Is Section 8 About to See its Biggest Expansion Ever?

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Section 8 is a maelstrom rotating ominously at the intersection of economics and politics. Let’s just bring up the elephant in the room: Section 8 is one of the most divisive topics in the real estate industry.

Some people despise Section 8 on philosophical or political grounds. Some people love Section 8 and believe it fills a desperate need in this country. Others are simply agnostic—they take it for what it is and plan accordingly. 

Despite the hurdles preventing an objective conversation about Section 8, it’s worth an attempt because we may be on the precipice of the largest expansion ever to the Housing Choice Voucher—or Section 8—program. And if President Biden’s campaign proposals and recently proposed legislation actually make it to the political finish line, there could be entirely new federal programs to help tenants pay rent and buyers purchase their first home. 

These things will take years to play out if they occur… and they could just as easily evaporate into thin air. It’s a messy issue, as most issues get when dealing with money and politics. 

But few could argue that we don’t have a housing problem in this country. Specifically, we have a shortage of available, affordable housing units for low-income families. Our shortage has led to so many of the Section 8 biases that real estate investors and property owners carry around with them: run-down buildings concentrated in areas that deflate property values and poorly managed local housing authorities—all of which create a negative feedback loom, making systemic progress seem untenable. 

So let’s hold our noses together and head into the maelstrom. The ramifications are important.

What’s happening now

Section 8 is managed at the local level by thousands of state and regional housing authorities, but all the money flows from the top—the federal government’s Department of Housing and Urban Development (HUD). 

As of 2020, about 2.2 million households are part of Section 8 and receive vouchers for rent assistance. Just under 70% of these vouchers go to the elderly, the disabled, and families with young children. And only about 20% of families who qualify for vouchers can actually get them. The Biden Administration wants to essentially “fully fund” Section 8, meaning that every household who qualifies can get a voucher. 

HUD administered just over $25 billion of its roughly $55 billion total budget to housing vouchers in 2020. The Biden administration is attempting to add about $5 billion to the budget for the current fiscal year, which will help about 200,000 more families join the voucher program. But getting a big, transformative increase through Congress will cost a lot of money—roughly $400 billion over 10 years, according to some early Congressional Budget Office (CBO) estimates. 

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The political backdrop

Biden’s campaign proposal was to spend $640 billion over 10 years to address the home ownership gap. This is between:

• People who need rent and home buying assistance—generally, those who spend more than 30% of their monthly income on rent, or who make less than 50% of a region’s median income, and
• The roaring housing market, where rents and prices are rising faster than GDP growth and faster than wages. 

The Biden administration first tried to get the money passed through the Infrastructure Bill, but the inevitable political bartering led to a very watered-down package passing to the Senate. The next attempt to increase HUD funding will be through budget reconciliation, which the Democrats can theoretically do in the Senate with a simple majority. 

We shall see. Many pitfalls lie in wait. But the initial political will appears to be strong. There’s also new bills being drafted which would explicitly increase vouchers by  $3 to $4 million over the next few years, if passed. This alone would double the current program size, if not more. 

COVID has us rethinking economics

The repercussions of COVID have touched more than just health and safety matters—the pandemic is increasingly becoming an economic and political force. Perhaps most importantly, the pandemic has ushered in a new philosophical approach to government spending. 

We’ve seen two massive stimulus programs, both of which had a large slice of housing relief and housing support—things like rent forgiveness, mortgage forbearance, moratoriums, and direct financial support of mortgage-backed securities. We did the stimulus and it didn’t break anything, as best as we can tell. It’s a good sign and it’s the most recent sign, easing the political friction to keep on keepin’ on.  

Will the voucher increase happen? 

There are several things that increase the odds of a change in Section 8 funding. 

The Democrats are in control

This one’s pretty simple. Dems have the White House and Congress—albeit, the Senate is split, and one Democratic senator from West Virginia is a Democrat in name only, having already bristled with the rest of the Democrats several times.

