More than 19% of Americans—more than 61 million people—live in so-called “areas of concentrated poverty,” which are defined by “persistently high poverty levels, low economic opportunity and high housing costs relative to income,” according to Freddie Mac.
This is significant because living in and growing up in poverty can have long-term impacts spanning from lower-quality education to lower quality health.
Freddie Mac suggests one solution for bringing economic mobility to areas of concentrated poverty is mixed-income housing, and the GSE has helped finance such developments. In a recent white paper, Freddie Mac explored the idea of mixed-income housing, highlighting a few successes as well as pointing out a few obstacles that could prevent these developments from succeeding in all “areas of concentrated poverty.”
“The development and transformation of an area of concentrated poverty can help revitalize the local economy by growing the tax base, leading to increased public investment and increased economic opportunity over time,” said Steve Guggenmos, VP of Multifamily Research and Modeling, Freddie Mac. “As these areas grow and develop, mixed-income and social impact housing are instrumental in encouraging residential economic diversity and preventing the displacement of long-time residents.”
Mixed-income housing properties offer units at market rate and other units below-market rate for lower-income tenants. Most often, the balance is 80/20, with 80% of units going at market rate and 20% reserved for low-income residents and available at a restricted rent level.
Freddie Mac noted that, “Ultimately, the optimal percentages of restricted and unrestricted units are dependent upon market conditions.” However, tipping the scales too far will prevent a property from being “economically feasible,” forcing rents on unrestricted units above market rate or potentially requiring more public subsidy than is available.
Public subsidies are often relied on in mixed-income housing. However, “socially conscious” private equity firms can also help with funding. One such firm, Turner Impact Capital, made the Regency Pointe mixed-income housing in the Washington D.C. metro area possible without a need for public subsidy, according to Freddie Mac.
Mixed-income housing can help improve affordable housing conditions for low-income residents, provide amenities for those residents, and help bolster an area’s economy, they come with limitations.
While speaking of the success of its mixed-income development investments, Freddie Mac also admitted, “fostering residential economic diversity and increasing access to opportunity for low-income residents through the development of mixed-income housing is ACPs is not an easy task.”
For a mixed-income development to be viable, the high-poverty area must also be attractive to higher earners, which means it should be in close proximity to a booming job market or perhaps be an area in the midst of revitalization, which is the case with several of the developments Freddie Mac has backed.