Subsidyscope

Structure of the U.S. Housing Sector

The Federal Role

Homeownership has long been viewed as a part of the American Dream, and the U.S. economy reflects that. Together, rental and owner-occupied housing encompasses a complex economic sector that contributed about 14 percent to the U.S. GDP in 2009.1

The U.S. government has long played a role in the availability and affordability of housing, intervening to support both supply and demand. In the early 1930s, the U.S. began building multi-family housing projects for use by low-income families.2 In addition, The Federal Housing Administration (FHA), created in 1934, gave middle- and low-income families access to mortgage markets and helped spur a broad increase in homeownership.3 Today, government housing programs have expanded and evolved to provide and maintain housing and house financing options for people at a variety of income levels.

This page provides a broad overview of the structure of the housing sector, with a focus on the federal government's role in producing, purchasing or renting housing. The government’s assistance to the housing market can be broadly grouped into three categories: rental housing, homeownership and block grants. Housing block grants are typically distributed to state or local entities with the discretion to determine the mix of rental and homeownership spending appropriate for their communities.4 Each of these three categories is described in more detail below.

Rental Housing Programs Help Millions

There is no single definition of “rental housing.” The term generally refers to a unit of housing that is used as a primary residence by a household that does not own the unit.5 Figure 1 shows that 86 percent of all housing units in the U.S. in 2009 were occupied. Of these occupied units, approximately 32 percent were home to renters.6

Many of the federal government’s initial activities in the rental housing market took place in the midst of the Great Depression. Programs like those enacted under the U.S. Housing Act of 1937 were designed both to create jobs and to improve unsafe or unsanitary housing conditions.7 The provision of decent housing, free of major physical problems related to heating, plumbing, electric or maintenance, remains a goal of many housing programs.8

According to a 2008 report from the Congressional Research Service (CRS), the largest housing problem today is a lack of affordability—housing that costs less than 30 percent of family income.9 In 2007, 8.6 million households lived in severely inadequate conditions or spent more than half their incomes on rent (described as ‘renters with severe problems’ in Figure 2 below)—about 24 percent of all renters that year.10 In that same year nearly 10 percent of rental units, on average, were vacant.11

The federal government employs a variety of programs to increase the supply of low-cost housing. In 2009, 73 percent of the $59 billion in federal grant funding in the housing sector went to rental programs; most of the remaining funding went to programs such as block grants that support both rental and homeownership activities (see Table 2 in Subsidyscope's direct expenditure page for more information).12 In 2007, these and other funds went to an estimated 5.2 million households.13

Figure 2: Housing Conditions of Renter and Owner Households in 2007

Source: Subsidyscope analysis of data from "Worst Case Housing Needs 2007." See: David L Hardiman et al. HUD. pp. 55-56, Tables A–1a, A-1b.

Note: HUD defines ‘severe problems’ as a rent burden that is more than 50% of income, or severely inadequate housing (serious physical problems related to heating, plumbing, electric or maintenance). 'Non-severe problems' are defined as a rent burden between 30% and 50% of income, moderately inadequate housing, or crowded housing.

Subsidies to Renters

Federal rental assistance primarily targets low-income households, defined by the U.S. Housing Act of 1937 as households that earn at or below 80 percent of the area median income.14 Several programs are specifically directed towards households with special needs, such as the elderly or persons with disabilities. For example, Shelter Plus Care funds programs that provide rental assistance payments to persons with serious mental illness or drug dependence.15 In addition, funding is available for certain populations, such as veterans, Native Americans, Native Hawaiians, and renters in rural areas.

Many rental assistance programs, including the well-known Section 8 Housing Choice Voucher Program, generally provide subsidies to a renter or a rental housing project so that tenants do not spend more than 30 percent of their income on rent.16

Subsidies to Developers of Rental Housing

In addition to subsidizing the rent paid by households for existing housing, the government also supports the maintenance and production of affordable rental housing. Through the 1950s, the federal government financed the construction of housing that was owned and managed by public housing agencies.17 Though government-owned civilian housing is no longer produced, some projects continue to receive operational support and are home to roughly 1.2 million families.18