Token arguments against increasing the size of the deficit or budget are waning 

The Republicans will naturally and reflexively push back on any increase to Federal spending on Section 8, just as they will on any spending, anywhere. It’s their move. The GOP is already trying to plant a flag about the “scourge of big government and increasing the deficit.” But that’s a hard narrative to pitch in 2021, after the GOP led the passage of nearly $7 trillion in new spending on tax cuts and stimulus over the past few years.

I’m not saying they won’t still try to sell the same narrative—just their efforts might fall on slightly deafer ears. 

The fact is that, starting in 2009, we’ve run the money printing presses till steam came off of them—and the economy is doing fine. That leaves some old arguments about the scourge of deficits in the past.

Obstacles to increasing Section 8

In addition to the political messes, there’s some functional problems we’d face with a massive increase to Section 8. A couple of big ones jump to the top of the list:

Many landlords won’t accept vouchers

In most privately-owned dwellings in most areas of the country, accepting a housing choice voucher (HCV) is up to the landlord themselves. It’s not mandatory. Some don’t do it because of bias, i.e. “Section 8 tenants are bad tenants and I don’t want to deal with it/them.” And some don’t do it because of myriad inspection programs and certifications that have to be done every year, which incur costs and time to the property owner. 

And if something goes wrong and an inspection fails, one or multiple tenants may need to be booted, disrupting the property owner’s cash flow. Messy stuff. 

The regional aspects play into this as well. Some states and municipalities have issues with paying promptly or dependably, and landlords there have spread their anecdotes with the local grapevine. And while it’s federal law that a landlord is free to reject any potential tenant with a HCV, more than a dozen states and 100 municipalities have passed laws to try and supersede the federal statute. These are known as “source-of-income” laws, which broadly state that someone can’t be rejected because of the source of their rent or income. 

Housing authority needs revamps

We will likely have to revamp the entire management structure of the HCV program. That includes how it’s administered, what the income thresholds are, how inspections and certifications are done—a top to bottom change. That’s the only way to ensure that more property owners want to accept Section 8 vouchers and “join the system.” 

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The ripple effects of a maxed Section 8 program

Let’s put all the political stuff to the side for a moment and just hypothesize about what it would mean if everyone who qualified for a housing voucher got one. That would mean about eight million additional households get vouchers—a massive addition to the pool of Americans who can pay full-market rents. 

If we assume that everything else in the economy stays about the same in the coming years—moderate GDP growth, increasing jobs, increasing wages, and moderate interest rates—then our housing markets will be extremely strong.

We already know there’s a chronic lack of inventory as Millennials enter prime home buying years and Americans seek out more spacious rural and suburban homes. Low inventory of homes, growing incomes, and a massive new pool of market-paying renters equals higher rents in every region of the country. Regionally, there will be differences in how fast an increase in Section 8 vouchers affect average rents and average property values, but it will be a rising tide. This is just objective reasoning, nothing political. 

One could easily theorize that having eight million more households in this country would create a virtuous cycle, as more folks with home stability leads to more stable jobs, better education, and so on. Can we do all of that without breaking the proverbial bank or creating a federal financial disaster? I’ll leave that to another discussion in another forum. On the whole, we should all want to see a massive increase to Section 8—if it can be managed right. 

Our other entitlement programs, like Social Security, Medicare, and unemployment insurance are all immensely popular… at least in the sense that politicians don’t dare touch them, on either side of the aisle, because their constituents like the programs. So if the Democrats can pull off the salesmanship to make affordable housing an entitlement program, it’s likely to stay in place. 

The COVID pandemic only highlighted the gaps we have in our economy relating to income equality and housing. Changing Section 8 funding will require boatloads of time, money, political will, and political power. I do not know if we’ll have enough of all four to bring the Administration’s goals to life.

However, the installation of Marcia Fudge as HUD Secretary is a sign that the Biden Administration’s will is strong. She wants to make Section 8 an entitlement program—a right, rather than a possibility—and she seems to have the full backing of the White House.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.