It’s no surprise that the area in which you live can significantly affect your access to opportunities. Whether it’s access to adequate housing, medical care, employment, transportation, quality schools, clean water, or infrastructure, these factors hold true whether buying or renting a home. To assess areas of potential opportunity, the Federal Housing Finance Agency (FHFA) categorizes areas as high-opportunity or non-high-opportunity using a broad brush. This classification by FHFA drives things such as the allocation of funding, affordable housing, and financing. It can also affect a fair lending analysis.
However, the categorization of these areas is not always cut and dry. In its recent report, High Opportunity Spectrum, Freddie Mac delves deeply into what makes a location “high-opportunity.” Freddie Mac looks beyond the general classification of the FHFA to see what support structures and offerings help with residents’ upward mobility and overall quality of living. In the paper, Freddie Mac looks at a new way to analyze areas using an Opportunity Atlas Score and Location Score. The analysis aims to look at “opportunity” as a spectrum rather than just a two-factor choice.
FHFA Definition Overview
FHFA defines a high-opportunity area as an area identified by a state or local Qualified Allocation Plan (QAP) or designated by the Department of Housing and Urban Development as a Difficult Development Area (DDA). High-opportunity areas must also have a poverty rate of less than 10% for metropolitan areas and 15% for non-metropolitan areas. These geographic areas are primarily driven by the 2022-2024 Duty to Serve classification of the census tract. The report finds that while these classifications can be helpful, they are limiting and do not look at other factors that enrich residents’ lives, especially those in lower-income groups.
In the analysis, the Freddie Mac paper concludes that adding additional factors to the basic FHFA definition can paint a more authentic picture of what is happening and why lower-income renters may find some areas more enriching than others despite the apparent poverty level or other geographic downfalls. The paper also finds that when sticking to the strict definition of high-opportunity area as defined by FHFA, the high-opportunity areas often have a disproportionate amount of owner households compared to the national average. The report finds this as a result of the FHFA’s definition’s goal to focus on the opportunity and not on the renters or owners. Still, in doing so, the description may miss other vital factors equating to opportunity.
Opportunity Atlas Score
Opportunity Atlas Score measures intergenerational income mobility and its direct relation to economic success and the opportunity of individuals. In its analysis, Freddie Mac uses the opportunity atlas score to look at areas based on an individual’s upward economic mobility potential, using data that directly correlates to the idea that where you grow up impacts your future income potential. As the report aptly points out, economic potential is the pinnacle of opportunity.
Freddie Mac’s analysis points out that the FHFA definition of a high-opportunity area misses key generational factors and only looks at the here and now. In doing so, the FHFA analysis misses key area performance factors, such as specific neighborhoods providing better chances of economic success later in life along with benefits beyond income mobility. For example, the report points out that children who grow up in high-income mobility census tracts also have lower incarceration rates and teen births. Combined, these factors give a better picture of a neighborhood’s opportunities. But the report does not stop at a one-factor test.
Location Score uses various economic and demographic variables to measure the location quality of rental performance. This method includes renter-focused attributes of the geographic area that impact property performance. These factors include economic factors such as median household income and the gross metropolitan product, population density, level of education of the area population, ease of access to transportation, the ratio of the rental to owner-owned properties, and labor market conditions, including employment ratios and average hours worked. These factors, when combined, provide valuable insight into each neighborhood and are tangible evidence of real opportunity within the community. These elements capture areas that would have been overlooked under the FHFA definition, such as turning the corner and having new economic investments. The overarching lesson of the Freddie Mac High Opportunity Spectrum analysis is that in looking at areas for residential mobility, lenders and regulators need to take a more holistic approach, putting aside old standards and looking at what is happening in the community and what underlying factors may lead to the renters’ ability for mobility, stability, and quality of living. The analysis in the report points out that we must be careful in painting “opportunity” too broadly, as when that happens, we can miss the real story and the essence of what makes an area a great place to live and rent.