The Housing Supply Gap Explored

The gap in our housing supply has definite numbers, both in Kentucky and Lexington. The Kentucky Housing Corporation (KHC) commissioned Bowen National Research to complete a comprehensive survey of the state’s housing supply. Their survey analysis resulted in housing supply information as of 2024 and a projected estimate of housing supply gap for 2029 to assist housing providers, developers, local leaders, and nonprofit organizations with a better understanding of the state of the housing market.​​​ Here are the numbers:

Kentucky has a shortage of 206,207 housing units and Lexington has a shortage of 22,549. To put that number in prospective, presently Lexington has an estimated 131,000 households according to the US census.  Lexington needs almost 20% more housing units to fill the gap in the housing supply.  Housing needs vary – rental or for -sale housing options. According to analysis, the state is missing almost an equal amount of rental housing to housing available for sale - shortage of 101,569 rentals and 104,638 units for sale. Lexington has a larger gap in needed rental units, 14,423 rentals missing and 8,126 ‘for sale’ missing. Another way housing needs vary is by cost.  The analysis broke down the units needed according to the income brackets based on Area Median Income (AMI). (Sidenote - this figure is compiled by taking the exact middle annual income in the spread of incomes for any area. So, half of the area’s population has an annual income above the AMI and half below the AMI. HUD has been using the AMI to determine eligibility for housing programs. Most HUD programs begin eligibility at 80% of AMI.) This is an important factor to consider as we move forward in development since the type of housing we develop needs to address the actual gap. Time for more numbers in this discussion.  According to the analysis, in Lexington 79% of the rentals are missing for households living at or below 50% of the AMI. This mirrors the need at the statewide level, 78% of rentals are missing for households living at or below 50% AMI. . It is also important to note that the analysis shows a for-sale housing gap for this same income population. Of the 8126 “for sale” housing units missing in Lexington, 25% of housing is needed for the population living at 50% or below AMI and at the statewide level it is 32% of the missing housing ‘for sale’ units.  To summarize the numbers, the population missing housing units are disproportionately the extremely poor and very poor households.

Why is there such a large gap in housing supply. Many knowledgeable in the construction/residential housing market begin by looking at the housing market crash of 2008, which led to a loss of housing developers which resulted in a decrease of construction labor available. They also identify supply chain issues, zoning and increased material costs to explain why there is a large gap in our supply of housing. All those factors are contributors to the gap in housing supply. However, it is important to look specifically at the significant number of missing housing units for the very low-income population (those living at or below 50% of the AMI).  Prior to 1940s and 1950s, urban areas frequently had diverse residential housing types mixed together with neighborhood businesses.  The butcher shop, hardware store, and seamstress storefront mixed right in with residential housing.  Of course, in those urban neighborhoods residential housing included more than just single family detached homes.  Residential housing types available were single family homes, duplexes, triplexes, and four-plexes – all sitting side by side. Historically, those diverse housing types were one of the ways low-income households moved into home ownership. Some of those households bought multiplex residential building and lived in one unit, renting out the others to afford the mortgage.  Our early history of zoning laws was designed to segregate the poor, immigrant and black population from white middle- and upper-class households. So, zoning blocked the development of diverse housing types - in residential neighborhoods resulting in swaths of neighborhoods with only single-family houses. The low income, immigrant population and non-white households were pushed into tenements (aka apartment complexes) in less desirable areas of the city.  Most of Lexington is still zoned to separate housing types. Although our new ZOTA has created the possibility of diversity - it is not totally inclusive for all of Lexington. Zones are hard to change once they are set. However, zoning is not the biggest barrier to developing housing for the households living at or below 50% AMI. The biggest barrier is funding a development so rent or mortgage is within their budget.  (Housing is considered affordable when it is 30% or less of household income. When a household pays more than 30% of their income for housing, it creates a level of housing instability.)  It is almost impossible to develop housing for this income bracket due to our funding practices. Housing is funded as a market commodity. Our funding practices expect rental property to have a mortgage and charge a rent to cover the cost of property expenses with a cushion of expendable income from the rent. The governmental programs to increase affordable housing development are designed to assist in lowering the mortgage. Although there are some grants for housing development, most funding is done with loans. Even Lexington’s Affordable Housing Fund offers low interest/no interest loans to cover a portion of the development costs. The Low-Income Housing Tax Credit (LIHTC) is the largest federal program designed to develop ‘affordable housing’ for the low-income households. LIHTC is not a loan and does not have to be repaid, but it does not cover the full cost of development. The program funds large apartment developments with the expectation of rent being set at either 80% or 60% of AMI. So, any new housing developed with LIHTC will already be a cost burden for those living at 50% or below AMI.  It is time to start creating some form of a housing safety net because the housing market will never provide housing for the low-income households.  It is not possible to develop housing to rent from $225 to $600/month without some kind of supplement.  Let’s start a conversation about low-income housing as infrastructure.