In recent years, the production of low-income rental housing has been incentivized through programs that lower financing costs for private or nonprofit developers. Some programs directly lower costs through grants, such as the Section 202 program that provides funds to construct supportive housing for the elderly.19 Other programs allow the developer to access below-market interest rates on loans, either through direct loans (for example, in the Section 515 program) or through loan guarantees.20 Finally, tax provisions such as the Low Income Housing Tax Credit (LIHTC) or tax-exemption on housing revenue bonds provide incentives that ultimately lower the costs of developing affordable housing.21

In exchange for receiving assistance through these programs, developers are required to keep a certain portion of their rental units affordable to low-income renters.22 In many instances these programs overlap, providing multiple forms of assistance to a single project; for example, LIHTC units are sometimes paired with Housing Choice Vouchers to make them affordable to tenants with very low incomes.23

In addition to the efforts described above, the federal government supports homelessness prevention through the creation and operation of emergency shelters, transitional housing and group homes.24 HUD estimates that nearly 1.6 million people used an emergency shelter or transitional housing program during fiscal year 2009.25 Although these homelessness prevention activities may not directly affect the wider housing market to the extent the other programs mentioned here do, they provide a platform from which otherwise homeless individuals or families can re-enter the housing market.

Rehabilitating Rental Housing

While the government supports the production of new rental housing, it also works to keep existing units in the stock of affordable housing. It accomplishes this through programs that provide capital funds for rehabilitation or renovation of public or private housing units. For example, LIHTCs can be used to update and convert an existing building into a building with affordable units.26 In addition, the HOPE VI program funds the redevelopment of severely distressed public housing, often replacing it with mixed-income communities.27 As is the case when producing new units, developers using housing preservation funds are required to make a certain number of affordable units available to renters for a period of time after the rehabilitation is complete.

Federal Programs Promote Homeownership

The term “homeownership” can refer to a variety of situations, such as one family that owns several homes; a person who owns a house, but rents another as their primary residence; or a person who holds a mortgage for a home but doesn’t have any equity in the home. However, government assistance in the area of “homeownership” generally refers to a household which owns, or holds a mortgage for, their primary residence.

Of the 112 million units of housing occupied in 2009, 76 million were occupied by their owner.28 This contributed to an average homeownership rate in 2009 of about 67.4 percent.29 Although homeowners are often thought of as living in detached single-family homes, homeownership can occur in a variety of structures. For example, in 2009 nearly 1.3 million homeowners lived in buildings with more than twenty units, and 5.4 million lived in manufactured or mobile homes.30

The majority of owner-occupied homes in the U.S. have some type of mortgage on the property. In 2009, only about 32 percent (or 24 million) owner-occupied homes were owned free and clear without a mortgage.31 For the same year, the Federal Reserve estimated that the amount of outstanding home mortgage debt in the U.S. totaled $10.3 trillion dollars.32

Though the majority of homes in America are now owner-occupied, this was not always the case. The federal government began to support mortgage financing in the 1930s to promote homeownership, bolster lending institutions, and spur the economy.33 In 1930, the homeownership rate was about 48 percent; by 1950 the rate had grown to 55 percent.34 This increase in homeownership was assisted, among other factors, by government policies that helped build a national market for housing credit through the creation of entities like FHA, the Federal Homes Loan Banks (FHLB) and the Federal National Mortgage Association (Fannie Mae).35

Today, the government continues to support homeownership and mortgage markets through a variety of programs, with the additional goal of extending credit to underserved populations.36 While there is some grant assistance for homebuyers and homeowners, the overwhelming majority of government activity in this area focuses on the availability and affordability of mortgages. In fact, the largest housing subsidy reported by the government—the mortgage interest deduction (MID)—is a tax expenditure intended to reduce the costs of financing a home through debt. In fiscal year 2009, the MID lowered federal revenues by an estimated $79.4 billion. The MID and other activities are discussed further below.

