Subsidized Housing in the US: A Summary
How much exists and how it works
“Affordable” housing is a common buzzword that can have many different meanings depending on the context. In a policy and real estate settings, this usually means housing that is subsidized by the government and is income-restricted, meaning there is an income ceiling to qualify for it. How much of this housing exists and how does it work? Thinking it was time to remind myself of the basics, and I thought it was worth summarizing for the blog. To start, below is a chart that summarizes about how much subsidized housing comprises the overall US housing stock.
This chart shows several important basic facts. First, most American households (65%) own their own private home. Of the minority who rent (35%), only a small percentage – about 6% of overall US housing, some 7 million households – live in subsidized housing. In reality, there are too many housing programs at all levels of government to summarize in one post, but there are three major federal programs that stand out as the largest and most important.
1. Public Housing
Owned & Managed by: Local Housing Authorities (overseen by HUD)
Financed by: Federal appropriations (through HUD)
Eligible population: 50%-80% AMI or below
Households served: About 877,000
The oldest of the big three federal housing programs, comprising about 1% of all US households in the chart above, is public housing. This is housing that is owned and managed by local government agencies known as public housing authorities (PHAs) and financed directly by the federal government through annual congressional appropriations. Following the Housing Acts of 1937 and 1949, the majority of public housing was built between the 1950s and 1980s.
Popular media depictions of public housing often evoke images of extreme poverty in isolated buildings with crime problems. And while this has certainly been true in some cases, the reality is much more complex. From its conception, public housing was designed to restrict eligibility to those with low incomes so as not to compete with the private real estate market. The original residents of public housing contained a diverse array of working-class families in the lower third of the income scale. Rapid growth of low-cost homeownership by federally subsidized mortgage insurance programs soon enabled many of the highest income of these working-class families to move out of public housing. Over time, this meant that the median income of public housing residents fell from 57% of the national income in the 1950s to less than 20% by the mid-1990s.2 Today, public housing continues to house extremely low-income households, and remains a critical source of housing for the country’s most vulnerable residents. As of 2020, the average annual income of households living in public housing was only $14,444, and the most common sources of income included social security, retirement benefits, or welfare payment.3
Originally, local government PHAs were authorized to issue bonds to finance the development costs of public housing while the federal government paid the interest and principal on the bonds. Meanwhile, the operating costs were fully covered by tenant rent payments. In the 1960s and 70s, tenant rent payments were capped at 30% of their income, which is how the program remains designed today. This capped rent, combined with the fact that eligibility for the program is generally restricted to 50%-80% of the area median income (AMI), meant that many PHAs no longer had enough rental income to maintain their properties. As a result, the federal government, through the Department of Housing and Urban Development (HUD), now subsidizes operating costs to fill this gap. These operating funds are subject to an unpredictable congressional appropriations process that rarely funds the full operating needs. Today, many PHAs have faced mounting budget deficits, with some estimate that public housing has a capital needs backlog of over $70 billion. With little foreseeable aid coming from Congress in the near future, most PHAs have had to resort to retiring their public housing stock by converting it into privately-managed housing through housing vouchers and LIHTC, the two other major federal housing programs discussed below. Only about 877,000 public housing units remain today, down from a peak of about 1.4M units in the mid-1990s.
2. Housing Vouchers
Owned & Managed by: Local Housing Authorities (overseen by HUD)
Financed by: Federal appropriations (through HUD)
Eligible population: 50% AMI or below, with preference given for 30% AMI
Households served: About 2.3 million
The second major federal housing program, housing about 2.3 million households or about 2% of the US population, is housing choice vouchers. Sometimes known as Section 8 vouchers after the section of the Housing Act of 1937 that authorized them, these vouchers are unique in American housing programs in that they don’t fund specific buildings or projects, but instead give funds directly to tenants who can use them to find housing in the private rental market.
