More funding for market-based housing vouchers is needed now. Building more housing to address housing shortages is a longer-term, more sustainable solution to solve America’s housing affordability crisis.
Chronic housing shortages have caused housing costs to skyrocket across the country in recent years, and many low-income renters have seen their incomes fail to keep up with rent increases. Since the start of the pandemic the nation’s typical rent – as measured by the Zillow Observed Rental Index (ZORI) – has increased by 26%, whereas average earnings have risen by 16% during that same period. This deviation between rent and income growth has caused more renter households to become rent burdened, exacerbating the need for housing assistance for many households.
To make matters more challenging, the rapid runup in rents has also weakened the value of a key form of housing assistance. The U.S. Department of Housing and Urban Development (HUD) has long played a crucial role in providing rental assistance to low-income renters, particularly through the use of Housing Choice Vouchers (HCVs). Vouchers are a crucial form of assistance for many low-income renters, but recently, as market conditions have shifted, the number of available vouchers has failed to keep up with demand and the value of vouchers has also fallen relative to market rents.
Funding limits that left massive numbers of qualifying households without rental assistance were already a challenge for the market before the pandemic. Since then, the need for vouchers has increased. From 2020 to 2022, the rapid surge in market rents caused voucher values to fall further behind. Across the country, the typical rent outpaced HUD’s measure of two-bedroom fair market rent (FMR) — which is used to calculate the value of Housing Choice Vouchers — by 11.6 percentage points during that period. The gap between these two measures is far more pronounced in certain counties. For example, in Miami-Dade County, the typical market-rate rental rose in price by 51% from 2020 to 2022, but voucher values only rose by 3%, a gap of 48 percentage points.
The number of households affected by these dynamics is substantial. As of 2021, there were approximately 19.5 million rent burdened households nationwide – households that spend more than 30 percent of their income on monthly rent payments. Of those, 9.8 million households were severely rent burdened – spending more than half of their income on monthly rent. Voucher eligibility is calculated somewhat differently – incorporating elements like family size and how a family’s income compares with the median income in their county or metropolitan area – but it shows a similar figure: Roughly 19 million U.S. households met the criteria for voucher eligibility in 2021. However, despite this demand, the number of HCVs available totaled just 2 million.
Sadly, the nationwide increase in rent burdens during the pandemic raises the risk of evictions and homelessness. Research shows that homelessness rises faster when rent affordability surpasses the 32% threshold. Improving the housing choice voucher program would likely be a step in reducing the rising flow of families into homelessness.
When rent increases faster than income, the risk of eviction and homelessness increases. Eviction raises housing instability with the probability of subsequent moves within two years of an eviction increasing by 80%-90%, while also raising the likelihood that an evicted family applies for shelter. Evictions also have a large negative impact on the health outcomes of evicted tenants that lead to more emergency room visits as well as mental health hospitalizations.
Unfortunately, discrepancies between the value of vouchers and market rent are part of the problem since they result in fewer housing units available to HCV recipients. Fewer eligible units raise the risk that families can’t find a unit they can afford.
Housing Choice Vouchers, also known as Section 8 vouchers, pay rent subsidies for many low-income families. The housing subsidy is paid to the landlord directly on behalf of the participating family. The family then pays the difference between the actual rent charged by the landlord and the amount subsidized by the program. Voucher holders typically pay 30% of their income as rent and the government pays the rest up to a rent ceiling. That rent ceiling depends on estimates of “fair market rent” at the county or metro level constructed by HUD. HUD aims to set the FMR at the 40th percentile of area-by-bedroom level gross rent.
Historically, HUD annual increases in FMRs haven’t kept up with market rents and there are several reasons why. First, there are huge disparities in rent growth within counties and/or within metro areas that FMR changes fail to take into account. One neighborhood in a county might be experiencing faster rent growth than the next neighborhood over, yet they are treated the same.
Secondly, since FMRs are updated using local Consumer Price Index rent measures and random digit dialing surveys, they fail to keep up with rapidly changing housing market conditions. This is because the rent components of the Consumer Price Index lag market-based rent indexes. For example, in 2021 when market rents measured by the Zillow Observed Rent Index began to exceed a 6% annual rent increase, the annual rent increase measured by the Consumer Price Index was still slightly below 2%. Gaps between actual market rent increases and FMRs usually lead to a “re-benchmarking” with each new decennial Census, which aims to realign the two measures.
Last, but perhaps most importantly, a lack of funding for the program has prevented the availability of market-based vouchers from meeting what’s needed. Without substantially more funding, an increase in the value of vouchers could result in fewer vouchers issued, limiting the number of at-risk renters receiving this desperately needed housing subsidy.
The good news is that there are known fixes that can be implemented immediately in order to estimate how much funding should go to rental assistance.
Research shows that indexing the rent ceiling for voucher eligible units to neighborhood rents rather than county- or metro-level estimates of FMR, would improve access, causing voucher holders to move to higher opportunity neighborhoods with lower crime, lower poverty and lower unemployment.
Zillow is already working with HUD to help improve FMR estimates, specifically leveraging the Zillow Observed Rent Index (ZORI), which tracks changes in market rent down to the ZIP code level. These small improvements have the potential to make more homes available to voucher recipients. Recently, HUD announced steps to modernize the HCV program inspection process, aimed at bolstering landlord acceptance of vouchers, while ensuring rental units are verified, safe, and livable for voucher holders. Congress has also recognized the need to modernize the HCV program and a bipartisan proposal from Sens. Cramer (R-ND) and Coons (D-DE) was reintroduced earlier this year, aimed at expanding access to affordable housing for HCV families.
Lastly, opponents of a housing voucher expansion often incorrectly infer that an expansion of the program would raise the overall price of rental housing. This is contrary to the bulk of empirical evidence that suggests that in the past, large voucher expansions have had no meaningful impact on citywide rents. Instead, the average rent for lower-priced units fell, while rent for higher-priced units increased. This is because an increase in the supply and value of vouchers allows voucher recipients to move to better neighborhoods.
Irrespective of the supply of housing vouchers, housing markets with the least elastic housing supply tend to experience the worst affordability challenges. Lowering barriers to building by relaxing density controls and revisiting existing land-use regulations will improve housing affordability. However, closing the nation’s housing shortage will take time. Tackling the rise in homelessness across the country’s major cities can begin with improving the housing choice voucher program.
[1] Zillow Observed Rent Index (ZORI) from Feb. 2020 to Feb. 2023
[2] U.S. Bureau of Labor Statistics, Average Hourly Earnings of All Employees, Total Private [CES0500000003], Average Weekly Hours of All Employees, Total Private [AWHAETP], retrieved from FRED, Federal Reserve Bank of St. Louis, March 24, 2023.
[3] Eligibility for a housing voucher is based on the total annual gross income and family size. In general, the family’s income may not exceed 50% of the median income for the county or metropolitan area in which the family chooses to live.
