The Effects of the Federal Budget Squeeze on Low-Income Housing Assistance

PDF of Full Report (44pp.)

By Douglas Rice and Barbara Sard

February 1, 2007

Key Findings

  • Nearly 9 million low-income families have severe housing affordability problems, an increase of 33 percent since 2000. Yet despite the increasing need for low-income housing assistance, the emergence of large federal budget deficits has created pressure to reduce domestic spending and led to cuts in low-income housing assistance.  
  • In 2006, funding for HUD's affordable housing and community development programs was $3.3 billion (8 percent) below the 2004 level, adjusted for inflation. These cuts come at a time when funding increases will be needed merely to continue to assist the same number of families being helped now. 
  • The squeeze on low-income housing already is affecting low-income families. More than 150,000 Section 8 housing vouchers have been lost over the past two years. 
  • Cuts in low-income housing assistance threaten to undermine major federal goals such as preserving the stock of affordable housing and improving housing opportunities for low-income families.

Related Areas of Research

Executive Summary

Federal housing assistance programs for low-income families face growing budget challenges.  Housing costs have grown faster than most families’ incomes in recent years, and a growing number of low-income families — including many working-poorfamilies — face housing costs that are unaffordably high.  Yet even as the need for low-income housing assistance has grown, the emergence of large budget deficits is creating growing pressure for significant cuts in domestic programs, including low-income housing programs.  Indeed, funding cuts have already contributed to the loss of more than 150,000 Section 8 housing vouchers and weakened efforts to rejuvenate and preserve the nation’s supply of public and private assisted housing for low-income families. 

Unfortunately, budget deficits are expected to persist over the next ten years and then — driven primarily by rising health care costs, the aging of the population, and recent tax cuts — to grow larger in succeeding decades.  The magnitude of the projected deficits and their probable economic impact are sufficiently great that Congress will be forced sooner or later to take major corrective action. 

This raises a critical question:  what type of actions will policymakers take to address the large budget shortfalls?  Unless policymakers address the shortfalls in a responsible, balanced manner that puts all parts of the budget (including taxes) on the table, deep cuts ultimately may be made in key safety-net programs for poor families, including low-income housing assistance programs.  Housing affordability problems could worsen sharply as a consequence.

This paper explores these issues.  It examines the implications of the mounting federal budget squeeze on the three largest federal sources of housing assistance for low-income families.  It finds that:

  • Large and growing numbers of low-income families face unaffordable housing costs.  Housing costs are placing heavy burdens on large numbers of low-income renter households, and these burdens have grown significantly since the start of the decade.  Recent Census data indicate that 8.8 million renter households with “low incomes” (i.e., below 80 percent of the median income in their state) pay more than half of their cash income for housing.  The number of such households with severe affordability problems has increased by 33 percent since 2000.

    High housing-cost burdens fall disproportionately on the poorest and most vulnerable people.  Nearly two-thirds of the low-income households that face severe housing-cost burdens — i.e., that pay more than 50 percent of their income for housing — have family members who are children, elderly, or people with disabilities.  And more than 70 percent of those with severe housing affordability problems have incomes below 30 percent of their state median income.  (Generally, 30 percent of the median income is roughly equivalent to the poverty line.)

    Severe housing-cost burdens can have a range of harmful consequences.  Families with severe housing-cost burdens face greater difficulty paying for food, medications, transportation, and other basic needs.  They are also more likely to be evicted from their homes and to suffer homelessness.  These effects can negatively affect family members’ nutrition and health, children’s educational development, and parents’ ability to maintain steady jobs.

  • Federal low-income housing assistance reduces housing affordability gaps.  Each year, the federal government spends more than three times as much on tax breaks for homeowners — with a large share of the resulting tax benefits going to upper-income households — as it spends on low-income housing assistance.  Moreover, federal low-income housing programs are not entitlement programs, and, due to funding limitations, they reach only a fraction of those who are poor enough to qualify for them.  Nevertheless, these programs enable roughly 5 million low-income households to secure decent, affordable housing.

