The Fear of Building Low Income Housing in Poor Neighborhoods: A Study

The result of increasing income segregation and rising housing costs is government intervention in promoting affordable housing. Subsidized housing policies aim to facilitate low income households’ housing costs thus giving them access to financially poor neighborhoods. Simultaneously, subsidized housing is a location-based policy. Housing subsidies influence the financially-struggling households’ as to where they should live. As a result of this construction, there can be spillover onto the other residents that live in the neighborhood.

The following study provides a cost-benefit analysis with regards to affordable housing construction with the local resident’s and how it demographically varies within specific neighborhoods and sites. The study details the impacts of multifamily housing developments as a result of the Low Income Housing Tax Credit (LIHTC). As a government-created entity, LIHTC was established in 1986 as a component of the federal housing policy. Between 1987 and 2008, this program has funded 21-percent of all multifamily development. As publicly-run housing projects continue to decline, the LIHTC program will remain as a one the leading government initiatives to fund affordable housing for low income households.

This study further combines location data and funding dates for all LIHTC projects, home buyer race and income data and housing transaction information from 129 counties across the United States. Estimates show that the influence of affordable housing construction has drastically different effects on property values within a short proximity regardless of the housing being constructed in richer or poorer neighborhoods or if the area has a high share of minorities.

LIHTC Overview

Since being created in 1986, the LIHTC program has fostered the development of multifamily housing across the United States. The annual tax credit is estimates at over 8 billion dollars and has funded 21-percent of all multifamily development from 1987-2008. Each year, federal tax credits are earmarked to states based on population. To qualify, guidelines dictate that proposed projects must rent to those who earn 60-percent or less of the Area Median Gross Income (AGMI). Also, developers must restrict the rents within low income units to 30-percent of their income for a period of 30-years.

Data Sources

Data is derived from a variety of sources. DataQuick (now part of Corelogic) provided detailed public records housing characteristics alongside transactions data collected from the county assessor. This paper is study is restricted to those counties which have transactions history data from at least 1996 resulting in a sample size of around 16 million transactions within 1.5 miles of an LIHTC site.

LIHTC financed project data has been provided by the Department of Housing and Urban Development (HUD) and covers 39,094 projects across 2.4 million low income housing units from 1987 to 2012. This analysis centers on the 7,098 LIHTC projects located in 129 counties. Additionally, 1990 census data was gathered to present median income levels and minority population shares.

Price Effects

The study begins with analyzing reduced form price effects which were obtained by integrating gradient estimates. LIHTC sites can be divided into four buckets based on the 1990 census median income. The quartile cutoffs are $26,017, $38,177 and $54,642 (according to 2012 inflation). The block group average median income for the sample-size counties is $66,652. Per the LIHTC requirements, residents may not earn more than 60-percent of the local area’s median gross income which equates to $39,991. Therefore, the bottom quartile of sites have residents earning considerably below the cutoff with top quartile neighborhoods have median incomes $15,000 above the cutoff.

The study also examines the impact of LIHTC development in areas with a high amount of minorities. To further analyze the data, the study focuses on those LIHTC sites to population areas of at least 50% Black or Hispanic from the 1990 census. The sites are further classified based on income distribution, as defined by the first and second quartiles (low income) and third and fourth quartiles (high income).

Results

When combined, the results imply that LIHTC construction increases the desirability in low income neighborhoods while decreasing the desirability in high income, low minority neighborhoods. There are several explanations for this finding. If LIHTC development is the shock that causes the price changes, there are other indirect mechanism causing the impact. First, if local residents have preferences of demographics, LIHTC residents could further attract a diversity of residents making the neighborhood less desirable than its current state.

Second, LIHTC construction impact on low income, low minority share areas is insignificant. However, in low-income, high minority areas there is a statistically significant decline in the Black home buyer percentage. There are also considerable decreases in the black share of home buyers that fall into the high income, high minority site and areas. This reveals that constructing affordable housing in high minority areas likely leads to lower racial segregation. Finally, the impact of affordable housing develop on local crime statistics finds that violent and property crimes decline in low income areas no matter the minority share. On the other hand, high income areas do not see an increase in crime, property crime actually decreases slightly. A reduction in crime within low income areas is one of the primary mechanisms by which LIHTC improves the lower income neighborhoods.

Welfare

When observing LIHTC development solely as a place-based policy, estimates indicate that there are large welfare gains for development within low income areas. However, location influences the welfare of those tenants living within affordable housing. Statistically, development of affordable housing in low income areas improves economic welfare within low income households. At the same time, there are diminishing marginal returns when new housing is constructed in poor area when these policies are scaled accordingly as a place-based policy.

Conclusion

Results show that affordable housing development boasts a major welfare impact as a place-based policy which offsets the welfare impacts to those tenants living within affordable housing sites. Since the primary goal of affordable housing policies is to decrease racial and income segregation within housing markets, the goals can be achieved through investment in affordable housing within low income and high minority locations. As a result, this sparks in-migration of high income as well as racial diversity among the residents who live there thus benefiting the entire neighborhood through new investment and pumping additional money into the hyper-local economy.