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Speaking of the Economy
Housing development in rural area
Speaking of the Economy
March 16, 2022

The Pricing and Supply of Rural Housing

Audiences: Community Advocates, General Public, Policymakers

Sierra Latham and Peter Dolkart discuss their work on the availability of affordable housing in small towns and rural communities. Latham is a senior research analyst at the Federal Reserve Bank of Richmond and Dolkart is a community development regional manager based in the Richmond Fed's Baltimore office.



Tim Sablik: Hello and welcome to Speaking of the Economy. I'm Tim Sablik, a senior economics writer at the Richmond Fed. I'm joined today by two of my colleagues: Sierra Latham, a senior research analyst, and Peter Dolkart, community development regional manager, to talk about the rural housing market.

Sierra and Peter, welcome to the show.

Peter Dolkart: Good to be here.

Sierra Latham: Thanks for having us.

Sablik: Many of us have been hearing about the effects of the pandemic on the housing market. Housing prices have been going up in many markets and houses seem to be in short supply. And we recently had John O'Trakoun, another Richmond Fed researcher, on the show at the end of last year to talk about that.

Today, I want to dig into some work that you've both done looking at housing affordability, particularly in rural markets, including an article that Sierra recently wrote for the Richmond Fed's Econ Focus magazine. To start, I was wondering if you could explain what researchers mean when they talk about households being "housing cost burdened" in the context of housing affordability?

Latham: Sure. Households are considered housing cost burdened if they spend more than 30 percent of their income on housing expenses, and that includes utility bills, insurance and taxes. Households that spend more than 50 percent of their income on housing expenses are considered severely housing cost burdened.

Being housing cost burdened means that households might have difficulty paying for other necessities because so much of their budget is allocated to housing. Identifying the share of households that are housing cost burdened tells us how difficult it is for folks to find housing that works for their budgets. Areas with high levels of housing cost burden are more likely to have insufficient housing options affordable to low- and middle-income households.

Sablik: You looked at the data for the national scope and also the Fifth District. What share of households are cost burdened nationally and here in our district?

Latham: Nationally, about 31 percent of households at all income levels are having housing cost burden. In the Fifth District, overall, across all spaces, about 27 percent of households at all income levels are housing cost burdened. That number is a little higher for urban areas — where 28 percent of households are housing cost burdened — and slightly lower in rural areas — where 25 percent of households are housing cost burdened.

Sablik: Yeah, I was surprised to learn from your article that the share of housing cost burdened households is nearly as high in rural places as in cities. I think housing affordability tends to be talked about more in terms of the context of big cities like New York or Los Angeles. What are the main factors contributing to unaffordable housing in rural areas?

Latham: Incomes tend to be lower in rural areas relative to urban areas. So, while housing prices are lower, so too are incomes. That will cause housing to be unaffordable to low- and middle-income households.

The housing market conditions that drive up rents and home prices in rural areas are going to depend on the specific location. But there are a few characteristics that are common among a preponderance of rural communities.

The first is that homeownership rates tend to be higher, which constrains the supply of homes available to rent. This is especially a challenge for low- and middle-income households for whom homeownership is out of reach.

At the same time, vacancy rates tend to be higher in rural areas. The prevailing reason why homes are vacant depends on the location. But a lot of times these vacant properties are not available for sale and for rent, which again further constrains the housing supply [and] will drive up prices in rural areas.

Lastly, compared to urban areas, a larger share of residents in rural areas are seniors. The trend towards aging in place means there's less turnover of homes to younger generations, which again is another source of scarcity in the housing market.

Sablik: That's what you kind of alluded to — the picture for housing affordability looks different if you're looking to own a home versus renting, right?

Latham: Exactly.

Sablik: So how does rural housing affordability look in the Fifth District for renters versus owners?

Latham: Sure. We measure the two things differently.

But first off, I just want to mention that housing affordability is the flip side of housing cost burden. Housing is considered affordable to a household if that household would spend no more than 30 percent of their income on housing expenses.