    Most of these households are helped by one of four programs:  the Housing Choice Voucher Program (also known as “Section 8”), which provides families with vouchers they use to help pay for rental housing in the private market; project-based Section 8 rental assistance, which helps cover the operating costs of privately owned housing in order to make it affordable for low-income families; public housing, which provides affordable housing to nearly 1.2 million of the nation’s poorest families; or the USDA’s Section 515 Rural Rental Housing Program (which is usually combined with rental assistance from the Section 521 Rental Assistance Program).  All four of these programs provide rental assistance that reduces families’ housing costs to roughly 30 percent of their income, the standard of housing affordability for low-income families that is used by the Department of Housing and Urban Development (HUD).

    By providing subsidies that allow even the very poor to afford decent housing, these programs greatly increase the likelihood that families who are helped can find affordable housing.  These programs also free up income that impoverished families can use for basic food, medical care, transportation, and other items that can improve their health and their employment prospects.  In addition, evidence suggests that when housing assistance is integrated with well-designed work supports, it can help low-income families increase their employment and earnings. 

TABLE 1:
Major Federal Low-Income Housing Programs Assist Roughly Five Million Households
[2]

 

Housing Choice (Section 8) Voucher Program

Project-Based Section 8 Rental Assistance

Public Housing

Section 515 Rural Rental Housing Program And Section 521 Rental Assistance Program

Number of Housing Units, 2005

2,116,850
(authorized vouchers)

1,293,000

1,162,000

260,000

Funding,  FY 2005 (budget authority)

$14.8 billion

$5.3 billion

$5.2 billion

$692 million

  • The nation faces serious budget challenges, and the resulting budget squeeze already has led to cuts in low-income housing assistance.  The federal budget outlook has suffered a dramatic reversal over the past five years.  In January 2001, the nonpartisan Congressional Budget Office (CBO) projected $5.6 trillion in federal budget surpluses for the coming ten years (2002-2011).  In contrast, CBO’s most recent projections indicate that the federal government is likely to amass budget deficits of $3.2 trillion over the same 2002-2011 period, assuming that the recent tax cuts and measures to shield middle-class families from the Alternative Minimum Tax are extended.

    More than two-thirds of this negative budget swing of more than $8 trillion has been caused by legislation that Congress and the Administration have enacted, rather than by economic or other factors outside their control.  And the single largest cause has been the series of expensive tax cuts enacted since 2001.  The tax cuts, along with sharp increases in spending on defense and homeland security, account for nearly 85 percent of the cost of legislation enacted since 2001.  In contrast, changes in spending on domestic discretionary (i.e., non-entitlement) programs, such as low-income housing assistance, have had little impact on the deterioration in the federal budget outlook; they account for only 6 percent of the cost of legislation enacted since 2001. [3]

    Unfortunately, the budget outlook will grow considerably worse in coming decades, as federal health care expenditures (and to a lesser degree, Social Security costs) swell in response to both the rising numbers of retired Americans and the relentless rise in health care costs in the U.S. health care system, and as the tax cuts enacted earlier in this decade — some of which are still phasing in — take full effect.  The result will be large federal budget deficits that, if not addressed, will ultimately cause serious damage to the economy.

    This reemergence of large, persistent budget deficits, combined with efforts by the Administration and many in Congress to make most or all of the recent tax cuts permanent despite their large costs, is creating mounting pressure to cut domestic programs, including housing assistance for low-income families.  Beginning in fiscal year 2005, the President has proposed, and Congress has enacted, significant cuts in low-income housing assistance.  For fiscal year 2006, the amount of funding approved by Congress for affordable housing and community development programs in HUD was nearly $3.3 billion (or 8 percent) below the 2004 level, adjusted for inflation [4]

  • These cuts are being made at a time when increases in funding for some low-income housing assistance programs are needed simply to avoid cuts in the number of low-income families served.  Over the past six years, Congress has cancelled nearly $13 billion of previously appropriated but unspent HUD funds and has recycled the funding back into HUD programs.  This has significantly reduced the amount of new appropriations that the housing programs have needed.  There is reason to believe, however, that unspent funds available for recycling are drying up.  If so, Congress soon will have to start providing significantly more new funding for the programs each year (by raising the annual appropriations levels for the programs significantly) just to keep the total amount of funds available for the programs from shrinking.

