Affordable Housing Incentives: Why Housing Prices Aren't the Whole Story

By Roger Valdez September 25, 2012

The City of Seattle recently released an audit of its Multifamily Tax Exemption (MFTE) Program. The program is supposed to be an incentive program for the development of multifamily rental units in the city, exchanging a tax break for developers and landlords on the costs of rehabilitation or development in exchange for lower rents on some units. The city sees less tax revenue, but those dollars end up accomplishing a public benefit: more affordable housing.

The audit found that the accomplishments of the program are hard to measure. For example, how does the city accurately measure whether the program “stimulated” new multifamily development?

It also makes some conflicting and troubling recommendations. First, it suggests more oversight and compliance measures, worrying that a tenant in living in a unit might end up earning too much money, violating the point of the program. Landlords, the audit suggests, should monitor more closely the incomes of tenants to be sure they don’t go up: Earn more money and lose your housing subsidy. (Residents could still stay in their units, but they'd have to pay market rate---and landlords would have to rent out another unit to someone making a qualifying income level.)

The report also suggests, accurately, that to create more housing, “the City should eliminate requirements that do not serve to advance the program’s goals, and simplify others to make program administration and oversight less cumbersome.” That’s going to be hard to do if the city also increases the number of reporting requirements to ensure compliance with tenant income limits.

The troubling recommendation is to tie the program more closely to the city's residential growth targets. As I’ve said elsewhere, neighborhood-specific growth targets are simply a way for NIMBYs to argue that they’ve “taken” enough growth. The targets, set by central planners in Olympia, end up acting like growth limits because neighbors and city officials see them that way rather than estimates that should be sustainably exceeded. Growth targets should be a floor, not a ceiling. Until they are, they shouldn’t be tied to anything else.

Finally, the problem with considering the value of the MFTE isn’t just with the lack of clarity in the city’s policy goals, but how we define affordability and our obsession with lowering housing prices, rather than lowering housing costs. Lower costs and you’ll get lower prices.

Currently, housing is considered affordable if a person pays 30 percent or less of his or her income on housing costs. But the mere fact that someone pays 30 percent of their monthly income on housing doesn't make it affordable. And, conversely, someone who spends 50 percent of their income on housing might be just fine. A millionaire who spends half her monthly income on housing doesn’t have a problem, while a single mother trying to make ends meet might not be able to pay her rent, even if it’s only 25 percent of her income.

Housing policy people have tried to solve this by lowering the percentage of Area Median Income (AMI) for people to be eligible for housing subsidies. If a person earns 60 percent of the local median income, for example, then they can apply for a housing subsidy.

The problem with these measures is that nobody buys housing this way. Real people make tradeoffs with housing costs based on benefits other than monthly rent. A person might live on Capitol Hill and pay substantially more for their apartment because she doesn’t need a car. Another family might live in Maple Valley and drive to work because the day care arrangement they have there is more affordable.

Accounting for these residual costs is a more rational and practical way of determining housing subsidies than housing prices tracked by median income. Maybe the family in Maple Valley would live in the city if they had better, more affordable day care and maybe that Capitol Hill resident could use a break on their bus pass, and free access to a car-sharing service like Zipcar. And these households may be willing to pay more rent for these advantages if their overall living expenses fell. We need affordable urban living, not just affordable housing.

If developers could produce more housing more affordably with fewer regulations and costs, like taxes, then rents would go down all across the city for all different kinds of housing. That's why things like the MFTE can be helpful: They offset operating costs, making lower rents feasible. But adding more oversight, paperwork, and reporting requirements is just adding costs:  Someone has to write all those reports.

The Seattle City Council needs to quit worrying about some developer (or tenant) laughing all the way to the bank because of the MFTE, but look, instead, at how fewer rules and reporting requirements for the program might make lower rents more feasible for qualifying projects.
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