Introduction to the Housing Voucher Program, 5/13/03

This analysis provides an introduction to the “Section 8” Housing Choice Voucher Program, covering the following key questions:

The Housing Choice Voucher Program (sometimes referred to as “Section 8” after the section of the U.S. Housing Act that authorized it) is the largest federal low-income housing assistance program. Families who are awarded vouchers use them to help pay the cost of renting housing on the open market. Because vouchers are provided to particular tenants to live where they choose, they are often referred to as “tenant-based” assistance. Vouchers can also be used to help families buy homes.

The voucher program is administered at the federal level by the Department of Housing and Urban Development (HUD). At the local level, the program is run by approximately 2,600 state, regional, and local housing agencies, known collectively as public housing agencies (PHAs). Many of these are independent public authorities, while others are part of city, county or state governments and thus are directly under the supervision of elected officials.

The Section 8 program was established in 1974 in the Nixon-Ford Administration. Major changes to the tenant-based portion of the program were made under legislation passed in 1984 (during the Reagan Administration) and in 1998. (In 1998, Congress merged the two previous components of the tenant-based section 8 program — certificates and vouchers — into a single housing program.)

There are currently 2.1 million housing vouchers. The voucher program is the only federal housing program serving low-income families that has grown with the population over the last 20 years. The emergence of vouchers as the centerpiece of federal low-income housing policy reflects a major shift during the last 30 years toward more market-based housing subsidies. Previously, the federal government had focused on supporting the construction of public housing or on subsidizing affordable private housing with project-based subsidies.

Housing vouchers are not an entitlement benefit. Because of funding limitations, only about one in four households that are eligible for vouchers receive any form of federal housing assistance. Most areas have long and growing waiting lists for vouchers, and many housing agencies have even stopped accepting new applications because of the size of the backlog.

The need for housing assistance is very great. A HUD analysis of Census data shows that in 1999 (the last year for which this analysis is available), nearly five million low-income households who did not receive housing assistance had “worst case housing needs,” which means they either paid more than half of their income for rent and utilities or lived in severely substandard rental housing. Most of the low-income families with “worst case” housing needs are working families. In addition, since housing costs have increased faster than incomes since 1999, the housing affordability problem is likely to be even more severe today.

Income eligibility limits for the voucher program are set as percentages of the local area median income. (Each year HUD calculates the median income, for households of different sizes, of every metropolitan area and rural county in the nation, and makes certain adjustments to these figures directed by law.) PHAs have substantial flexibility to determine which families they will serve, and are permitted to establish admission preferences based on household characteristics (preferences could, for example, favor local residents or families moving from welfare to work) or on housing needs such as homelessness.

Income limits: PHAs must set the overall income cap for families admitted to the voucher program between 50 percent and 80 percent of the area median income. (Nationally, 80 percent of median income is $45,200 for a family of four.) PHAs may only set the local eligibility limit above 50 percent of area median income (nationally, $28,250 for a family of four) if they state a reason for doing so in their annual plan for the voucher program. In practice this requirement does little to restrict the flexibility of PHAs in setting income limits.

Targeting to the neediest families: Housing agencies are required to ensure that 75 percent of households newly admitted to the voucher program each year have incomes at or below 30 percent of the area median. Nationally, 30 percent of median income is $16,950 for a family of four, or roughly equivalent to the poverty line.

HUD refers to households with incomes up to 80 percent of the area median as low-income households, those with incomes up to 50 percent of the area median as very low-income households, and those with incomes up to 30 percent of the area median as extremely low-income households.

Families can apply for vouchers at any agency that administers the voucher program. Vouchers become available when the agency receives new vouchers or families leave the program. (About 11 percent of vouchers “turnover” each year; the rate varies substantially across the county.) Waiting times are frequently very long; in 2000 the average wait for a voucher was 28 months. In many communities waiting lists are so long that the lists are closed to new applicants. A family that receives a voucher may use it either to help pay the rent of its current unit or to rent a different unit. In either case, the family must lease a unit with the voucher within a fixed period set by the housing agency (this period must be at least 60 days but is often longer) or the family will lose the voucher.

Once a family identifies a unit, the public housing agency must inspect the unit to determine that it meets the voucher program’s housing quality standards. In addition, the agency must certify that the rent is “reasonable” — that is, consistent with market rents for similar units in the local area. The agency then signs a contract with the landlord and makes monthly subsidy payments directly to the landlord. The landlord and the family also sign a lease agreement.