Grant Assistance to Homebuyers

The government operates a handful of grant programs which help homebuyers obtain the resources needed to build or buy a home. The Self-Help Homeownership Opportunity Program, for example, provides low-income households who contribute labor or ‘sweat equity’ with assistance in buying (or renovating) their home.37 These grants are first awarded to nonprofits or other organizations, who in turn provide an average of up to $15,000 in assistance to recipient households.38

Widespread Government Efforts to Subsidize Mortgages

The vast majority of assistance to homebuyers and homeowners is conveyed through the tax code and through support of mortgage markets. For example, the First-Time Homebuyer Credit, first enacted with the 2008 Housing and Economic Recovery Act (HERA), encouraged homeownership by allowing a one-time tax credit of up to $7,500 to those buying their first home (it has since expired).39 Many of these programs, like the MID mentioned above, are not specifically targeted to first-time homebuyers. Certain benefits, such as mortgage credit certificates derived from state sales of tax-exempt revenue bonds, are means-tested—allowing only low- or moderate-income families to participate.40 However, the majority of tax breaks given to homeowners are based on the tax liability of the household, with some limitations. Thus, the higher the taxable income of the household, the more benefits they receive from the tax expenditure program.

The government operates multiple programs intended both to make mortgages more available and affordable, and to ensure liquidity in credit markets. The most visible of these are the government’s loan guarantee programs run by agencies such as the FHA, the Department of Veterans Affairs, and the Rural Housing Service. These programs guarantee certain types of mortgages sold to first-time or lower-income homebuyers, providing homeownership opportunities to many who can only provide a low downpayment and for whom financing would be too expensive or out of reach.41 In fiscal year 2009, the FHA alone insured more than 1.9 million single-family mortgages.42

Another tool widely used to supply below-market interest rates to homebuyers are tax-exempt mortgage bonds. States use the proceeds of these bonds, which are exempt from federal income tax, to provide mortgages to homebuyers at reduced interest rates.43 These loans are often made in conjunction with loan guarantees from programs like the FHA.44

The federal government also funds direct loan programs, such as that run by the Rural Housing Service, which provide mortgages at below-market interest rates directly to homebuyers.45 While less prevalent than federal loan guarantee programs, the government made about $4.1 billion in direct loan obligations in 2009.46

In addition to supporting a supply of more affordable loans, the government devotes significant resources to ensuring liquidity in the wider mortgage market.47 For example, the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) are privately owned companies chartered by the government to purchase mortgages and to create and guarantee mortgage-backed securities.48 According to the Congressional Budget Office, “their federal charters have allowed the two entities to borrow at interest rates lower than those paid by comparable finance companies…. The lower borrowing costs enjoyed by the two entities flowed to participants in the housing market in the form of lower mortgage rates and to the entities’ stockholders in the form of higher profits.”49

In the wake of the 2008 financial crisis, the government placed Fannie Mae and Freddie Mac into conservatorship in order to stabilize their declining financial conditions.50 According to the Federal Housing Finance Agency, the U.S. Department of the Treasury (Treasury) provided a net total of $135 billion to the through June 2010, with the cumulative amount projected to increase by a net $6 to $124 billion through 2013.51 Other government agencies have also estimated the costs of taking on Fannie Mae and Freddie Mac. For more information about the costs of conservatorship, as well as other federal actions intended to strengthen the mortgage market and the wider financial market as a whole, visit Subsidyscope's risk transfers page.

Government support of the mortgage market is not limited to Fannie Mae and Freddie Mac. Other federal efforts to ensure liquidity include the Federal Home Loan Banks, which loan funds to financial institutions to ensure the banks have adequate resources to provide mortgages.52 In addition, the Government National Mortgage Association (Ginnie Mae) guarantees pools of mortgages that are issued or guaranteed by the FHA and VA.53 For more information about these entities, visit Subsidyscope’s risk transfers page.

Helping People Keep Their Homes

The federal government operates programs that provide counseling and other assistance to homeowners in order to avoid foreclosure (as well as other services for homebuyers or renters).54 In 2007, federal foreclosure prevention activities began to increase in response to concerns over rising foreclosure rates.55 These programs are broadly intended to help homeowners keep their homes through loan modifications that, for example, reduce the interest rates or the principals on mortgages.56

Participation in these programs has varied.57 For example, the HOPE for Homeowner program, which offers certain mortgage holders at risk of default the option to refinance with FHA backing, reportedly closed only 50 new mortgages in its first 9 months.58 The program has since been modified, and it guaranteed $900 million in mortgages in fiscal year 2009 (see Table 2 in Subsidyscope's risk transfers page).59 A report from HUD and Treasury on a selection of other foreclosure programs estimated that they began 3.5 million modification arrangements between April 2009 and August 2010.60