When we're looking at how much affordable housing exists in a market, we start with an income threshold – for example, 80 percent of the area median income. We then take 30 percent of that income level and see how many housing units exist in the market that would cost less than that amount. For example, the area median income in Harrisonburg, Va., was about $46,700. According to the most recent American Community Survey, 80 percent of that amount would be $37,300, meaning a household earning 80 percent of area median income in Harrisonburg, Va., could afford up to $934 in housing expenses every month without being housing cost burdened.

We determine if there's enough affordable housing by seeing whether there are enough units affordable to a specific income level to match that number of households. Focusing on rental units and the Fifth District, we see that there [is] a shortage of units affordable to households earning 60 percent AMI and 80 percent AMI. There appears to be enough units for households earning 100 percent AMI or more.

But again, that doesn't mean that all areas have sufficient housing for households earning the area median income. Every local market is different. And there are certainly going to be some communities throughout rural parts of the Fifth District that do have insufficient housing for households earning the area median income.

Turning to the ownership market, we look at the months' supply of housing available for sale as a measure of market tightness. That means how much scarcity there is in the housing market. Each month, the supply of housing is the ratio of homes for sale on the market to the homes sold in that month. Over time, housing markets for units affordable to households earning 120 percent AMI have become tighter throughout the rural Fifth District. In 2010, rural markets in the Fifth District had an average of seven months' supply of housing units available to households earning 120 percent AMI versus four months in 2020.

Sablik: Yeah, it's definitely a noticeable decline.

I think it's important to mention here that one of the reasons the Fed is interested in the housing market is its connection to the labor market. For example, workers may be unable to move to take advantage of new job opportunities if they can't find affordable housing. How big of a problem has that been historically? And has it been getting worse?

Dolkart: Well, Tim, I can't speak to what the statistics are saying. I can talk to the community leaders and stakeholders I speak to every week throughout our district. For example in northeast Maryland, in Harford and Cecil County, you have a number of jobs and job centers such as the Amazon distribution plant. DuPont has got a facility up there. There are increasingly a large amount of jobs in warehousing and other types of opportunities right on the I-95 corridor.

However, what you constantly hear is that the actual places where people can live affordably close to those jobs is the problem. The fact is there are no transportation systems or public bus systems like we have in Baltimore or other urban centers. You hear that [about] northeast Maryland. I've been hearing it for quite some time in Western Maryland, where [there's] an organization that helps construct portable housing in Garrett County, for example. They have funding mechanisms to build low- and moderate-income housing. But when it comes to trying to find that kind of workforce housing for not just private sector jobs but also public school teachers, policemen and other people who work and serve the public, they're finding that the funding mechanisms are just not there. As a result, a lot of people in that region end up living across the border in Pennsylvania [and] West Virginia.

Sablik: Right. Thanks, Peter, for that update. That's really interesting.

I think the next thing that comes to mind with affordable housing is, is there a way to increase the supply? What are the main barriers to financing, say, new construction or renovating existing housing?

Dolkart: Well, private capital has always been an issue. Of course, it's traditional that in rural America, there are fewer and smaller size banks. Then we've had bank consolidation going on for several years and many banks are now headquartered in urban areas. They do still have an obligation under the Community Reinvestment Act to make investments including affordable housing, but they're less connected to those rural areas through bank consolidation.

Also, a lot of local rural counties lack a public housing authority or housing department that can help coordinate and identify those needs. I mentioned Garrett County, for example. There isn't a public housing authority per se or housing department in that county that's in far western Maryland. As a result, the local Community Action Agency — which is an agency from the 1960s that was primarily there to serve poverty programs such as Head Start — they have become the de facto housing development in that region. They also have to run a transportation system to serve their clients.

The other thing is government-funded operating subsidies are critical to support new construction, particularly for poor households and housing markets in which construction costs are significantly higher than low rents can cover. Yes, there has been an increase in appropriations for federal rental assistance. However, the contracts have been restructured over the years so that they're almost only covering the cost of existing contracts.

Then, of course, you have issues like the current cost of materials, lack of developer interest or locations in these areas, lack of local construction labor force. Cost of land is always a major variable. And then in some places like our district in West Virginia, you have whole issues of topography and just getting the equipment and instruction out to regions of that state.

Sablik: Right.

