.

The two entities had financed about 70 percent of all original loans for multifamily properties in 2008 and 2009 as private capital pulled back, stated Karan Kaul, a research associate at the Housing Finance Policy Center at the Urban Institute. By the end of 2014 their market presence slipped to 30 percent.

"The affordability issues are becoming more severe at the lower end of the market," said Kaul, adding, "Absent some kind of government intervention or subsidy, there is just not going to be any investments made at that lower end of the market."

The report also points out that despite dramatic changes in affordability, Freddie Mac Multifamily "has consistently met its mandated affordable housing goals." Those were achieved by developing offerings that allowed for growth into markets that support affordability, including via enhancements to its Targeted Affordable Housing business and its Small Balance Loan program

Kaul said Freddie Mac introduced a "small balance loan program" in the past three years targeting smaller multifamily buildings that have difficulty securing private financing. He said this initiative has enabled Freddie Mac to crack this market segment in a meaningful way and could help stem the decline in the supply of affordable housing.

"To make a real, lasting difference, those of us participating in the multifamily rental housing market must make sure that we understand market needs," the report concludes, noting "There are factors that make things difficult and are not easily controlled, such as land and construction costs. But as we source capital to the rental market, we need to look for opportunities to carefully target capital to build and maintain units that are affordable to lower-income households, especially those that have incentives to stay that way."

Freddie Mac Multifamily is the nation's multifamily housing finance leader. Nearly 90 percent of the rental homes it funds are affordable to families with low to moderate incomes.