The Brooke Amendment — a law otherwise known as “the 30 percent rule” that has shaped U.S. housing policy since the 1960s — is in the crosshairs as spending on real estate soars to record heights.

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At first glance, David Bieri seems like the classic economics professor — he frequently dons white dress shirts and red or blue perfectly-knotted ties topped with a coordinating vest and a single-breasted, woolen jacket.

His office walls are lined with hundreds of books about economics, urban planning, public and international affairs, and real estate, with the excess covering his desk, save for a few precious inches reserved for his desktop monitor, keyboard and a refreshing drink to soothe his British-inflected voice after a day of lectures and interviews.

David Bieri | VTU

Although you’d expect Bieri to approach the question of housing affordability through rote mathematics, the former finance executive instead spends his days waging war against the Brooke Amendment — a law that’s shaped the U.S. government’s housing affordability strategy for the past 54 years.

The amendment’s simple affordability threshold has helped millions of the lowest-income Americans avoid homelessness through Section 8, which limits their monthly rent contribution to 30 percent of their income. It’s also helped millions more Americans quickly calculate affordability as they rent or buy on the open market.

However, Bieri believes the threshold has become obsolete in an increasingly volatile economy where more than 19 million U.S. households already spend nearly 50 percent of their income on housing.

He and others have theorized swapping Brooke’s fixed ratio for a flexible liquidity and solvency model. But the idea has gotten little traction outside of passionate rap sessions between housing experts and academics, as lawmakers consistently underfund and overlook housing as a governmental priority.

“The first thing to bear in mind is that in economics, which is a social science, we never have fixed ratios of fixed numbers, right?” Bieri said. “Debating the optimal ratio or optimal number for whatever issue doesn’t make sense because such a thing never exists.”

The origin of the 30% rule

The Brooke Amendment was passed on the heels of the 1968 Fair Housing Act, which established anti-discrimination guidelines for public housing. While the 1968 Act lowered the barrier for renters who were denied housing because of demographics, it didn’t solve the issue of affordability.

In response to growing criticism from renters about exorbitant rent increases, Fair Housing Act co-author Senator Edward Brooke created the affordability threshold that would bear his name, which capped rent in public housing to 25 percent of household income before increasing to 30 percent in 1981.

Brooke has since become a rule of thumb beyond the public housing sphere as academics and financial experts used the amendment’s threshold as a simple way for the general public to understand affordability and easily balance their budgets.

Will Fischer, the Center on Budget and Policy Priorities’ senior director for Housing Policy and Research, said Brooke’s ubiquity outside of public housing is no surprise, as the original 25 percent threshold came from early 20th-century guidance about how to budget.

“[The original Brooke Amendment] 25 percent standard goes back way further than [1969] — it goes back at least to the 1920s and 30s and the idea was that people should spend one week’s worth of earnings a month on housing, and that kind of became a pretty widely used standard,” he said.

Although Bieri understands the public’s attraction to simple rules of thumb — which is seen in other financial advice like the 50/20/30 budget — he said they often don’t account for today’s economic landscape.

“Earnings have developed at a certain pace, and house prices have developed at a certain pace,” Bieri said. “The ratio of house prices to earnings right now are absolutely no longer what they were in the 1960s, so that ratio already doesn’t make sense from that perspective. Wages have developed at a much slower pace than house prices.”

For example, in 1970 — one year after the Brooke Amendment’s passage —  the median U.S. household income was $8,730 per year, and the median home price clocked in at $23,400. An archived article in The New York Times notes the typical household paid approximately $127 per month for a mortgage in 1970, equal to 18 percent of the homeowner’s monthly income.

However, a 1982 study from nonpartisan public policy nonprofit RAND notes the median income for homebuyers in 1970 was closer to the $20,000 mark, meaning an even smaller share of income went to housing costs.

Meanwhile, median rents reached $108 in 1970 — roughly 15 percent of the median U.S. household’s monthly income — a figure well within Brooke’s now-ubiquitous 25 percent affordability cap.

The following decades brought multiple economic crises, record inflation and unemployment rates, and a widening gap between wage growth and the cost of housing. A recent study published by real estate brokerage Clever reveals that from 1960 to 2020, the U.S. median home price increased 121 percent when adjusted for inflation. During the same time period, the median rent increased 72 percent and the median household income only rose 29 percent.

“[Housing affordability] is also a problem of the labor market,” Bieri said. “We wouldn’t have a housing affordability problem if wages had kept up with house prices.”

Drawing from his previous life as a financial executive, Bieri said he’s urging his students and fellow colleagues to think about affordability in terms of liquidity and solvency — a modus operandi he’s explained through 12 years of lectures, five peer-reviewed papers and multiple interviews with publications like CNBC and Fortune.