Maybe you could talk a bit more about what individual rural communities are doing to try and get around those difficulties and expand the stock of housing while also trying to ensure that that new housing remains affordable.

Dolkart: Well, one concept or a model that's kind of gotten a renaissance or resurgence are community land trusts. These are nonprofit, community-based organizations designed to ensure that land remains affordable. Essentially, the land trust owns the land, and then houses are constructed above that land with an understanding that they will remain affordable in perpetuity.

We, for example, have in Virginia the Piedmont Housing Alliance, including the Community Land Trust. We featured that organization during Investing in Rural America this past fall. They are interesting models. While they work for a lot of communities, it depends on the area.

Another idea that has come up is the idea that when a community is doing some type of other community facility, a school, a library [or] some other type of facility that serves the larger public, they can also commingle that with building additional affordable housing units, saving on construction costs.

The other thing I've been hearing and seeing a lot of, particularly in rural areas, is home repair programs. As Sierra pointed out, the housing stock in rural areas tends to be older and it tends to be filled with older residents who need assistance in just maintaining and repairing these houses. We run a program called Investment Connection at the Richmond Fed where we take proposals from nonprofits serving low- and moderate-income communities. We try to match them up with funders. Just in the last several months, we've been getting a number of home repair and program funding requests to serve rural areas.

Sablik: Great.

Another kind of way to approach this issue of housing affordability might be to provide subsidies to low- and moderate-income households to help them better afford the housing that is there. How effective have these programs been in rural places?

Latham: Sure, I can take that one. To clarify, there are two types of subsidies that I want to talk about. The first are subsidies that are given directly to households themselves to help defray the cost of rent. In other cases, construction costs can be subsidized in exchange for long-term affordability.

Talking about the first example, I want to discuss housing choice vouchers, also known as Section 8 vouchers, which allow recipients to pay for units that they rent on the private market. The recipient pays 30 percent of their household income towards rent usually and the federal government subsidizes the remainder. The Housing Choice Voucher Program serves about 2 million people per year nationally. For households who get them, vouchers significantly reduce rent burden, reduce the likelihood that they'll live in overcrowded condition and lessen the risk of homelessness. It's really powerful as a tool for lessening the effects of housing cost burden.

The downside is that the waitlist for housing choice vouchers tends to be long, with a median waitlist length of about one and a half years nationally. Fewer than one in four eligible households receive subsidies on an annual basis. Also, even if a household does receive a housing choice voucher, the recipient might find it challenging to find a landlord willing to accept vouchers, particularly in rural areas where rental housing makes up a relatively small share of housing units. [Finally], vouchers have to be used within 60 days of the time that they're received, and about 30 percent of recipients are unable to find suitable housing in that time.

Next, I want to talk about two programs that subsidize the cost of construction in exchange for long-term affordability. The first one is Low-Income Housing Tax Credits or LIHTC and the second is USDA Rural Development Section 515, which I'm just going to refer to as Section 515 loans. Under each program, developers agree to make their units affordable to households earning less than the area median income for a set period of time.

LIHTC and Section 515 properties are two very effective mechanisms of providing housing at below-market rates to low- and middle-income households. Both are constrained by the federal budget. One in four LIHTC projects received funding and Section 515 funding has been declining over time. Moreover, these funding sources only cover a portion of the development cost for new affordable property. The remainder is funded by other public funding sources or through debt financing.

Another downside to LIHTC and Section 515 properties is that their affordability periods are 15 and 30 years, respectively. After that time, the affordable units may be converted to market-rate units if nothing is done to preserve them. Looking just at rural parts of the Fifth District, nearly 7,700 LIHTC and Section 515 units are scheduled to lose their affordability by 2030. That doesn't necessarily mean that they're going to go away. There are a lot of things that can be done to preserve those units.

Dolkart: If I could just jump in, Sierra.

You're right — LIHTC and Section 515 are very effective programs when fully funded. But they do require a certain level of technical capacity, particularly if you are seeking bank, private capital. Not every financial institution has the staffing with the capacity to understand how these instruments work, and certainly that would be the case for community banks in rural areas.

