Econsult Solutions, Inc. (ESI) Senior Vice President and Principal Peter Angelides, PH.D., presented at the Pennsylvania Intergovernmental Cooperation Authority's (PICA) fourth annual fall conference on Naturally Occurring Affordable Housing.

1. PICA Meeting
October 26, 2017
Peter Angelides, PhD, AICP
Naturally Occurring
Affordable Housing

2. 2 Outline
• Where does affordable housing come from?
• Some statistics on housing in Philadelphia
• Conclusions

3. 3 Origins of NOAF
• Naturally Occurring Affordable Housing (NOAF)
• MARKET RATE housing affordable to LMI
households
• Most housing affordable to LMI families is
market rate housing
• The main driver is “Filtering”

4. 4 Filtering: Overview
• Market forces make housing affordable to LMI
households
o Filtering: Houses decrease in price relative to
income and becomes affordable to LMI
families
o Upward filtering: previously affordable units
become unaffordable (e.g. gentrification)
• Well understood, widely observed

5. 5 Academic Literature
• “Filtering has long been considered the primary mechanism by which markets
supply low-income housing…the nation’s housing stock filters down at a rate of
roughly 1.9 percent per year in real terms”
– Rosenthal in American Economic Review (2014)
– “Filtering does occur in housing markets, and it is important quantitatively…”
– Weicher and Thibodeau in Journal of Urban Economics (1985)
– “The bottom third of families or thereabouts…are accommodated through the process
that housing experts know as “filtering”…By default and to some extent by the design of
policy makers, it has long been the process that has delivered shelter to tens of millions
of North Americans.”
– Harris in Social Science History (2013)
– “For more than 60 years, housing economists and urban geographers have
empirically researched filtering and shown that filtering is an important process through
which housing demand is met.”
– Clark in Encyclopedia of Geography (2010)

6. 6 Why Filtering?
• Physically older – entropy
• Design becomes dated
• Location is no longer in favor

7. 7
Houses decay due to age
• Systems need replacement
• Damage and wear and tear
Physical Decay

8. 8
Authentic Victorian
A Traditional Victorian Floor Plan
Dated Design

9. 9
Modern Victorian
Modern “Victorian” Floor Plan
Updated design reflects
modern preferences

10. 10
Characteristic
Authentic
Victorian
Modern
Victorian
Bedrooms 3 3
Bathrooms (full / half) 1 / 0 2 / 1
Servant’s Quarters Yes No
Kitchen Enclosed Open
Butler’s Pantry Yes No
Garage No Yes
Closets Few Many
Air Conditioning No Yes
All else being equal, a Modern Victorian is worth more
because it reflects modern preferences and lifestyles
Internal Design is Very Different

11. 11

12. 12 Location is Less Valuable
• Newly built houses are in “good” neighborhoods
– valuable enough to support new development
• Jobs move
• New transportation becomes available
• Newer investment occurs elsewhere

13. 13 Gentrification
• Gentrification occurs when locations come back
into favor
o Not as common, and needs to overcome physical
decay and obsolescence

14. 14 Observed during resale
New Sale 1 Sale 2 Sale 3 Sale 4 Sale 5
Price
(Compared to median income)
Housing Affordability
Example Housing Affordability Change Over Time
Time
Affordable to
LMI HH
Filters
here
Filtering
observed here

15. 15 Summary of Filtering
• Units decrease in value relative to income
• Filtering is the Normal State of Affairs
• Filtering supplies most housing affordable to LMI
households across the country
• Analogous to a conveyor belt:
o New housing starts at one end and as it travels down
the belt, it decreases in value (relative to income)
o At some point, it passes the “affordable to LMI” line
o Then it has filtered

16. 16 Affordability
• Affordability is measured against incomes
• FHA (Federal housing Administration) loans:
– The sum of the monthly mortgage and monthly tax
payments must be less than 31% of your gross (pre-
taxes) monthly salary.
– The sum of the monthly mortgage, monthly tax and
other monthly debt payments must be less than 43%
of your gross (pre-taxes) monthly salary.