In addition to counseling services, there are several programs which enable homeowners to renovate their homes. For example, HUD administers multiple programs that help homeowners (and renters) minimize or remove health hazards, such as lead paint, so that residents can remain in their homes.61

Block Grants Support Homeownership and Rental Housing

Although most federal housing grants are funneled to recipients through specific programs, the government also provides ‘block grants’ to states and local entities. Instead of dictating a specific use for each dollar, HUD block grants allow recipient governments to determine the best use of the funds according to the needs of their communities. Block grants such as the HOME Investment Partnership and Community Development Block Grants are allocated through formulas based on factors such as population size or need. In turn, those governments spend funds on priority housing needs (approved by HUD) and report the outcomes of their activities.62 HOME funds alone provided subsidies for 307,000 rental units over a fifteen year period ending in 2007.63 Due to the flexible nature of these funds, Subsidyscope does not classify them as either rental housing assistance or homeownership assistance.

1. Subsidyscope analysis of data from the Bureau of Economic Analysis (BEA). Calculated by summing “Housing and Utilities” consumption and “Residential” private investment from “Table 1.5.5. Gross Domestic Product, Expanded Detail” of BEA’s NIPA tables. Utilities were excluded from this estimation by subtracting “Household Utilities” (found in "Table 2.4.5. Personal Consumption Expenditures by Type of Product"). See Bureau of Economic Analysis. "All NIPA Tables."
2. Maggie McCarty et al. Congressional Research Service (CRS). "Overview of Federal Housing Assistance Programs and Policy." July 22, 2008. p. 2.
3. Government Accountability Office (GAO). "Federal Housing Administration: Decline in the Agency's Market Share was Associated with Product and Process Developments of Other Mortgage Market Participants." June 2007. p. 6.
4. For an example, see the Community Development Block Grant (CDBG) program or the HOME Investments Partnerships program.
5. See the U.S. Census glossary for one definition of "renter-occupied housing."
6. Calculated by dividing 35,378 renters by 111,806 occupied housing units. See the U.S. Census Bureau. "American Housing Survey National Tables: 2009." Introductory Characteristics Table 1-1.
7. Maggie McCarty et al. CRS. "Overview of Federal Housing Assistance Programs and Policy." July 22, 2008. pp. 1-2.
8. David L. Hardiman et al. HUD. "Worst Case Housing Needs 2007." May 2010. p. 6.
9. Maggie McCarty et al. CRS. "Overview of Federal Housing Assistance Programs and Policy." July 22, 2008. p. Summary. For more information about determining affordability, see: David L. Hardiman et al. HUD. "Worst Case Housing Needs 2007." May 2010. pp. 7, 91.
10. According to HUD, "severely inadequate housing includes a variety of serious physical problems related to heating, plumbing, electric, or maintenance." David L. Hardiman et al. HUD. "Worst Case Housing Needs 2007." May 2010. pp. 1, 55, Table A–1a.
11. Rental vacancy rate averaged from figures in Table 1 of the U.S. Census Bureau's "Housing Vacancies and Homeownership (CPS/HVS)." Based on 2007 data, HUD concluded that there is a mismatch between the number of renters with extremely low incomes and the supply of decent affordable housing available to those renters. HUD further estimates that, as of 2007, there are only 44.2 available, affordable units for every 100 extremely low-income households. Adequacy of housing is also an issue, with HUD noting that “if physically adequate units are required, only 37.4 are available per 100 extremely low-income households.” See: David L. Hardiman et al. HUD. "Worst Case Housing Needs 2007." May 2010. pp. viii, 25.
12. Subsidyscope analysis of data from USASpending.gov
13. The number of renters receiving housing assistance includes those receiving federal, state and local assistance. See: David L. Hardiman et al. HUD. "Worst Case Housing Needs 2007." May 2010. p. 55, Table A–1a. For more information, see page 90.