Latham: That's an excellent point, Peter. Going back to what you said earlier, there are not an abundance of developers that are even necessarily willing to build in rural areas. So, you might actually see less properties being developed in rural areas using LIHTC and Section 515 just by virtue of the fact that there isn't a lot of supply in the construction sector there.

The last type of housing subsidy that I want to talk about is public housing, and I want to talk about it specifically because a lot of times we think about public housing being an urban housing solution. However, there are more than 26,000 public housing units located in the rural Fifth District counties alone. These properties were constructed using federal funds, they're maintained using federal funds, and they're operated using local public housing entities. In urban areas, those are usually public housing agencies, but in rural areas those might be more Community Action Agencies or even statewide agencies that administer the programs.

Public housing has no affordability period. However, over time, buildings have been decommissioned as a result of scarce funding for maintenance. Also, one of the downsides of public housing is that there are relatively long waiting periods. The national median waitlist time is nine months to get into a public housing building.

Between housing choice vouchers, LIHTC, Section 515 and public housing, those are just four of the examples of the types of subsidies that serve low- and moderate-income households in rural parts of the Fifth District. There are a number of other solutions that we can talk to. They have their pros and their cons, but households that generally are served are very, very well served by them.

Sablik: Great. Thanks, Sarah and Peter, for that overview. That's really helpful. And it definitely, I think, clarifies that this is a longstanding issue. And then on top of that, we have the pandemic that's clearly thrown a wrench into the housing market in a variety of ways.

Do you have any sense of how local policymakers or even national policymakers are responding to the additional challenges of the pandemic on top of these longstanding issues?

Latham: Peter already spoke to a few local policies that are really helping with affordability: community land trusts were one of them, co-locating projects with essential services, and the home repair programs that help maintain the existing properties that are there. We've also talked about federal and state level subsidies, but some of the most innovative solutions really do happen at the local level.

Many of the tools used in urban areas can also be used in rural areas. For example, rural communities can offer density bonuses to developers willing to build housing units that will be made available to low- and middle-income households. A density bonus allows the developer to build additional units beyond what is allowed under current zoning. In exchange, some or all of the additional units will be made affordable to low- and middle-income households. Another policy that is kind of similar to the community land trust model is the land bank model, where a nonprofit entity acquires and maintains tax delinquent properties that have been abandoned, and then donates those properties so that they can be developed for affordable housing purposes.

Dolkart: There are also a number of other incentives that local governments in rural areas could potentially offer. They can allow a developer or management company to charge a higher management fee than they might otherwise charge in an urban area. Also, there have been various things like opportunity zones, which actually predated the pandemic but whose entire intent was to pour private capital into low- and moderate-income communities, including rural areas, and give that developer a tax incentive.

There's also the issue of regulatory barriers, too, where state and federal housing programs should try to coordinate so that they can eliminate barriers. For example in Maryland, one of the issues that we've confronted over the last decade is that Maryland is one of two states, the other being California, that mandates that fire sprinklers have to be installed in all new single-family homes. That significantly increases the cost, especially for homes in rural areas that are well water and not on a municipal water system. That increases the cost by thousands of dollars. So those types of barriers have to be looked at.

Latham: Thanks, Peter.

The last example we want to talk about is modular housing. Modular housing is built, in part, in a factory and shipped to a site for assembly and is a cheaper alternative to site-built construction. It overcomes a number of the obstacles to construction that exist in rural areas, which we've discussed earlier in our conversation. For example, many rural areas have difficulty attracting developers because of a lack of construction resources, and modular homes circumvent that problem. Modern modular homes look indistinguishable from site-built, single-family detached homes and provide just as much safety and comfort for the families that live in them. Mortgage providers have also been more willing to finance the purchase of modular homes with conventional mortgages, which significantly decreases the cost of the homes as opposed to some of the previous financing models that were available for earlier generations of modular homes.

Sablik: Thanks, Sierra and Peter, for that comprehensive overview. Hopefully, some of those initiatives will start seeing some effects in terms of improving housing affordability in real markets. For any of our listeners who are interested in reading more about this, you can check out the latest issue of Econ Focus on, which has Sierra's article on this topic.

Thanks again both of you for being here.

Dolkart: Thank you.

Latham: Thank you for having us, Tim. We appreciate it.