Affordable Housing and Kansas City: Further Thoughts
(You can read part one, part two, part three, part four, part five, part six, part seven, and part eight in this series here.)
The concerns people have over housing affordability raise a number of policy questions ranging from zoning to the fees Fannie Mae and Freddie Mac charge for new mortgages to the minimum wage, vouchers, and the low-income housing tax credit (LIHTC). In Missouri, the largest state-funded tax subsidy is the LIHTC program. The analysis in the previous two blog posts helps reveal why Missouri’s current LIHTC program is not designed to meaningfully improve housing affordability in Kansas City.
As I explained in the previous post in this series, Kansas City has a surplus of affordable housing for all income groups except those at the very bottom. But does the LIHTC program actually help those at the bottom of the income ladder?
There are numerous problems with the LIHTC program, such as the fact that it inflates construction costs. But arguably the biggest problem is that the criteria it imposes for developers to receive subsidies do nothing to promote additional housing at the cheapest rent levels. The most common arrangement for LIHTC developments is for 40% of the units to be reserved for those earning below 60% of the area median income (AMI). But the rents for the LIHTC units are not based on the income of the potential residents; rents are set based on the income in the surrounding area (the AMI). Because of this, even LIHTC-subsidized housing would likely not be affordable enough for the lowest-income families.
To use some numbers to illustrate this example: As explained above, rent needs to be no more than 30% of your income to be considered affordable, and LIHTC units considered “affordable” can be reserved for those making 60% of the AMI. So rent for that “affordable” unit in a LIHTC development will be 18% of the AMI (30% x 60% of AMI). Based on the $78,000 AMI in Kansas City, this means that the monthly rent for a family of 3 in that LIHTC unit is about $1,170 per month ($78,000 x 18% / 12). But as was described previously in this blog series, a family of three in Kansas City making 30% of the AMI needs rent to be about $585 per month to be considered affordable—and the cost of the LIHTC unit is nearly double that figure. Because of this, LIHTC tends to offer little to no help to the poorest residents.
In future work, the Show-Me Institute will provide more insights into not just the LIHTC program but the broader array of policies that have been discussed—or even new proposals that have not garnered as much attention—to promote a dynamic housing market that serves the needs of all Missourians.