Landlords are under no obligation to rent to families with vouchers, although landlords who receive Low-Income Housing Tax Credits or some other federal subsidies are forbidden to discriminate against a family because it has a voucher. (Some states and localities also forbid unsubsidized landlords to discriminate against voucher holders.) Some families are not able to use their vouchers within the allowed time period, for reasons such as a shortage of affordable housing and the reluctance of some landlords to accept vouchers. If this occurs, the family loses the voucher and the housing agency awards it to a different family.

Studies have found that the proportion of voucher holders who are able to use their vouchers — known as the success rate — fell from 81 percent in the early 1990s to 69 percent in 2000. This decline appears to have reflected the tight housing markets in many areas at the time of the latter survey; anecdotal evidence suggests that success rates in some areas have risen substantially since 2000.

Special Types of Vouchers

Some vouchers, known as special purpose vouchers, were created to serve particular groups of families and are subject to special eligibility criteria, in addition to the normal voucher criteria. These include:

welfare-to-work vouchers, for current and former welfare recipients who are attempting to move to self-sufficiency;

family unification vouchers, which are provided to families in cases where the lack of adequate housing has caused (or is threatening to cause) a child to be removed from the family or has prevented a child from being reunited with the family;

disability vouchers, set aside to help people with disabilities live independently; and

tenant protection vouchers, for families that have been displaced from project-based subsidized housing units. (Most frequently, these families lived in project-based Section 8 buildings whose owners opted to leave the program when their contract expired or in public housing developments that were demolished or converted to mixed-income housing under the HOPE VI program.) Enhanced vouchers, a subcategory of tenant protection vouchers, are designed to ensure than tenants can afford to remain in buildings that left the project-based Section 8 program or prepaid a federally insured mortgage that had restricted rents.

Also, Congress in 1996 authorized a special demonstration known as Moving to Work, which allows 32 agencies to experiment with changes to the rules that apply to a portion or all of their vouchers to encourage families to move to self-sufficiency.

The percentage of a housing agency’s vouchers that are in use is referred to as the agency’s utilization rate. Housing agencies can attain a utilization rate that is at or close to 100 percent even if their success rate is low by “overissuing” vouchers, just as airlines over-book flights. For example, if one out of every five families typically is unable to use its voucher, the agency can issue five vouchers for every four it has the funds to support. As discussed below, agencies have access to reserve funds to cover their costs temporarily if an unexpectedly high number of families use their vouchers.

Largely because many housing agencies make effective use of overissuing, utilization rates are much higher than success rates. HUD reports indicate that 94 percent of vouchers were in use in fiscal year 2002, and HUD projects that utilization will rise to 95 percent in 2003 and 96 percent in 2004.

The amount of rent a voucher can cover is capped by a payment standard set by the housing agency. A housing agency is allowed to set the payment standard anywhere between 90 percent and 110 percent of the fair market rent, which is HUD’s estimate of the amount needed to cover the rent and utility costs of moderately priced housing units in the area. Housing agencies can set payment standards outside this range if they get HUD’s approval.

HUD sets fair market rents annually in each metropolitan area and non-metropolitan county for units with different numbers of bedrooms. In most areas, the fair market rent is set at an amount sufficient to pay rent and utility costs for 40 percent of the recently rented units in the area, excluding new units. In 1999, HUD determined that in 39 metropolitan areas, however, these “40^th percentile rents” were insufficient to enable voucher holders to rent housing outside a few low-cost neighborhoods. To avoid concentrating voucher holders in these neighborhoods, HUD now sets the fair market rent for those 39 areas at the 50^th percentile instead.

The amount that a voucher pays is based on: (1) the payment standard, (2) the actual rent and utility costs of the housing unit, and (3) the family’s annual “adjusted income,” which includes deductions for each child as well as any child care costs. (Households in which the head or spouse is elderly or has a disability receive a special deduction; and may have unreimbursed medical expenses and costs of assistance for a person with a disability deducted as well.)

While the great majority of vouchers are used for tenant-based rental assistance, agencies may use some vouchers to help families purchase homes or to provide project-based rental assistance. Homeownership vouchers are used to meet mortgage payments and other ongoing costs of homeownership. HUD has recently issued regulations that would allow one year’s worth of voucher payments to be used in a lump sum for a downpayment, if Congress specifies in an appropriations act that voucher funds may be used this way.

