Affordable Housing, America’s Bugbear of Shelter Definition & Measures

‘Affordable Housing’, America’s Bugbear of Shelter Definition & Measures

How Do YOU Describe & Measure Affordable Housing & Housing Affordability?

First, the bugbear. Per Webster’s College Dictionary, bugbear is ‘a persistent problem or source of annoyance’. Throughout the U.S. housing market, bugbear is the absence of clear description, and resulting internecine confusion – due to lack of consensus regarding measures of affordable housing, that are ‘perennial problems and sources of annoyance’, among realty, shelter and housing finance aficionados!

Here’s a recent example from April 2010 issue of Multi-Housing News (p.11): Two companies “…have won the bid to develop the 900 – unit initial phase of Hunter’s Point South, a mixed – use affordable housing project that will leverage $2 billion in private investment. The development cost for the residences in the first phase is $360 million.” Stop! That’s $400,000.00 to develop each affordable housing unit! How so? ($360,000,000. divided by 900 units). Prompts one to speculate what the unit sale price or apartment rental rate will be for each affordable housing unit. And, affordable to whom?
Answer: Anyone who can afford a likely (un)affordable price tag or be subsidized!

At the opposite end of the affordable housing definition/description spectrum is this lightly edited gem, from the former chairman of a national realty trade body: “Affordable housing has become a politically correct euphemism for subsidized housing. While source of funding for (payment) shortfalls for an affordable housing property is not always specified, more than likely it is supplied by the taxpayer, one way or another.”

Several years ago, PMN Publishing researched, prepared and distributed the seminal booklet titled HOUSING AFFORDOGRAPHY; subtitled, ‘Study of Affordable Housing Formulae & Measures of Housing Affordability’, a.k.a.

• Housing’s ‘Anything you want it to be!’ Perennial Prevarication! Or,

• In the minds of many (then) recently displaced homeowners, ‘Housing’s dirty little secret!’

The gist of the booklet was comprised of four descriptions, and as many measures of, affordable housing perspective:

• The 30% Housing Expense Factor (‘HEF’) purist

• The Housing Opportunity Index (‘HOI’) devotee

• The Housing Wage (‘HW’) aficionado; and/or simply,

• One Who Believes, when a home buyer/mortgagor or apartment lessee commits to payments on a mortgage or lease; & a lender/mortgagee or apartment lessor underwrites a loan/mortgage or executes a lease, it’s affordable & that’s all there is to it! (Think back to the earlier $400,000.00 affordable housing example…)

The booklet, as popular and widely discussed as it was during its’ two year run in the realty and housing markets, is now out of print. But during the past year, a fifth measure has come to light, and is herewith added to the four descriptive measures:

• Income to Home Value Ratio (‘IHVR’)

A challenge to the reader. Take time to learn and understand the basics and nuances of these descriptions of affordable housing measures, and begin applying them to your workaday life and housing interests. And, as you happen upon additional descriptions and measures of affordable housing, please let us know via: GFA c/o Box # 47024, Indianapolis, IN. 46247.


The 30% Housing Expense Factor or HEF

A safe, working definition. ‘Housing is affordable when no more than 30 percent of a household’s annual gross income (i.e. household can be one or more income producers living in the same singular housing unit) or AGI, is consumed by the sum total of annual PITI (Principal & Interest dollars paid on one’s home mortgage, real estate Taxes & homeowner’s Insurance premium dollars), plus annual utility expenses (water, sewer, heating fuel) for the housing unit, but not including telecommunications costs (e.g. telephone, cable TV & Internet access)’1 Note. This safe 30% HEF sometimes varies (e.g. 25%, 28%) among realty, shelter and housing finance practitioners.

An alternate, but riskier working definition, has the 30 percent HEF, of a household’s AGI, comprised of only PITI, but not including annual utility expenses & telecommunications costs. This, in effect, creates a ‘two sides of the same coin dilemma’: the safe, or more conservative, ‘loaded’ 30% HEF, described in the previous paragraph, versus a riskier ‘barebones’ 30% HEF! Can you see how the temptation to buy ‘more house than one can afford’ quickly appears, when one’s entire 30% HEF is comprised of just PITI, without including the usual household utility expenses – that still need to be paid, but outside the widely recognized 30% HEF limit? Hence, the riskier rental and or home buying perspective!