14. Though this definition of ‘low-income’ is widely used to determine eligibility for government housing assistance, many programs target assistance to households earning at or below 80% of the area median income. See: David L. Hardiman et al. HUD. "Worst Case Housing Needs 2007." May 2010. p. 48. For an example, see the "Low-Income Housing Tax Credit program, described on page 14 of the "Overview of Federal Housing Assistance Programs and Policy." Maggie McCarty et al. CRS. July 22, 2008.
15. Catalog of Federal Domestic Assistance. "Shelter Plus Care."
16. David L. Hardiman et al. HUD. "Worst Case Housing Needs 2007." May 2010. p. 50.
17. Quigley, John M. "Just Suppose: Housing Subsidies for Low-Income Renters." March 2007. p. 2.
18. Maggie McCarty et al. CRS. "Overview of Federal Housing Assistance Programs and Policy." July 22, 2008. p. 9; and GAO. "Comparing the Characteristics and Costs of Housing Programs." January 2002. pp. 6-7. These estimates vary. HUD estimates that local public housing agencies provide housing for 1.1 million families. See: David L. Hardiman et al. HUD. "Worst Case Housing Needs 2007." May 2010. p. 50.
19. Maggie McCarty et al. CRS. "Overview of Federal Housing Assistance Programs and Policy." July 22, 2008. p. 12.
20. GAO. "Comparing the Characteristics and Costs of Housing Programs." January 2002. p. 2; and Maggie McCarty et al. CRS. "The Department of Housing and Urban Development (HUD): FY2011 Appropriations." July 26, 2010. p. 1.
21. Maggie McCarty et al. CRS. "Overview of Federal Housing Assistance Programs and Policy." July 22, 2008. pp. 14-15.
22. Ibid., pp. 12, 14.
23. GAO. "Comparing the Characteristics and Costs of Housing Programs." January 2002. p. 6.
24. Perl, Libby. CRS. "The HUD Homeless Assistance Grants: Distribution of Funds." July 8, 2009. p. Summary.
25. HUD. "The 2009 Annual Homeless Assessment Report to Congress." June 2010. p. iii.
26. Keightley, Mark P. CRS. "Introduction to the Design of the Low-Income Housing Tax Credit." May 21, 2009. p. 1.
27. McCarty, Maggie. CRS. "HOPE VI Public Housing Revitalization Program: Background, Funding, and Issues." January 17, 2009. p. Summary.
28. U.S. Census Bureau. "American Housing Survey National Tables: 2009." Introductory Characteristics Table 1-1.
29. U.S. Census Bureau. "Housing Vacancies and Home Ownership (CPS/HVS)." Table 5: Home Ownership Rates for the U.S.: 1965-2009. The homeownership estimates are derived from CPS/HVS (rather than the American Housing Survey, AHS) as it is one of the principal purposes of that survey. The principal purpose of the AHS is to provide more information about size, composition and state of housing. For more information about these two data sources, see: U.S. Census Bureau. "Housing Topics." Last Updated: December 2, 2004.
30. U.S. Census Bureau. "American Housing Survey National Tables: 2009." Introductory Characteristics Table 1-1.
31. Ibid., Mortgage Characteristics Table 3-15.
32. The Federal Reserve estimates that outstanding mortgage debt includes mortgages on 1-4 family properties, including farm houses. It excludes multi-family residential debt, which is defined as "loans on structures of five or more units." See: FRB. "Flow of Funds Accounts of the United States." Debt growth, borrowing and debt outstanding tables. September 17, 2010. p. 9. For more information, see p. 96, Level Tables.
33. GAO. "Federal Housing Administration: Decline in the Agency's Market Share was Associated with Product and Process Developments of Other Mortgage Market Participants." June 2007. p. 6.
34. Slivinski, Stephen. "House Bias: The Economic Consequences of Subsidizing Homeownership." Fall 2008. p. 13.
35. Ibid.
36. GAO. "Federal Housing Administration: Decline in the Agency's Market Share was Associated with Product and Process Developments of Other Mortgage Market Participants." June 2007. p. 6; and Office of Management and Budget (OMB). "Analytical Perspectives Fiscal Year 2011." p. 349.