“A much more helpful way to look at things is not to look at the fixed [30 percent] ratio, but to look at how much housing people could afford if their income stopped,” he said. “The same way that we measure a corporation’s liquidity or solvency, you could think of housing affordability the same way.”

Solvency calculates a company’s ability to afford its long-term debts and expenses, and liquidity focuses on a company’s cash reserves and its ability to turn assets into cash easily, quickly and at a low cost. A healthy company has the cash reserves to cover its debts and expenses, even when revenue temporarily slows or stops.

There are multiple ways to calculate solvency, according to investment website Investopedia. However, Bieri relies on the most common ratio, which is when current assets (i.e. owned property that has value) exceed current liabilities (i.e. debts and financial obligations).

“How long can you hold your breath financially without losing a roof over your head? If your source of income dried up?” he added. “Earlier in the pandemic, a lot of the restaurants actually had very low solvency because they needed to generate income and the minute the income stopped, the whole music stopped.”

“For households, it might be much more useful to look at the cash flow,” he added. “Because the real risk is that once the income stops, how long can someone afford to stay in their home?”

‘That’s not a reason to walk away’

Will Fischer

While Bieri is ready to ditch the 30 percent rule, Fischer isn’t ready to discard the standard due to its simplicity and long track record. However, he understands that keeping monthly housing costs under 30 percent has been a long-foregone option for most.

“Rents have been rising a lot in recent decades and there’s a large percentage of households, roughly 50 percent, who pay over 30 percent and that’s much higher for people with low incomes,” he said. “The fact there are lots of people who are paying over 30 percent of their income for rent doesn’t mean that there’s a reason to walk away from that standard.”

“Instead we should be looking for ways to enable more people to rent housing at that rate,” he added.

While Fischer is at odds with Bieri about the usefulness of Brooke, they agree that affordability is a multi-layered issue that requires adequately funding assistance programs, increasing incomes and vastly improving the scale and quality of the U.S.’s housing stock.

“There are federal programs that are designed to help people afford housing, but because they’re deeply underfunded, only about one in four eligible households get that assistance,” Fischer said. “That’s really unfortunate because there’s evidence those programs make a really big difference. Those programs reduce rates of homelessness by about three-quarters among people who get housing vouchers.”

For Americans who don’t qualify for housing vouchers but are still extremely cost-burdened — households must make 50 percent to 80 percent less than their area median income to get HUD assistance — Fischer said overhauling zoning is one of the most impactful policy decisions that can be made to bring housing costs in alignment with current median wages and incomes.

“One big reason that rents have gone up so much in this country is that there are a lot of places that just have shortages of housing,” Fischer said. “[Builders] aren’t building enough new homes or apartments to keep pace with demand. The big part of the solution to that is changing zoning rules to make it easier to build more housing.”

Chart by Daniel Houston

Prior to the coronavirus pandemic, legislators in Minneapolis, Oregon, California, Nebraska and Virginia made headlines for their upzoning efforts, which would allow developers to build multifamily housing on land once reserved for single-family dwellings. While lawmakers in Minneapolis and Oregon were successful, efforts in other states have stalled.

“Local governments, in many ways, hold the key to solving the housing affordability problem, but they are very often the victims of extremely powerful entrenched political interests that don’t like dense development,” Bieri said. “What then happens is that housing is not in plentiful supply, because it’s so difficult to build. House prices go up.”

“To clear people’s guilty conscience at the local level, they just say, ‘Whoa, you know, there are these federal programs that are helping the poor, we don’t have to do anything,'” he added. “So in some ways, local governments are being bailed out by the federal government in that they don’t have to do anything, despite the fact that they’re the most effective and should be doing something about the lack of plentiful and affordable housing.”

Where’s the money?

Sarah Saadian

Although Fischer and Sarah Saadian, the senior vice president of public policy at the National Low Income Housing Coalition, said they wouldn’t use the term “bailout” to describe current federal housing assistance’s role in solving affordability issues, they acknowledged the current system needs an overhaul.

Fischer said he’d like to see more funding for the housing voucher program, which is better known as Section 8.

“The housing voucher program is the biggest and most well-targeted federal rental assistance program that isn’t going to expire, like the pandemic rule assistance,” Fischer said. “But because of funding limitations, there are really long waiting lists almost everywhere in the country.”

The Department of Housing and Urban Development unveiled the details for its fiscal year 2023 budget in September, which included a $1.6 billion request for 200,000 additional Section 8 housing vouchers along with several other policy changes to make securing a voucher easier.

The funding went into effect in April, with HUD Secretary Marcia Fudge announcing the Section 8 program would receive its biggest funding increase yet — $2.9 billion (up 10.5 percent from FY 2022) — with seniors, people with disabilities and working families with children poised to get the lion’s share of the help.

“Those vouchers will make a difference, quickly and effectively,” Fischer said. “That’s a key thing that’s in play right now.”