Here’s another challenge for you. From now on, when you hear or read of this ‘30% affordable housing factor’, ask yourself: ‘Are they describing or advocating the safe (i.e. ‘loaded’) 30% HEF, or the riskier (i.e. ‘barebones’) 30% HEF – & Why?’ Know what you’ll learn? The measure is rarely clarified; and when one asks, the realty, shelter or housing finance practitioner will generally not know or say. That’s one reason why ‘affordable housing’ continues to be the bugbear of the American shelter industry.


The Housing Opportunity Index or HOI.

‘Housing Opportunity Index (‘HOI’), formerly known as the Housing Affordability Index or HAI. This oft quoted index links a lender and trade advocacy group, e.g. National Association of Home Builders or NAHB/Wells Fargo HOI, also National Association of Realtors or NAR/Wells Fargo HOI. Here’s how HOI is described on NAHB’s website:

In the U.S., an HOI is calculated quarterly by the NAHB, comparing
the Average Median Income (‘AMI’) in a locality with the median
home price. The index is stated as a percent of the population, with said
AMI, able to afford the median – priced house. For example, in
year 2000, a HOI of 81% of AMI households in Indianapolis (with an
AMI of $57,700 at the time) would be able to afford the median – priced
home of $122,000). In comparison, San Francisco, with an AMI of
$74,900 and median house price of $464,000 had a HOI of 10.3%.’2

Two important cautions. ‘NAHB assumes households can afford to spend 28 percent of their AGI on housing’ (Recall 30% HEF measure described earlier), but does NOT, in anything this realty writer has read, specify whether composition of the 28% HEF is ‘loaded’ or ‘barebones’ – hence the ‘first problem’ with the HOI: Does the unspecified HEF nuance favor the safer or riskier perspective?. A second possible flaw? To ‘work (these) numbers’, one needs to know the total number of homes sold in the targeted local housing market during the studied year, to calculate the percentage of citizenry ‘able to afford the median – priced home…’ This detail is rarely, if ever, provided. Case in point? This (April 2011) press release published in RISMedia’s REAL ESTATE magazine (p.7.):

Nationwide housing affordability, during the fourth quarter of 2010, rose to its’
highest level in 20 years…according to NAHB/Wells Fargo HOI data. The HOI
indicated 73.9% of all new and existing homes sold in the fourth quarter of 2010
were affordable to families earning the national median income of $64,400.”

See? Which HEF perspective is favored or built into the HOI; the safer or riskier perspective; and, how many homes ‘sold’ across the U.S., to compute the 73.9% HOI?
In this writer’s opinion, the HOI measure of housing affordability, as interesting and helpful as it may be, remains flawed as long as it’s a proprietary affordable housing measure sans HEF explanation and total home sale disclosure.


The Housing Wage or HW

‘Housing Wage (‘HW”) methodology comes at affordable housing and housing affordability differently. Instead of first estimating value of a home or lease, then calculating how much AGI is required to afford same; HW methodology calculates the amount a person working fulltime must earn to afford, for example, a two – bedroom apartment, in a given local housing market, without paying more than 30% of AGI in rent.’ 3

An example: If a 2BR2B apartment rents for $900/month and represents
30% HEF (usually ‘barebones’), mathematical extrapolation calculates
AGI to be $36,000., which,, when divided by 12 months, and in turn, 172 work
hours/month (40 hrs. X 4.3 weeks/month) = $17.44/hour is the HW required to
afford this 2BR2B apartment in this local housing market. But note, utility
expenses, unless included in the monthly rent rate, will still need to be paid.

Furthermore, it’s common to see results of HW analysis expressed in terms of ‘How many times the minimum wage’, the wage or salary – earner must make to afford, for example, a two – bedroom apartment. In the above example this would be, using 2009 Federal Minimum Wage of $7.25/hour, a factor of 2.4. Therefore, in this local housing market, one must earn 2.4 times minimum wage, in this instance, of $7.25 = $17.40/hour, to afford the aforementioned $900.00/month 2BR2B apartment.


Workforce Housing or WFH

Workforce Housing (‘WFH’) is generally defined as being homes and apartments for nurses, firefighters, policemen and teachers making between 60 and 120% of a local housing market’s (i.e. usually affluent communities where they work) Area Median Income or AMI. How to calculate this range in workforce housing salaries and wages?

1. Go to to ascertain the AMI for the targeted local housing market.
2. Calculate the 60 & 120% range figures.
3. Multiply the two ’60 & 120% dollar range figures’ by 30% HEF.
4. Divide these two totals by 12 months, to estimate monthly rent or mortgage payment required of this targeted workforce, to be able to afford to live in said local housing market.