Housing choice vouchers are allocated by HUD to local PHAs (or local housing departments where no local PHA exists) to distribute. Voucher holders pay up to 30% of their income in rent and the voucher makes up any gap in payment between this amount and a HUD-mandated maximum rent known as the fair market rent (FMR), This is calculated as the 40th percentile of the local market rents in over 2,600 housing markets nationwide. In practice, discrimination against voucher holders in the private market remains common. Although there are source of income anti-discrimination laws in a handful of states, this is the exception rather than the norm. Even where these laws due exist, enforcement is an issue. Landlords that accept vouchers are subject to extra physical standards inspections and paperwork. A portion of housing vouchers are project-based, meaning that the local housing authority contracts directly with the owner of a unit rather than a tenant. In these cases, the vouchers are fixed to the unit, and the tenant cannot take the voucher with them when they leave.
Like public housing, housing choice vouchers are funded by annual congressional appropriations and allocated to local housing authorities. Since the 1990s, local PHAs have gradually begun to retire their public housing stock in favor of housing choice vouchers. In FY 2024, funding for vouchers made up over half of HUD’s nearly $70 billion budget.
Eligibility for vouchers is set by local PHAs but generally incomes cannot exceed 50% of the local area median income (AMI). By law, PHAs must provide 75% of their allocated vouchers to those with incomes at 30% AMI or below. In practice, most households with vouchers earn less than $15,000 per year, well below the federal poverty line.4
There are several notable advantages to vouchers over project-based subsidy programs. It is much less expensive per unit, allowing the government to serve more households with the same funding. They also allow more geographic choice for households than traditional public housing does. However, like with public housing, funding for vouchers is sparse, and it remains difficult to convince Congress to allocate more funding for the program. Overall, only about 1 in 4 eligible low-income households receive federal rental assistance between the public housing and voucher programs combined, and there are millions on the waitlists for both programs. In the meantime, a third housing program, one that relies mainly on tax incentives and private actors, now funds the majority of new subsidized housing construction.
3. Low Income Housing Tax Credit
Owned & Managed by: Mainly private entities
Financed by: Federal tax credits through the IRS
Eligible population: Incomes < 60% AMI (w/ few exceptions)
Households served: About 2.5 million
The Low-Income Housing Tax Credit (LIHTC) program is the largest program for the development of new affordable housing today. Originally created by the Tax Reform Act of 1986, the program was designed to incentivize private investment in affordable housing in exchange for federal tax credits. Notably, this means that the largest affordable housing development program is managed not by the federal Department of Housing and Urban Development (HUD), but instead by the Internal Revenue Service (IRS). To date, the LIHTC program has financed the development of over 3.5 million units since its creation, of which about 2.5 million units are still active in the program.
In contrast to the public ownership and management of public housing, any entity, either private or public, can use LIHTC to build housing. Most LIHTC projects are owned and managed by private developers. Although there is no reliable database of federally supported housing construction, previous estimates have suggested that about 19% of LIHTC projects are owned and operated by non-profit entities, while most of the rest are owned by private, for-profit developers.5 These companies are responsible for administering the program according to IRS rules and submitting proof of compliance after the projects are operational.
The financing of LIHTC projects is extremely complex. The primary source of financing comes from federal tax credits that are allocated to developers through state housing finance agencies. The amount of tax credits allocated to each project are capped according to a certain percentage (usually 4% or 9%) of eligible costs. Private investors, usually big banks, invest in affordable housing developments in exchange for these tax credits. When they do so, they become part-time owners of the project, usually forming a Limited Partnership entity to do so. The legal and financial details of this are too much for a single post, and there is now an entire legal, accounting, and financial industry dedicated to serving LIHTC developers. The diagram below gives a snapshot of how a typical project is structured. It’s also important to say that the investor equity from tax credits is usually not enough to finance a project by itself, so most new LIHTC developments also rely on private commercial loans and low-interest state and local government loans to finance construction.
