Section 8's Impact on Property Values

Section 8 of the Housing Act of 1937 is the federal rental assistance program created during the New Deal and continually operated since then by the Department of Housing and Urban Development. It provides funds to local housing authorities to augment the rent that low-income tenants pay to private-sector landlords. Qualifying tenants typically pay no more than 30% of their adjusted gross income on rent. Section 8 funds pay the balance. In some markets Section 8 is a major force, impacting the values of both individual buildings and neighborhoods.

In order to provide enough, but not too much, subsidy, HUD surveys market rents throughout the US. The maximum Section 8 rental rates, known as Fair Market Rents (FMR's), are determined by HUD on a district basis. The largest of these districts in Massachusetts is metropolitan Boston - which includes Boston, Quincy, Cambridge, Somerville, and many North Shore towns and cities. The Fair Market Rent is based on the 40% percentile level of surveyed market-rate rents in the district. The 2014 FMR in Greater Boston for a two-bedroom unit is $1,454 per month, including utility costs and allowances for provision of major appliances. This represents an increase of $10, or less than one percent, over the corresponding rent in 2013. Rents for other unit sizes are calculated as ratios of the two-bedroom rent. The 2014 FMR's for efficiency, one and three-bedroom units are $1,042, $1,164 and $1,781 respectively. The FMR is adjusted annually based on local rent data. HUD also determines the local average costs for utilities - with the base rent adjusted accordingly. Since landlords rarely include all utilities in the rent, the payment to the landlord is typically adjusted downward on a case-by-case basis.

Section 8 subsidies may be Tenant-Based or Project-Based, with major differences in how the system works for landlords.

The Project-Based Section 8 program commits landlords to offer certain units at the local Fair Market Rent for a given number of years, often ten years or more. This program is typically utilized by professional developers and investors who specialize in subsidized housing. Tenants pay below-market rent to the landlord, who in turn receives subsidy from the government in the form of direct payments, tax credits, or subsidized loans. Sometimes the negotiated Project-Based rents are set below the local FMR. On the other hand, housing authorities try hard to maintain Project-Based buildings in the system, and rent may also be allowed to rise above the FMR, in order to retain landlords within the program or to allow them to make building upgrades. In Boston there are approximately 215 buildings that receive Project-Based Section 8 subsidies, of which 54 are in Dorchester, 29 are in South Boston, and 40 are in Roxbury, with the remainder fairly evenly spread throughout all neighborhoods. The Project-Based buildings include income-restricted apartment buildings, as well as elderly and SRO facilities. Nationally approximately $10 billion is budgeted for Project-Based assistance in 2014.

Project-Based Section 8 buildings can create valuation issues for appraisers, especially when the properties are located in affluent neighborhoods. While current rents may be restricted, the potential exists for a return to market-rate rent when the Section 8 agreements expire or HUD loans are refinanced. It is important for an appraiser to examine the duration of commitments to housing authorities, subsidized lending programs, and tax credits that bind owners of buildings receiving Project-Based funds. If these commitments are soon to expire, the appropriate value of the property may be greater or less than the value based on current income and expenses.

Tenant-Based Section 8 vouchers are issued to tenants who can choose an apartment in any building that accepts Section 8 tenants and passes inspection. This program is also known as the "Housing Choice Voucher Program." The tenant can transfer his/her voucher to another building that meets the required standards and rent levels. Landlords are not required to participate in the program and can choose not to rent to Section 8 tenants. The program operates with direct subsidies, typically deposited directly each month into the owner's bank account. Landlords may have a mix of Section 8 and market-rate tenants in the same building. Nationally HUD has budgeted approximately $20 billion in tenant-based assistance to 2.1 million families in 2014.

The Tenant-Based Section 8 program works fairly simply for landlords, housing authorities, and tenants alike. Landlords who offer units to Section 8 tenants can remove units from the program at will when leases expire and are allowed to evict tenants for non-payment of rent, property damage and other lease infractions. Landlords have the right to screen and reject prospective tenants, subject to the prohibitions against discrimination. Units are inspected annually and must be well maintained to continue in the program. Tenants typically want to remain in the program and have a financial incentive to comply with regulations and not damage the building. Turnover and vacancy rates can be reduced since tenants tend to remain in place. Only a moderate degree of annual rent appreciation is usually allowed, which can cause Section 8 rents to lag behind if rent in a neighborhood starts to change rapidly. Local Housing Authorities determine annual rent increases, sometimes denying them to stretch their resources.

Housing authorities in less affluent parts of Metropolitan Boston such as Chelsea, Everett and Revere can set Section 8 rents below the FMR, with two bedroom units renting for $1,300 or less, plus utilities. Tenants who begin under Section 8 in one municipality may relocate to another town and carry their rental subsidy with them, sometimes paying rent that differs from market rent for that town. It is important for the appraiser to look at the actual rent roll rather than relying on the Fair Market Rent when determining rental income.

Housing authorities in less affluent parts of Metropolitan Boston such as Chelsea, Everett and Revere can set Section 8 rents below the FMR, with two bedroom units renting for $1,300 or less, plus utilities. Tenants who begin under Section 8 in one municipality may relocate to another town and carry their rental subsidy with them, sometimes paying rent that differs from market rent for that town. It is important for the appraiser to look at the actual rent roll rather than relying on the Fair Market Rent when determining rental income.

Since there is no mandate for building owners to accept Tenant-Based Section 8 tenants, very few participate where market-rate rents exceed the Fair Market Rent. This has reduced the amount of Tenant-Based housing available in Somerville, Cambridge, Charlestown, South Boston, and other newly affluent areas. Units available in the Tenant-Based Section 8 program are increasingly concentrated in the lower rent districts in the region: parts of Dorchester, Mattapan, Hyde Park, East Boston, Chelsea, Revere, Malden, Everett and Lynn.

In order to preserve Tenant-Based Section 8 housing the Boston Housing Authority will often allow landlords to charge rents as high as Section 8 allows, with rents that can exceed the localized market. On one hand, this preserves the supply of affordable Section 8 housing. On the other hand, as more units are leased to Section 8 tenants the vacancy rate declines, creating upward rental pressure on unsubsidized units. Within the past year unsubsidized market rate rents in Dorchester have risen until they meet or exceed the Fair Market level, increasing property values across the board. The Fair Market Rent is becoming the floor for market-rate rent in many of Boston's working class neighborhoods. While the climb to the Fair Market Rent level may have been rapid in these neighborhoods, further rent increases might revert to the rather slow annual increases in the overall FMR.

Section 8 subsidies have micro and macro impacts on residential property values. From an appraiser's or owner's perspective it is important to remember that while Fair Market Rent governs the income stream of the subject being valued, it may differ from the prevailing rent in the surrounding neighborhood. In low-rent neighborhoods that are transitioning upward, Section 8 can create upward pressure on unsubsidized rents, increasing the values of comparables. In downwardly transitioning urban areas the opposite may be true.

All property values depend on their surroundings. The appraiser needs to be aware of the micro impacts of the Section 8 program on individual buildings, while simultaneously examining Section 8's macro impact on the surrounding neighborhood.

Richard Graf, RA