Using NSP3 to Meet Affordable Rental Demand

3.19.2012 | With new housing starts and pricing data due out today and tomorrow, we hope to see continued revival in the housing market. But often overlooked in the focus on housing, and the lurking foreclosures in the pipeline, is what has happened to the rental market. It’s getting much harder for families to find affordable rentals.

As Zillow, the real estate site, recently reported, rents were up 3% since January 2011 while  home values dropped 4.6%.  Recognizing the growing pressure to find affordable rentals, HUD is urging a focus on affordable rentals in its latest round of grants under the Neighborhood Stabilization Program. But as a recent report notes, their success in stimulating rental development has so far been modest at best.

With foreclosures and other economic pressures, many more individuals and families are renting today, driving up prices with the renewed demand.  As Zillow reports, only about 30% of U.S. metro areas were spared rental increases. See also Sarah’s post on affordable housing

Affordable rents–those that consume less than 30% of a household’s annual income– are particularly hard to find, for several reasons, as a recent report by the Center for Housing Policy explains. Homeowners who have recently lost their homes due to foreclosure or other economic hardships may need to rent either temporarily or permanently. Also, many rental properties were foreclosed on, boosting the number of renters looking for a new place and depleting the supply of rental units. Finally, development of multifamily units screeched to a halt with the recession, limiting supply even further.

As noted, HUD recently included a stipulation in its Neighborhood Stabilization Program (NSP) program to support the development of affordable rentals. As the Center for Housing Policy’s Zachary Patton and Maya Brennan report in “Rental Housing Activities in NSP3 Plans: How are Grantees Planning to Re-Use Foreclosed Properties to Meet Local Rental Demand?” [pdf], the $1 billion in NSP3 funding was “tied to statutory language imposing an additional requirement on grantees—that they establish procedures to create preferences for the development of affordable rental housing in their NSP3 programs. This requirement has not been strongly emphasized, however, and is open to many different interpretations.”

The NSP is a federal grant program administered by the HUD  to help stabilize communities with large numbers of foreclosures and prevent spillover effects in surrounding neighborhoods.

In general, NSP3 grantees can:

  • Establish financing mechanisms for the purchase and redevelopment of foreclosed residential properties;
  • Acquire and rehab abandoned or foreclosed residential properties in order to sell, rent, or redevelop them;
  • Establish and operate land banks for residential properties;
  • Demolish blighted structures;
  • Redevelop demolished or vacant properties as housing.

The Center for Housing Policy reviewed 251 NSP3 grantees, finding that 70% included rental housing in their plans. Of those, 79% planned to develop exclusively rentals, while another 25% planned mixed-use developments. Most planned for single-family rentals (one to four units). Nearly all (90%) say they plan to acquire and rehab foreclosures for future rentals.

Nearly six in ten of the 251 grantees were targeting very low income families, those earning at or below 50% of area median income.  (NSP3 funds must be used to benefit households earning no more than 120% of an area’s median income).

Fort Wayne, Indiana, is a case in point, and one of several case studies in the Center for Housing report.

Fort Wayne is planning for the immediate need for affordable rental housing as well as for the time when mortgage credit returns and people shift back to homeowners. Fort Wayne has traditionally been a city of homeowners, although vacancies had been a growing problem. The city is devoting one-third of its nearly $2.4 million NSP3 grant to support three developments, including Renaissance Pointe Homes, a 66 unit, mixed-income development. The units are all lease-purchase options, in which renters can put some of the rent and a $500 annual stipend toward eventual purchase. Units will all remain rental housing through the 15-year tax credit compliance period and will be converted to homeownership units after that.

As the Patton and Brenna note:

“Residents will have access to homeownership counseling and will be eligible to receive $500 per year for five years for use as downpayment assistance or home upgrades when they are ready to purchase a home.  The city refers to this financial assistance as an asset-building incentive.  Residents who are ready to buy a home before Renaissance Pointe can be converted from rental to homeownership units can apply their accrued asset-building incentives to pursue another homeownership opportunity in the neighborhood, which is located within a mile of downtown.  Through this approach, the city hopes to meet the area’s current housing needs while preparing both its residents and its housing stock for a return to Fort Wayne’s homeownership-focused market in the future.”

As Patton and Brennan also notes, Fort Wayne was ahead of the game in many ways. Prior to the foreclosure crisis, it had commissioned a housing market study to try to understand the shifting demographics and their impact on local housing needs. With this information as a baseline, it was easy to notice in 2010 the significant uptick in demand for rentals that was underway.

“Fort Wayne’s neighborhood stabilization strategies have been guided by the initial housing market study and the support of a mayor focused on resolving the city’s vacancy problem,” the Center for Housing Study reports. “When the first round of NSP was introduced, Fort Wayne had already mapped out its neighborhood stabilization approach, developed strategies (primarily focused on homeownership at the time), trained personnel, secured public buy-in, and identified sources of funding.  NSP funding enhanced their capacity to follow through on these efforts. The updated housing market study and addition of NSP3 funding have helped the city build on its existing efforts and address the newly identified demand for affordable rental housing.”

Fort Wayne’s success also turns on its cross-sector collaboration across both the public and private sectors. They’ve brought federal and state agencies to the table as well as real estate professionals, developers, bankers, community groups, and many others. The city’s deputy director of community development is convinced that this cross-sector collaboration is the reason for the success of the development efforts.

Patton and Brennan also conclude that collaboration is key, and often that collaboration will necessarily cross jurisdictional boundaries. Counties with little experience in affordable rental housing, for example, could partner with cities that have more direct experience. As we’ve written before, poverty is spreading to the suburbs, leaving many municipalities unprepared for the different set of needs lower-income families require, including affordable rentals.

Yet despite the foresight and success of Fort Wayne, the authors find that overall, the NSP3 stipulation has had little overall effect on boosting a focus on affordable rental housing. In round 1 of funding (that didn’t have the stipulation), 65% of grantees planned to construct at least one affordable rental unit. In round 3, that had only risen to 67%.

Plus, Read more about the challenges of building affordable rental housng:
REO & Vacant Properties: Strategies for Neighborhood Stabilization [pdf] (Federal Reserve)

Stabilizing Neighborhoods Impacted by Concentrated Foreclosures: Scattered-Site Rental Housing Challenges and Opportunities (NeighborWorks America and the Joint Center for Housing Studies of Harvard University)

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