    Funding increases also will be needed in the years ahead to renew long-term contracts HUD has signed with the private owners of approximately 300,000 housing units (mostly through the project-based Section 8 program) to make these units affordable to low-income tenants.  In the past, Congress provided upfront all of the financing needed to fund these rental assistance contracts throughout their full duration, which for most of these contracts was 20 to 40 years.  As a result, no new funding for these contracts has been needed in annual HUD appropriations bills.  But nearly halfof these long-term contracts are slated to expire over the next five years, and renewing them will require approximately $2 billion in new appropriationsover the coming five years.  (If some owners choose not to renew their federal rental assistance contracts, a similar amount of funding will be required to provide vouchers to households that otherwise could lose their homes.)
  • Funding cuts already are affecting low-income families and threatening to compromise major housing policy goals.  Since early 2004, funding shortfalls and policy changes in the Section 8 tenant-based voucher program have contributed to the loss of more than 150,000 vouchers, a loss unprecedented in the program’s history.  Moreover, steps taken by state and local housing agencies to adjust to these funding shortfalls have limited the housing choices available to many families with vouchers, compromising one of the program’s basic goals.

    Recent funding cuts also are undermining other housing policy goals, such as the preservation of the public housing stock, which remains an important source of affordable housing to families with very low incomes.  Over the past decade, the nation has experienced a net loss of approximately 170,000 public housing units to deterioration and decay, and much of the remaining public housing stock has substantial repair and rehabilitation needs that must be met if public housing is to be revitalized and preserved.  Efforts to meet this goal are being hindered, however, by a steep decline in funding for public housing; annual funding for public housing operating and capital costs fell by 25 percent between 1999 and 2006, after adjusting for inflation.  Without an infusion of new resources, the remaining 1.2 million public housing units, about half of which are home to people who are elderly or have serious disabilities, will continue to deteriorate.

    The 1.4 million units of privately ownedhousing supported by federal subsidies also face preservation challenges.  Roughly 300,000 units have already been lost over the past decade, mostly because owners decided not to renew contracts with HUD to provide units at rents affordable to low-income households.  Also, as noted above, about $2 billion in new appropriations will be required over the next five years to renew long-term contracts that cover an additional 300,000 units and are slated to expire during this period; it is unclear whether Congress and the President will provide these funds.

Meeting the housing needs of low-income families in the face of the long-term fiscal problems the nation faces will be a challenging task.  Doing so will require placing all of the budget — including tax cuts, special-interest tax breaks, and various spending programs that are protected by powerful constituencies — on the table, and reaching bipartisan agreement on a balanced mix of reductions in projected spending and increases in revenues.  Doing so also will require adherence to a principle espoused by David Stockman, President Reagan’s first budget director, in the 1980s:  Mr. Stockman said that when seeking to reduce the deficit, policymakers should go after “weak claims” that have been made on the federal Treasury, including weak claims made by powerful interests and constituencies, rather than politically “weak clients.”  Those who are weak politically include the low-income families assisted by the federal housing programs.

A balanced approach to deficit reduction is not foreign to American political culture.  It was successfully followed in the first half of the 1990s, for example.  The landmark deficit-reduction packages enacted in 1990 and 1993 each contained a mix of spending reductions and tax increases.  Moreover, those measures packaged spending reductions and revenue-raising measures together with increases in key anti-poverty initiatives.  The result was legislation that reduced deficits and poverty at the same time.  (The 1990 and 1993 legislation demonstrated that when all of the budget is put on the table, it is possible to secure sufficient savings to achieve large-scale deficit reduction, while reinvesting a portion of the savings in policies to reduce poverty.) 

This model needs to be followed in the future as well.  Those who are concerned with equity in our society and with the needs of low-income families in areas such as housing and health care will need to be involved in efforts to bring this about.

Click here to read the full-text PDF of this report (44pp.)

End Notes:

[1] This report was made possible through the generous support of the Fannie Mae Foundation.  The Fannie Mae Foundation is committed to the full and fair exposition of issues related to affordable housing and community development.  The opinions expressed in this publication are those of the authors and do not necessarily represent the views of the Fannie Mae Foundation or its officers or directors.

[2] See Appendix B for more detailed information and sources.

[3] The term “cost of legislation” refers to the cost of tax and spending bills as estimated by the Congressional Budget Office and the Congressional Joint Committee on Taxation, relative to the budget baseline.

[4] In addition, the President had proposed additional cuts in funding for HUD programs in 2007.  As this paper goes to press, Congress is considering final legislation to fund HUD and most other federal agencies for 2007.  Indications are that Congress will provide substantial increases in funding for Section 8 and public housing, though most other HUD programs will be funded at 2006 levels – and below those levels, once inflation is taken into account.

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