Quantifying Affordability

For more than two decades the cost of housing in America has risen faster than earned incomes. The affordability challenge created by this persistent imbalance is well understood, and the Home Ownership Affordability Monitor published by the Federal Reserve Bank of Atlanta readily makes this clear. The Fed team has created a simple yet insightful calculation by comparing the total cost of home ownership, including mortgage principal and interest, taxes and insurance for the median household in the United States to the total income of the median household. Since 2010 that share of household income has risen at a national level from a low of roughly 25% to more than 40% today.

This ratio of affordability is based on the “median” US household - the families right at the midpoint of all income earners. Those households earned approximately $90,000 annually in 2025. Yet, half of American households earned significantly less than that, making the challenge of affordability even harder. In some of the most economically challenged counties in the US, where some of the most vulnerable families live, the burden is acute. For example, in Auburn-Opelika, Alabama, Hinesville, Georgia, and New Orleans, Louisiana, the ratio approaches or exceeds 50%. In those states, where the median household income is even less than the national average, below 70,000, the rise in housing cost means a daily balancing of income just to meet the basic necessities of life. 

Lower-income wage earners experience this increasing challenge every day as they balance the financial demands of basic necessities of life, beginning with a roof over their heads. And, the response to this challenge has been notable and represents a mix of both policy initiatives and private capital. From a policy perspective, the most well known is the Low Income Housing Tax Credit provision of the 1986 Tax Reform Act, commonly known as LIHTC. Since then, according to the Tax Policy Center of the Brookings Institution, the United States under this program has supported over 3.5 Million units of affordable housing. Equally well known is the program administered by the Department of Housing and Urban Development, Tenant-Based Rental Assistance, more commonly known as Housing Choice Vouchers, which last year alone distributed more than $38 Billion to families in the United States.

In the private sector, the response has been significant as well. According to a survey by the New York Fed’s Case Study on Affordable Housing, Banks and Pension Funds provide more than half of all private capital to affordable housing - with banks providing more than $100B annually under the provisions of the Community Reinvestment Act alone. 

Yet, the need persists. 

The questions we hope to address are: why does this funding gap persists and, closely related to that, what are the opportunities for private investors who want to be part of the solution? We believe the answer lies in a fundamental misperception of the affordable housing investment sector, on a fundamental issue: the character of the investments available to private investors. 

Investors’ View

Generalist investors typically have viewed affordable housing as a monolithic allocation to an asset class, and one that produces either a low return, or provides a high degree of risk, both of which are significant misperceptions. In their 2025 paper “An Alpha in Affordable Housing?“, Sven Damen, Matthijs Korevaar and Stijn Van Nieuwerburgh from the University of Antwerp, Erasmus School of Economics and Columbia University found that both rental yield for multifamily housing and the net capital gains yield was materially higher for low-rent than for high-rent property investors. In total, they find that annualized total returns are 1.97% higher in Belgium, 3.73% in the Netherlands, and 4.15% in the United States for low-rent compared to high-rent properties. And, perhaps more importantly, they find that lower rent properties have a lower correlation to the business cycle than high-rent properties. In sum, affordable housing generates a higher return with less risk than traditional residential real estate.

It is this misperception of the characteristics of the returns in affordable housing investments, as well as a fundamental misunderstanding of the sector itself that drive a misallocation of resources, and an underfunding of an important investment sector

Current research efforts on affordable housing (e.g. HUD’s Worst Case Housing Needs: Report to Congress, New York Fed’s research cited previously), highlight the size of the problem in terms of:

• the affordability gap,

• the units of housing needed, and

• the associated capital required to "fill the gap".

No doubt, these are important measures to understand the scale of the problem. Yet, by treating the problem as one of scale, investors in the sector are led to assess opportunities as solving a singular problem, with a singular solution. This fails to reflect reality, as the affordable housing sector spans multiple opportunities: 

• ground-up development

• housing preservation

• housing types (as varied as mobile home communities and multifamily buildings)

• dedicated construction to mixed-use developments.

We believe that this broad lack of appreciation for the complexities of different solutions in the affordable housing sector inhibits capital flows two ways: first, as in any sector, generalities mask the return / risk tradeoffs in various sub sectors of affordable housing, which then inhibits many potential asset owners from entering the space. Second, this leads asset allocators who do have a commitment to affordable housing to restrain their commitments to a simple allocation into the space. That in turn leads to a concentration in the largest, most well known providers, who have limited capacity to deploy capital. Ultimately, the result is a lower sector aggregate allocation than warranted based on traditional risk / return frameworks.

Up Next

In the weeks ahead, in our next piece written in collaboration with some of the foremost thought leaders and innovators in the affordable and workforce housing sector, we hope to shed light on the different segments of the broader affordable housing sector. We will explore not only the return and risks associated with each segment, but also the dynamics of the sector, as well as the social benefits created for tenants and communities.