Just like public housing and rental vouchers, LIHTC projects are income restricted. However, unlike other subsidy programs, LIHTC projects are marketed and leased on the open market. Anybody making equal to or less than 60% or less of the area median income (AMI) are eligible to apply. Unlike public housing and vouchers, the rents are not set as a percentage of tenant income but are instead set at a fixed maximum amount that varies by the designated AMI and bedroom count of a particular unit. This means that unlike with public housing and vouchers, residents can and often do pay more than 30% of their income in rent at LIHTC projects. LIHTC properties also accept tenant rental vouchers, which can help pay for the gap between their income and rent. Each metropolitan region across the country has its own max rents and income levels set by HUD. Below is an example of the max rents and income levels for LIHTC properties in the Washington, DC region.
LIHTC Monthly Rent Limits – Washington, DC Metropolitan Region
LIHTC Annual Income Limits – Washington, DC Metropolitan Region
Final Thoughts
In many ways, the US subsidized housing story is one of a long, steady decline of publicly owned housing in favor of either tenant vouchers and privately owned and developed LIHTC housing. The chart below summarizes this evolution over time.
The production shift towards LIHTC has had several advantages and disadvantages. On the plus side, LIHTC has proven that it can produce new affordable housing at a steady pace. A robust affordable housing industry has developed in the US with the expertise necessary to build and maintain high-quality affordable housing. LIHTC is not dependent on annual congressional appropriations and enjoys bipartisan (mostly) support in Congress. It can also flexibly be combined with other financing sources, which gives owners options to finance property maintenance over time.
On the other hand, LIHTC usually involves much more financing complexity than typical market rate multifamily housing. It is not uncommon for a LIHTC project to have 6 or more sources of funding, each with their own set of legal documents, bureaucratic approvals processes, and compliance measures. This means that a substantial amount of time and money is spent on transaction costs rather than the actual construction of new affordable housing. Additionally, the market for tax credits means that investors are often only willing to pay less than a dollar per tax credit received. This means that for every dollar of tax revenue that the federal government foregoes for the program through tax credits, there is usually less than a dollar in equity invested into affordable housing. Finally, the program rules only requires that housing must only stay income-restricted for 30 years, putting many affordable properties at risk of expiration to market rate rents at the end of the affordability period. Because of this, some estimates suggest that there are up to 294,000 affordable units that could expire between 2025 and 2029.7
For now, LIHTC is an imperfect solution that remains dominant program for building new subsidized housing in the US. As an alternative, some states and localities have started raising new ideas for publicly owned, mixed-income housing, a topic worthy of its own detailed post. For those curious to learn more, I’ve included a few great references below. Have a great week!
Notes and Reference List
1. “Other” category includes various smaller federal housing programs, such as Section 236, Section 202, HOME, and USDA rental housing programs. Estimates for private homeowner and renter amounts come from the Harvard Joint Center for Housing Studies 2024 Housing Report data backup, Table W-1. Estimates for subsidized renters come from the National Housing Preservation Database.
2. Alex Schwartz, “Public Housing” in Housing Policy in the United States, (New York, NY: Routledge, 2015), 168.
3. Same source as above, see page 169 for interesting table on public housing resident demographics.
4. Laurie Goodman, Karan Kaul, and Michael Stegman, “Leveraging Financing to Encourage Landlords to Accept Housing Choice Vouchers”, Urban Institute (September 2022): p. 7.
5. Alex Schwartz, “The Low-Income Housing Tax Credit” in Housing Policy in the United States, (New York, NY: Routledge, 2015), 143.
6. Corianne Payton Scally, Amanda Gold, and Nicole DuBois, “The Low Income Housing Tax Credit: How it Works and Who it Serves”, Urban Institute (July 2018): p. 5.
7. Joint Center for Housing Studies of Harvard University, “The State of the Nation’s Housing 2024”, p. 38.
Often times cities (NYC specifically) will impose rules for new housing developments. Referred to as the 80/20 Rule, it requires 20% of the units in a new development to consist of affordable units. These units can't use different materials in construction or be segregated to certain floors. The remaining 80% can be rented at market rates. I realize this doesn't fit under one of your 3 categories, but it is another component of affordable housing.