For example. Given $63,800 AMI X 60% = $38,280; and $63,800 AMI X 120% = $76,560, or a wage/salary range of $38,280 to $76,560/year for workforce to be able to buy or rent affordable housing in this local housing market. Again, 30% HEF is usually calculated from the ‘barebones’ perspective, encouraging the tendency to ‘buy more house or rent more apartment’ than might be prudent, as utility expenses will still (maybe not, in the case of apartments) need to be paid ‘outside’ the 30% HEF allowance.

What HW does, is demonstrate to targeted workforce, their municipal employers, land planners, and local zoning boards, what salaries/wages need to be, to enable nurses, firefighters, policemen and teachers to live in the local housing markets where they work!


The Income to Home Value Ratio or IHVR..

Simply, this ratio achieves traction when a housing market’s median home value (e.g. US in 2010 = $172,134) is divided by its’ AMI (e.g. US in 2010 = $63,800) for same time period, in same housing market; in this case, resulting in a 2.7 IHVR.

In other words, households earning the U.S. AMI of $63,800 would have to purchase a home costing nearly three times their AGI, to own a median U.S. home valued at $172,134. Sound extravagant? Not when considering some local housing markets are still at 7 IHVR, requiring households to spend more than seven times their AGI to own a median priced home in their local housing market.


One Who Simply Believes that…

“Ownership housing is affordable if the price is right.” Shelterforce, Fall 2007.

Summary. “…the perspectives on affordable housing and housing affordability are as broad and imprecise as the perspectives and measures described in this brief review. In the final analysis, if there is no consensus or agreement, on a common definition or description of affordable housing and housing affordability, let alone practical and easy – to – use formulae, relative to the subject; then there’ll be few Ah Ha! home buying and renting experiences; and the final ‘One Who simply Believes…’ perspective, will remain as appropriate as any other definition and measure of this too variegated subject!” 4


What say YOU?

Is there a practical, affordable housing definition and or description, as well as additional measures thereof, with which you’re familiar, that has not been covered in the previous paragraphs? If so, please communicate it/them to us, for possible inclusion in a new edition of HOUSING AFFORDOGRAPHY, at some point in the future. Use either the postal mailing address provided earlier in this bugbear expose’, or via the MHIndustry HOTLINE: (877) MFD-HSNG or 633-4764 or (317) 346-7156.

Another subject altogether: ‘Update to Rankings in the 22nd annual ALLEN REPORT’

Turn to page # 18 in your copy of the 22nd annual ALLEN REPORT. Soon after the compilation of ‘# rental homesites owned/fee – managed’ data was complete, and landlease (nee manufactured home) community portfolio owners/operators ranked, American Land Lease in FL. (a.k.a. Green Courte Partners in IL.), listed as #9 on this year’s list, acquired six LLCommunities, containing 1,850 rental homesites, from CRF Communities (#24). Had this acquisition consummated a month earlier, and these two new totals been included in the above – referenced compilation, American Land Lease would likely have been ranked as #7 in the 22nd annual ALLEN REPORT.

Turn to page # 19 in your copy of the 22nd annual ALLEN REPORT. A month after publication of this year’s ALLEN REPORT, we learned there had been a significant reporting error in the property portfolio numbers for J & H Asset Property Management, in CA. Their correct portfolio numbers are 69 LLCommunities and 10,520 rental homesites fee – managed. This correction constructively moves them up in ranking from #70 to #14; an adjustment that’ll be effected in the next edition of the ALLEN REPORT.

Do YOU have your copy of the 22nd annual ALLEN REPORT? Well, our inventory is down to the last few dozen copies of this seminal statistical compendium. And we’re making this very special offer through to the end of May 2011:

For a total of $250.00, we’ll send you the 22nd annual ALLEN REPORT (cover price is $450.00), a one year paid subscription to the Allen Letter professional journal (12 monthly issues, usually for $134.95), and – as long as they last – a copy of the Manufactured Housing $$$ Primer, the first and only book ever published on the subject of chattel (personal property) finance as it applies to the manufactured housing industry (usually $29.95 postpaid). And postage/handling charges are included in the aforementioned $250.00. This Special Offer is not available on our website, but must be ordered by phoning the MHIndustry HOTLINE: (877) MFD-HSNG or 633-4764, or (317) 346-7156.
End Notes:

1. HOUSING AFFORDOGRAPHY, George Allen, PMN Publishing, Indianapolis, IN., June 2008., p. 13
2. Ibid., p.19 (revised)
3. Ibid., p.23 (revised)
4. Ibid., p.31 (revised)

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