There is no limit to the proportion of its vouchers that an agency may allow to be used for homeownership, but agencies must still comply with the regular eligibility and targeting rules described above. As a result, most of the relatively few agencies that have implemented voucher homeownership programs use the new program feature to help families already receiving voucher assistance make the transition to homeownership.

An agency can also set aside up to 20 percent of its vouchers as project-based vouchers, which can be used only at a designated housing development. An agency may use project-based vouchers to support construction or rehabilitation of affordable housing (by guaranteeing the developer a steady stream of revenue that can help repay debts incurred during construction) or to ensure that affordable housing is available to voucher holders even when housing markets are tight. After one year, families living in project-based units are eligible to move to a unit of their choice using the first tenant-based voucher that becomes available.

The voucher program is funded entirely by the federal government. The annual funding each agency receives for existing vouchers is often referred to as “renewal funding” because it is technically provided through the renewal of an annual contract between HUD and the housing agency governing the use of voucher funds.

Each housing agency can receive funding only for the vouchers it is authorized to administer. An agency’s number of “authorized vouchers” is not determined by any single formula. Instead, it is essentially the sum of the vouchers that the agency has been awarded since the start of the voucher program.

The amount of funding each agency receives per voucher is based on the actual cost of its vouchers during the previous year, adjusted for inflation. For each voucher a family uses, the housing agency receives an administrative fee. The amount of administrative funding a housing agency receives is based on a formula that reflects local employment costs and other special costs of serving the families in its area.

Under a new system enacted by Congress for fiscal year 2003, agencies initially receive funding only for their vouchers that are actually in use. To obtain funding for additional vouchers that they are able to use (up to their total number of authorized vouchers), agencies must access a “central fund” that acts as a reserve. Housing agencies also have access to “program reserve” funds, which are assigned to individual agencies but held centrally in the federal treasury. Each agency is assigned a program reserve equal to one-twelfth of its total voucher funding and may obtain additional reserve funds if needed.

The central fund and program reserves are crucial to the voucher program because many of its costs are unpredictable. The cost of vouchers depends on local rents and the incomes of voucher holders, both of which can vary in unforeseen ways. In addition, shifts in local housing markets can enable more families to use their vouchers, causing an unexpected increase in an agency’s funding needs. Reserve funds enable agencies to respond to these developments without cutting back on the assistance they provide to current voucher holders.

Until fiscal year 2003, housing agencies could, and often did, receive funding for more vouchers than they were able to use. As a result, a number of agencies did not use all of their voucher funds. Unused funds have either been recaptured by HUD and used elsewhere in the Section 8 program or rescinded by Congress and used for other purposes. This problem appears to have been eliminated by the fiscal year 2003 appropriations act, which established the current system of funding only vouchers in use. It is expected, however, that through fiscal year 2004 HUD will continue to recapture some unspent funds awarded under the old system.

In most years Congress funds some new vouchers in addition to renewing existing ones. New vouchers generally receive separate funding allocations in appropriations bills. About 40 percent of new vouchers in recent years have been tenant protection vouchers (see box on page 4); since these vouchers act as replacements for lost project-based units, they do not actually lead to a net increase in federal housing assistance.

New vouchers that do not replace lost housing units are referred to as incremental vouchers. Most incremental vouchers are general-purpose vouchers, which HUD calls “fair share vouchers.” HUD distributes these vouchers among the states based on a formula and then allocates them to housing agencies within each state on a competitive basis. “Special purpose vouchers” other than tenant protection vouchers are generally awarded through national competitions.

A substantial amount of research indicates that vouchers are a highly effective form of housing assistance. A 2002 report by the U.S. General Accounting Office found that vouchers are more cost-effective than federal programs that build affordable housing for low-income households. In addition, a growing though not conclusive body of evidence suggests that housing vouchers promote positive outcomes for children and help families leave welfare and succeed in the workplace — by enabling families to move out of high-poverty areas and into neighborhoods with more jobs, lower crime, and better schools.

Based on these and other findings, the bipartisan, Congressionally-chartered Millennial Housing Commission strongly endorsed the voucher program in its May 2002 report, describing the program as “flexible, cost-effective, and successful in its mission."