17. 17 FHA Limits for 2017
PHILADELPHIA County
PHILADELPHIA-CAMDEN-WILMINGTON, PA-NJ-D
Single Duplex Tri-plex Four-plex
$379,500 $485,800 $587,250 $729,800
Lending Limits for FHA Loans in
Philadelphia County

18. 18 Affordability
• A unit is affordable if the annual cost <= 31% of income
Annual Cost Calculation
Principal
and Interest
Private
Mortgage
Insurance
(PMI)
Homeowne
s Insurance
Property
Taxes
Annual Cost

19. 19 Affordability Calculation
Affordability Rate Amount
Annual Income $40,000
Affordability Threshold 31% $12,400
Annual Cost Rate Amount
Purchase Price $145,286
Down payment 3.50% $5,085
Mortgage Amount $140,201
Principal and Interest 3.75% $7,792
Property tax 1.40% $2,034
PMI 0.80% $1,122
Homeowners Insurance 1.00% $1,453
Annual Cost $12,400
$12,400 <= $12,400


20. 20 Affordability at Different Income Levels
Income
Annual
Expenditure
Affordable
Price
$30,000 $9,300 $108,965
$40,000 $12,400 $145,286
$50,000 $15,500 $181,607
$60,000 $18,600 $217,929

21. 21 TESTIMONY OF PETER ANGELIDES, PHD, AICP – NEW JERSEY AFFORDABLE HOUSING NEED AND OBLIGATION
Assessed Value of Single Family Houses in Philadelphia

22. 22 TESTIMONY OF PETER ANGELIDES, PHD, AICP – NEW JERSEY AFFORDABLE HOUSING NEED AND OBLIGATION
Price Bands

23. 23 TESTIMONY OF PETER ANGELIDES, PHD, AICP – NEW JERSEY AFFORDABLE HOUSING NEED AND OBLIGATION
Single Family Houses Affordable at Different Income Levels

24. 24 TESTIMONY OF PETER ANGELIDES, PHD, AICP – NEW JERSEY AFFORDABLE HOUSING NEED AND OBLIGATION
Single Family Houses Affordable at Different Income Levels

25. 25 Number of SF Houses by Affordable Levels
Income
Affordable
Price
Number of
SF Houses Cumulative
$30,000 $108,965 209,961 209,961
$40,000 $145,286 78,414 288,375
$50,000 $181,607 53,852 342,227
$60,000 $217,929 37,865 380,092
Note: Values are from the Office of Property Assessment October, 2017

26. 26
Number of SF Houses by Affordable
Levels and Exterior Conditions
Exterior
Condition
Affordable Levels
$30,000 $40,000 $50,000 $60,000
More
than
$60,000
All
New/Rehabbed
3,271 2,013 1,719 2,044 14,502 23,549
Above Average 4,731 2,485 1,865 1,874 14,704 25,659
Average 185,327 72,695 49,533 33,651 39,965 381,171
Below Average 16,632 1,221 735 296 605 19,489
Total 209,961 78,414 53,852 37,865 69,776 449,868

27. 27 TESTIMONY OF PETER ANGELIDES, PHD, AICP – NEW JERSEY AFFORDABLE HOUSING NEED AND OBLIGATION
Upper North Philadelphia
• Address: 3731 North 15th Street, Philadelphia, PA
• Market Value: $82,900
• Income Band: $30,000

28. 28 TESTIMONY OF PETER ANGELIDES, PHD, AICP – NEW JERSEY AFFORDABLE HOUSING NEED AND OBLIGATION
Upper North Philadelphia
• Address: 1310 W Allegheny Ave, Philadelphia, PA
• Market Value: $100,700
• Income Band: $30,000

29. 29 TESTIMONY OF PETER ANGELIDES, PHD, AICP – NEW JERSEY AFFORDABLE HOUSING NEED AND OBLIGATION
Northeast Philadelphia
• Address: 1411s 4th St, Philadelphia, PA
• Market Value: $112,800
• Income Band: $40,000

30. 30 TESTIMONY OF PETER ANGELIDES, PHD, AICP – NEW JERSEY AFFORDABLE HOUSING NEED AND OBLIGATION
South Philadelphia
• Address: 1411s 4th St, Philadelphia, PA
• Market Value: $169,900
• Income Band: $50,000

31. 31 TESTIMONY OF PETER ANGELIDES, PHD, AICP – NEW JERSEY AFFORDABLE HOUSING NEED AND OBLIGATION
West Philadelphia
• Address: 342N 42nd St, Philadelphia, PA
• Market Value: $132,500
• Income Band: $40,000