Section 8: HUD changing FMR in the near future?

[Garrett Fulton]

Hello BP,

I've been reading that HUD is looking to roll out a new way to calculate fair market rates for section 8 housing in large metropolitan areas. The new policy called "small area fair market rate would set new fair market rates by zip codes within a city. Some zip codes would be lower than the average and others would be higher.

Here's the link to the HUD site.

http://www.regulations.gov/#!documentDetail;D=HUD-...

I looked up what the new fair market rates would be in Baltimore for my properties zip codes and it looks as though I would take a 10%-15% cut in my rents if this policy is rolled out in Baltimore.

Do any of you guys know when this new policy would take effect?

Will it be mandatory for all PHAs to adopt this policy?

What's the likelihood of this policy even being passed? 

Thanks for you input!

[Bradley Bogdan]

Currently, HUD has only helped PHAs with calculating FMRs over the entire area of their jurisdiction. Its a clunky, complex system that shoots to give you the 40% percentile rent+utilities amount over a 3 year rolling period. Its very thorough, but like most systems, works best for the middle of the range of PHA sizes and extremes in rental variation, as the system doesn't work well in places where there is very limited data (many rural PHAs), markets with rapidly rising/falling rental prices (SF for example), or places that have complex neighborhood divisions and wide range of rental cost within their jurisdiction (generally big cities).

Up to now, HUD has encouraged PHAs to adjust the raw FMR amounts to be more specific and encourage low income recipients to mix into the area more uniformly. That can mean setting FMRs by neighborhood to reflect rental prices or encourage a better mix of tenants across the area (by perhaps offering higher FMRs in an area where there are few voucher holders renting, even if rent prices wouldn't necessarily indicate those FMRs). Currently, they have a fairly narrow band of how far they can adjust the FMR by neighborhood to encourage mixing, this proposed change would really widen that band. Obviously not all PHAs do this for their cities, as its a lot of work and isn't always necessary to achieve the goals of the program, but for instance, Dallas (and I believe Cook County, IL) is currently trying it out. Perhaps someone renting Section 8 in that area could comment.

In general, when PHAs have lowered FMR rates or changed program rules, they tend to grandfather in current rentals or shift any additional costs to the tenant. This is not always the case (as I'm sure the folks from Raleigh will pop in to remind us), but by and large, they do try not to seriously offend or drive away landlords.

If passed, it would be mandatory for large cities to adopt and possible for cities that don't quite meet all the criteria for size or concentration of voucher holders in certain neighborhoods. If you're in an area with substantially less than 100 census tracts within the voucher area, you probably won't see any changes or see this implemented. To give an example of size, Buffalo NY has roughly 65 census tracts (my rough count off the census tract map) for ~254,000 people and is the 69th most populous city in the U.S. I'm guessing that would make is solidly too small to be covered under this proposed rule. That means all but the biggest 30-40 cities or so are probably too small. 

This rule would probably only be negative in the sense that it would reduce the "premium" that exists in some urban zips for Section 8 rents. In theory, there aren't supposed to be premiums in the first place, so we as investors (my family included) have definitely gotten more than the program intended if you're able to charge above market rates for Seciton 8 tenants. In theory, they are hoping to reduce the Section 8 stock in tougher neighborhoods and raise the number of rentals willing to accept Section 8 rates in better neighborhoods by a roughly even amount. Will it work? I guess we'll have to see if it passes.