Small Area FMR Paper Issued by Center on Budget and Policy Priorities

Responding to a HUD Federal Register notice seeking public comment regarding the use of small area Fair Market Rents (FMRs) (see Memo, 6/8), the Center on Budget and Policy Priorities (CBPP) issued a paper titled, “Neighborhood-Based Subsidy Caps Can Make Housing Vouchers More Efficient and Effective.” CPBB reports that early evidence suggests that small area FMRs (SAFMRs) enable voucher holders to move to lower-poverty, lower-crime neighborhoods. In addition, HUD’s plan to extend SAFMRs beyond six pilot areas would likely reduce voucher costs.

SAFMRs reflect rents in U.S. Postal Service ZIP code areas. The goal is to provide voucher tenants with subsidies more in line with neighborhood-scale rental markets, including subsidies that would be relatively higher if tenants move to areas where rents are higher but where there is better access to jobs, educational opportunities, transportation, and other services. HUD is only considering using SAFMRs for housing vouchers in a select areas where voucher holders are disproportionately concentrated in high-poverty areas and where a large share of rental units are in ZIP codes where SAFMRs would be more than 10% above or below the metropolitan FMR. HUD does not intend to use SAFMRs for other programs that use FMRs.

In the voucher program, the FMR is the basis for determining the “payment standard amount” used to calculate the maximum monthly subsidy for a voucher householder. Public Housing Agencies (PHAs) may establish their payment standards between 90% and 110% of the FMR. HUD calculates FMRs for all metropolitan and nonmetropolitan areas. A single FMR is used throughout an entire metropolitan area, even though these areas generally have many different housing submarkets.

Rents can vary greatly from one neighborhood to another; therefore, payment standards based on metropolitan-wide FMRs are often too low to cover market rents in some neighborhoods and can be higher than needed in others. When the payment standard in a neighborhood is too high, families can afford units that are larger or that have more amenities. In addition, owners can charge above-market rents, unless the PHA strictly enforces rules requiring rents to be reasonable for the local market. This reduces the cost-effectiveness of the voucher program and encourages families to use vouchers — and owners to accept them — in the lowest-rent neighborhoods. On the other hand, when the payment standard is too low, as is often the case for neighborhoods with low poverty, low crime, and high-performing schools, many families struggle to find units they can afford to rent with their voucher.

Use of metropolitan-wide FMRs is one reason that vouchers have not been as effective as they could be in enabling families to move to neighborhoods with low poverty rates. Just 20% of families with children in the voucher program live in low-poverty neighborhoods, those where fewer than 10% of residents are poor.

FMRs are usually set at the 40th percentile gross rent for typical rental units occupied by recent movers in the metropolitan area. Beginning in 2000, HUD began to set FMRs at the 50th percentile in some high-cost areas in order to help voucher households move out of areas of concentrated poverty. However, HUD acknowledges that using the 50th percentile FMR has proven to be inadequate to enable moves to areas of higher opportunity.

CBPP cites a study which found that between 2000 and 2010, voucher holders in the 50 largest metropolitan areas became more concentrated and more likely to live in neighborhoods with poverty rates at or above 30%, even though 50th percentile FMRs were used in most of those areas at some point. Another study frequently cited in the CBPP report, conducted by Robert Collinson and Peter Ganong, focused on the initial implementation of 50th percentile FMRs in 2001. Their study found that the main effect of using 50th percentile FMRS was increased costs without improved housing quality.

While PHAs in five areas have voluntarily participated in a HUD SAFMR demonstration (see Memo, 11/30/12), SAFMRs were first implemented in December 2010 in Dallas, which was required to participate as part of a civil rights lawsuit settlement. The lawsuit claimed that metropolitan-wide FMRs prevented minority voucher holders from moving to predominantly white neighborhoods with higher rents. Collinson and Ganong found that three years after Dallas switched to SAFMRs, people who used vouchers to move lived in neighborhoods with 17% less violent crime, and poverty rates 2 percentage points lower than they would have lived in under metropolitan-wide FMRs.

Collinson and Ganong found that the average annual cost of a voucher in Dallas fell by 5% ($375) from 2010 through 2014, as did the average voucher cost for the five PHAs in the SAFMR demonstration. In comparison, the average cost rose by 2% in Fort Worth, as well as nationally. CBPP estimates that if the 16 areas currently using the 50th percentile FMRs converted to SAFMRs, costs would be reduced by 10% ($130 million annually), but some of that cost saving would be offset by the added cost of some voucher holders moving to higher-rent neighborhoods. If SAFMRs are implemented nationally, CBPP estimates that voucher costs would drop by about 6% if voucher holders did not move to higher-cost neighborhoods. Since some households would move to lower-poverty, higher-rent neighborhoods, the actual savings would be less.

As NLIHC recommended to HUD in 2010 (see Memo, 7/16/10), CBPP urges HUD to phase in sharp FMR declines so that households do not suffer substantial rent increases.

NLIHC long has advocated for smaller FMR areas and supports HUD’s continued consideration of SAFMRs. NLIHC will submit comments prior to the July 2 deadline.

CBPP’s paper is at http://www.cbpp.org/research/housing/neighborhood-based-subsidy-caps-can-make-housing-vouchers-more-efficient-and

The June 2 Federal Register notice is at http://www.gpo.gov/fdsys/pkg/FR-2015-06-02/pdf/2015-13430.pdf