37. HUD. "Notice of Funding Available for Fiscal Year 2009 for Self-Help Home Ownership Opportunity Program (SHOP)." June 12, 2009. pp. 3-4.
38. Catalog of Federal Domestic Assistance. "Self-Help Home Ownership Opportunity Program."
39. The First-Time Homebuyer Credit was later expanded by legislation that increased the credit limit to $8,000, and enabled long-time homeowners buying new homes to qualify for the credit, among other changes. For more information, see: GAO. "Tax Administration: Usage and Selected Analyses of the First-Time Homebuyer Credit." September 2, 2010. pp. 1, 3.
40. Maggie McCarty et al. CRS. "Overview of Federal Housing Assistance Programs and Policy." July 22, 2008. p. 15; and National Association of Home Builders (NAHB). “Mortgage Revenue Bonds and Mortgage Credit Certificates."
41. Maggie McCarty et al. CRS. "Overview of Federal Housing Assistance Programs and Policy." July 22, 2008. p. 19.
42. HUD. "Federal Housing Administration Annual Management Report Fiscal Year 2009." p. 6.
43. Maggie McCarty et al. CRS. "Overview of Federal Housing Assistance Programs and Policy." July 22, 2008. p. 15.
44. National Council of State Housing Agencies (NCSHA). "FHA Insurance."
45. Foote, Bruce E. CRS. "USDA Rural Housing Programs: An Overview." May 11, 2006. p. 3.
46. Subsidyscope analysis of data from the Federal Credit Supplement. p. 1, Table 1.
47. OMB. "Analytical Perspectives Fiscal Year 2011." p. 346.
48. Congressional Budget Office (CBO). "The Budget and Economic Outlook: An Update." August 2010. pp. 89-90.
49. CBO. "CBO's Budgetary Treatment of Fannie Mae and Freddie Mac." January 2010. p. 4.
50. OMB. "Analytical Perspectives Fiscal Year 2011." pp. 349-350.
51. Subsidyscope analysis of data from the Federal Housing Finance Agency (FHFA). "FHFA Releases Projections Showing Range of Potential Draws for Fannie Mae and Freddie Mac." October 21, 2010. p. 10. These amounts net out dividend payments made to Treasury totaling $12.8 billion (for a gross of $148 billion) through June 2010, and projected dividend payments between $67 and $91 billion (for a gross between $73 and $215 billion) through 2013. See: Table 1: Quarterly Draws on Treasury Commitments to Fannie Mae and Freddie Mac per the Senior Preferred Stock Purchase Agreements and Table 2: Dividends on Enterprise Draws from Treasury in "Data as of October 1, 2010 on Treasury and Federal Reserve Purchase Programs for GSE and Mortgage Related-Securities."
52. OMB. "Analytical Perspectives Fiscal Year 2011." p. 349.
53. Government National Mortgage Association (Ginnie Mae). "About Ginnie Mae;" and CBO. "The Budget and Economic Outlook: An Update." August 2010. p. 90.
54. Maggie McCarty et al. CRS. "The Department of Housing and Urban Development (HUD): FY2011 Appropriations." July 26, 2010. p. 24.
55. HUD. "Report to Congress on the Root Causes of the Foreclosure Crisis." January 2010. p. 44.
56. Webel, Baird and Edward V. Murphy. CRS. "The Emergency Economic Stabilization Act and Current Financial Turmoil: Issues and Analysis." October 31, 2008. p. 5.
57. For more information about these programs, see: OMB. "Analytical Perspectives Fiscal Year 2011." p. 347; and HUD. "Report to Congress on the Root Causes of the Foreclosure Crisis." January 2010. p. 45.
58. Jones, Katie. CRS. "Preserving Homeownership: Foreclosure Prevention Initiatives." August 28, 2009. pp. 12-14.
59. Jones, Katie. CRS. "Preserving Homeownership: Foreclosure Prevention Initiatives." August 28, 2009. p. 13; and OMB. "Federal Credit Supplement Fiscal Year 2010." p. 9.
60. This estimate includes trial modifications that have not yet been made permanent. See: HUD and U.S. Department of the Treasury. "The Obama Administration's Efforts to Stabilize the Housing Market and Help American Homeowners." October 2010. p. 1.
61. HUD. "Grant Programs at OHHLHC." Last Updated: January 30, 2008.
62. Maggie McCarty et al. CRS. "Overview of Federal Housing Assistance Programs and Policy." July 22, 2008. pp. 15-16.
63. David L. Hardiman et al. HUD. "Worst Case Housing Needs 2007." May 2010. p. 51.

Last updated March 30, 2011.