Chart by Daniel Houston

In the meantime, Fischer said wait times for vouchers can still be extremely long — something Americans witnessed firsthand when the federal government created a temporary rental assistance program to stave off the threat of an eviction tsunami.

“On average, people who get a voucher have to wait for two years beforehand, and lots of people have to wait way longer than that,” he said. “The solution is pretty straightforward — we need to find more vouchers to reach more of those people in need.”

Saadian agreed with Fischer’s focus on better funding for Section 8; however, she said, there are other federal programs that desperately need more money, such as the National Housing Trust Fund, which focuses on building, rehabilitating, preserving and operating rental housing for extremely low-income people.

“The problem is that there’s a market failure — the private sector on its own typically can’t build or operate housing that’s affordable to households for low-income [renters],” she said. “The only way that housing really gets built is if there are federal, state or local resources that are going into those developments.”

On May 3, HUD allocated $382 million for the Fund with states receiving a minimum of $3 million each. However, that’s small potatoes compared to the $80 billion President Joe Biden’s Build Back Better bill (which has morphed into the Inflation Reduction Act after some bipartisan wrangling) proposed to preserve and build public housing.

Saadian told Inman there are “clear places” where the federal government “could be stepping up to the scale of need by classifying housing as mandatory spending and dramatically raising the minimum wage.”

The last federal minimum wage increase was in 2009 when Congress raised it from $6.55 per hour to $7.25 per hour. Before that, there was an increase from $5.15 to $5.85 per hour in 2007 — breaking a 10-year run of no increases.

“We’ve gotten into this pattern where we let inflation just eat away at the minimum wage’s value instead of doing something to make sure that it’s still a more adequate wage for folks,” David Cooper, director of the economic analysis and research network at the EPI, told CNBC last July.

Saadian said the fight for a $15 federal minimum wage has gone on for so long that even that wouldn’t be enough to help Americans combat affordability issues. For example, California enacted a $15 minimum wage on Jan. 1, but a minimum wage worker clocking 40 hours per week only makes $31,200 pre-tax — $33,415 short of the annual income required to afford a median-priced, one-bedroom rental in the state.

“The most recent Out of Reach report that we put out, the average minimum wage worker would have to work 97 hours per week — so more than two full-time jobs — to afford a modest two-bedroom apartment at fair market rent,” she added. “Even in places that have higher minimum wages, we still see that struggle. Providing rental assistance and improving our housing stock has to happen in addition to raising wages.”

Focusing on the big picture

Bieri and Saadian agree there are better ways to think about affordability beyond the Brooke Amendment, but the move to shelve the 30-percent rule has been limited.

“I will say there have been conversations about whether there’s a better way to measure need because if you make $20,000, and you’re spending 30 percent of your income on rent, you’re in a very different position than if you make $150,000,” Saadian said, echoing Bieri’s preference for focusing on solvency. “But those conversations have been more [informal] among people who work in [the housing policy] space about whether we should measure how much money households have after they pay rent.”

Although it looks like the 30-percent rule is here to stay, Bieri, Fischer and Saadian say it’s important to focus on the range of solutions on the table rather than get locked into squabbles over the correct ratio or equation.

“I think the thing that’s really important for people to know is that unless we’re addressing the crisis for people with the very lowest incomes and the greatest needs, we’re never going to see an end to the housing crisis,” Saadian said. “If we’re not addressing those underlying causes, it’s going to have ripple effects for the rest of the market, and so that’s why I’ve encouraged people to think about solutions, like zoning, to make the change we need to happen.”

Bieri said the U.S. could learn quite a bit from Europe, where several governments regulate zoning on a federal level and have tax codes that create an even playing field for renters and homeowners — two things that increase density and undercut NIMBY-ism (not in my backyard) on local levels.

“Property taxes are tax deductible and mortgage interest payments are deductible and that immediately pitches homeowners against renters and it turns renters into second-class citizens,” he said. “Now, the fact that renters very often tend to be from minority households or lower-income households goes without saying, but we, through the Federal Tax Code, are propagating a society that distinguishes between whether you’re a renter or homeowner, and that makes it difficult for homeowners to support policies that benefit renters.”

On the federal level, Saadian said voters should reach out to their legislators about passing more robust renter protection laws, cracking down on source of income discrimination (e.g. housing vouchers),  regulating how much housing stock institutional investors can purchase and ensuring housing programs will be classified as mandatory spending.

“We continue to be worried about housing’s place in our federal strategy. There have been some big mistakes and big missed opportunities, given all of the dynamics I talked about today,” she said. “There are things being done on the local level, but that by itself is not enough to really end the housing crisis.

“For that, we have to look towards federal action and we need everybody’s help to get that done.”

Email Marian McPherson

homebuying | recession
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