Thursday, December 7, 2023

California's Experts on Affordable

Housing Finance, Advocacy & Policy

New HUD Rent Rule Expands Opportunities in California

Introduction

In late October, the federal Department of Housing and Urban Development (HUD) announced a major expansion of the mandatory use of zip code-based rent limits, referred to as Small Area Fair Market Rents (SAFMR), for the Housing Choice Voucher (HCV) program. The HCV program is the largest source of rental assistance in the country and actively serves over 300,000 households in California. In addition to the 24 metropolitan areas where SAFMRs are already mandatory in the administration of HCV – which include the Sacramento-Arden-Arcade-Roseville (Sacramento) and San Diego-Carlsbad-San Marcos (San Diego) metros in California – HUD will now require an additional 41 metros across the country to utilize SAFMRs. Three of these new mandatory metros are in California: Los Angeles-Long Beach-Glendale (Los Angeles), Oxnard-Thousand Oaks-Ventura (Oxnard), and San Jose-Sunnyvale-Santa Clara (San Jose).

HUD typically uses Fair Market Rents (FMRs) to help set subsidy limits for HCV holders for most jurisdictions, but SAFMRs were adopted in 2016 for a few metro areas to increase the accuracy of local rental cost estimates for the HCV program and to promote access to higher opportunity areas. FMRs are calculated at the metro level, while SAFMRs are calculated at the zip code level to better reflect local housing market conditions. During the COVID-19 pandemic, HUD began incorporating private rental data in their FMR and SAFMR estimates, and they are likely to continue this practice moving forward.

SAFMRs further HUD’s goal of increasing voucher usage in low-poverty opportunity areas, thus helping address the federal and state mandates to affirmatively further fair housing (AFFH). AFFH is a legal mandate to undo historic patterns of segregation and combat ongoing discrimination. The use of SAFMRs is primarily intended to help overcome patterns of segregation. As an AFFH strategy, the use of SAFMRs allows for increased subsidy caps in high-cost areas that would otherwise be out of reach for low-income households. For example, the San Diego-Carlsbad-San Marcos metro’s two-bedroom 2024 FMR is $2,833, while the equivalent SAFMR for zip code 92103 (San Diego) is $3,050. Housing authorities can set the voucher limits between 90 and 110 percent of the FMR or SAFMR, and many housing authorities request to increase voucher limits to 120 percent of FMR or SAFMR due to ongoing challenges related to rental market volatility.

The following newsletter provides an assessment conducted by the California Housing Partnership (Partnership) on recent changes in SAFMRs and FMRs – including the expansion of SAFMRs – and their implications for affordable housing in California. We hope that this analysis will provide key insights for our stakeholders and partners who will be impacted by these changes.



Assessment of Recent Changes in FMRs/SAFMRs

The Partnership analyzed both the recent changes in HUD’s FMR/SAFMR methodology and the impacts of SAFMR expansion in 2024.

Changes in FMR/SAFMR Rent Levels

When adjusting for inflation, California’s median SAFMR and FMR have continued to rise since 2016 while other states saw only modest increases, see below. Between 2016 and 2024, median SAFMRs increased by 32% and 15% for California and other states, respectively – while median FMRs increased by 14% and 5% for California and other states, respectively. California, like other states, saw a particularly sharp increase in both SAFMRs and FMRs between 2023 and 2024. The pandemic-era downturn in rents between 2021 and 2023 makes the jump back to pre-pandemic trends appear massive. In addition, metro areas across California experienced varying degrees of change in their FMRs. For example, the San Francisco metro area’s FMR outpaced all other California metro areas from 2012 through 2022 until it was surpassed by the Santa Cruz-Watsonville metro in 2023.

The new methodology, which introduced private rental data in FY 2023, does not alter the trend of either FMR or SAFMR estimates significantly. Per the chart below, the introduction of private data in 2023 appears to have minimal impact on the overall trajectory of both FMR and SAFMR estimates. HUD’s SAFMR estimates seem much closer to real-time private sources than FMR estimates. FMR estimates tend to lag significantly behind both CoStar and Zillow rent estimates. Conversely, SAFMR estimates match reasonably closely with CoStar estimates while lagging somewhat behind Zillow estimates. Given these results, SAFMRs calculated with private rental data may represent a promising approach to capturing a more accurate snapshot of rental market conditions.

Analysis of SAFMR Expansion in California

Mandatory SAFMRs will increase rent subsidy caps for the HCV program in metros across California. Prior to HUD’s recent announcement, since FY 2018 only the Sacramento and San Diego metro areas were required to utilize SAFMRs in their HCV programs. This policy impacted 10 public housing authorities (PHAs) located across these metro areas – meaning about 10% of the state’s PHAs are currently mandated to utilize SAFMRs. According to HUD, about 12% of allocated HCVs in California are currently mandated to use SAFMR standards. With the expansion to the Los Angeles, Oxnard, and San Jose metros, these proportions will likely increase significantly.

With the expansion of mandatory SAFMRs, some PHAs are concerned about maintaining contract rents in lower-rent zip codes while offering higher rents in higher-rent zip codes. In earlier evaluations of SAFMRs, HUD found that per unit costs stayed about the same or declined and further reported that per unit costs rose at the same rate in mandated SAFMR metro areas as in non-SAFMR metro areas. However, there has not yet been a full examination of the financial impacts of SAFMRs on PHAs, including those in the Sacramento or San Diego metros. More evidence is needed to understand the impacts that SAFMRs will have on PHA revenue.

While preliminary findings from HUD on initial SAFMR implementation found no impact on lease-up success rates for voucher holders, they do report that new voucher recipients are modestly more likely to move to low-poverty neighborhoods. Overall concentration in low-rent, high-poverty neighborhoods also declined. These modest effects support recent evidence that that higher payment standards are necessary, but not sufficient, to dramatically increase lease-up rates in higher opportunity areas and that supply issues, landlord acceptance of HCV, and barriers in the housing search process can impact lease-up in these areas. Support services, including navigation services, will be necessary to realize the full potential of SAFMRs.



The Partnership analyzed the potential impact of the SAFMR expansion on the Los Angeles, Oxnard, and San Jose metro areas – including the net change in potential affordable homes and possible AFFH implications. Our methodology for the analysis is based on the NYU Furman Center’s 2018 report that examined the transition from FMRs to SAFMRs nationwide.[1]

Across the Los Angeles, Oxnard, and San Jose metro areas, 27 PHAs administer over 130,000 vouchers through their respective HCV programs – the vast majority located in the Los Angeles metro area. Three of the 27 PHAs – the Housing Authority of the City of Los Angeles (HACLA), the Housing Authority of the City of Redondo Beach, and the Culver City Housing Authority – have already implemented SAFMR standards in several zip codes within their service areas. We removed those zip codes that already utilize SAFMRs from our overall analysis when estimating the net change in potential affordable homes.

In the transition from FMRs to mandatory SAFMRs, our analysis found that the Oxnard and San Jose metro areas would see a net increase in the number of potential affordable homes for voucher holders. The Los Angeles metro area would see a net decrease in potential affordable homes for voucher holders. The Los Angeles metro area already implements an SAFMR standard in many of the higher-rent zip codes, which likely impacted our results. Also, our analysis does not account for the impact of a “hold harmless” policy – which would maintain rent standards for voucher holders already living in areas where the applicable SAFMR is below the FMR. If we had controlled for a “hold harmless” in our analysis for the Los Angeles metro, we would likely see a reduction in the estimated impact of the transition from FMR to SAFMR on the number of potential affordable homes for voucher holders.

More jurisdictions transitioning to the SAFMR standard has significant AFFH implications for HCV recipients. Our analysis also shows that the share of affordable rental homes under the FMR standard is disproportionately high in both high-poverty and low-rent neighborhoods, while this share under the SAFMR standard is more equitably distributed. Under the new SAFMR standard, a voucher holder is equally able to find an affordable home in a high-rent/low-poverty neighborhood as they are to find one in a low-rent/high-poverty neighborhood. A considerable share of HCV recipients have historically lived in high-poverty neighborhoods, but with the new SAFMR standard many exclusionary and high-opportunity neighborhoods will become accessible to more lower-income households.

Conclusion and Recommendations

HUD’s recent technical and policy changes to SAFMRs and FMRs are welcome efforts to advance affordable housing for low-income Californians. The incorporation of private rental data ensures that HUD can stay current with the ever-fluctuating housing market in California, while the expansion of SAFMRs will both help increase accuracy and help the state meet its mandate to AFFH. Although we recognize that there will be tradeoffs in the transition to mandatory SAFMRs, the Partnership is overall supportive of HUD’s efforts.

The Partnership is concerned with the net reduction in affordable homes in the Los Angeles metro area. In addition to the hold harmless rule for existing tenants, we recommend that PHAs maintain higher payment standards in zip codes with SAFMRs below the FMR by utilizing either 110% or 120% (if permitted by HUD) of the payment standard in these zip codes to mitigate this loss.

To ensure that SAFMRs can successfully increase access to opportunity, we also recommend that PHAs provide mobility/navigation services to help families successfully move into high-rent/high-opportunity areas, as discussed in our 2021 AFFH policy brief. The recent Creating Moves to Opportunity experiment demonstrated how important these services are, beyond changes in payment standards, in helping families make these moves. HUD’s ongoing Community Choice Demonstration – which includes HACLA – is one example of government support for these services. Increased support for families during the housing search process as an effective way to build on higher payment standards and increase access to higher opportunity areas.

The Partnership is also concerned with potential increased costs or other unintended negative consequences that PHAs may bear in the transition to SAFMRs. We recommend that HUD make shortfall funding available to PHAs to help with the transition in case it is not budget neutral, particularly for those PHAs implementing hold harmless policies. In addition to the mobility services already recommended, this shortfall funding could help improve HCV lease-up rates and landlord acceptance of HCVs.

[1] Note that this analysis only considers the number of units with rents below the FMR or SAFMR payment standard according to the American Community Survey (ACS) and does not directly incorporate vacancy rates. However, HUD already accounts for low vacancy rates in addition to the number of rental units in higher rent zip codes when selecting mandatory SAFMR metros. Jurisdictions with low vacancy rates may particularly benefit from navigation services or similar programs to assist voucher holders. Further, our analysis uses FY 2023 SAFMR and FMR estimates as the underlying data for FY 2024 SAFMR estimates is not available.



To learn more about the data contained in this report, please contact Matt Alvarez-Nissen (mnissen@chpc.net), Senior Research/Policy Associate at the California Housing Partnership.

To learn more about the policy recommendations contained in this report, contact Mark Stivers (mstivers@chpc.net), Director of Legislative and Regulatory Advocacy at the California Housing Partnership.