Research Report Category: Affordable Housing Trends

Affordable Housing Trends – Spring 2024

Affordable Housing

Trends Report

Spring 2024

About This Report

The Arbor Realty Trust Affordable Housing Trends Report, developed in partnership with Chandan Economics, offers a wide-ranging view into the complex, yet critically important affordable and workforce housing sectors.

 

This report series is a comprehensive primer to help industry stakeholders understand the major trends shaping the affordable housing market. It addresses the significant changes observed both in terms of policy decisions and market dynamics and describes opportunities for investment and financing in the space.

 

Focused primarily on affordable housing supported by government spending, subsidies, or tax incentives, including the Low-Income Housing Tax Credit (LIHTC), Housing Choice Vouchers (HCV), and Project-Based Section 8, these reports also cover the Naturally Occurring Affordable Housing (NOAH) segment and the utilization of rent control.

Key Takeaways

  • Approximately half of all rental households in the U.S. are now classified as moderately or severely cost-constrained.
  • Critical affordable housing programs received funding expansions in the recently passed FY 2024 federal spending package.
  • Up-zoning is being utilized more frequently to encourage affordable housing creation by allowing development in higher-density areas.

Table of Contents

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State of the Market

As the cost of homeownership climbs ever higher, the affordability crisis has become one of the nation’s most intractable issues. The number of renters that are either moderately or severely housing cost-constrained reached an all-time high of 22.5 million households in 2022, accounting for roughly half (49.8%) of all rentals (Chart 1)1, according to a Chandan Economics analysis of U.S. Census Bureau data. While the number of non-cost-burdened rental households has remained effectively flat (-0.05%) over the past five years, cost-burdened rentals have swelled by 10%.

 

The National Low Income Housing Coalition’s (NLIHC) March 2024 report The Gap notes that the shortage of affordable rental housing widened between 2019 and 2022, expanding by 480,000 units. The NLIHC estimated that the U.S. currently needs 7.3 million more affordable housing units to meet current demand.

As affordable housing advocates continued to pressure lawmakers, the federal government’s 2024 budget offered some welcomed news. It included an $8.3 billion increase in funding for the U.S. Department of Housing and Urban Development’s affordable housing programs. At the same time, state and local governments are utilizing policy initiatives, including tax credits for new construction and targeted amendments to zoning codes, to encourage development. With more funding on the way, policymakers and private market advocates are pressing ahead with plans to add units to an increasingly tight housing market.

LIHTC

The Low-Income Housing Tax Credit (LIHTC) program is the nation’s single-largest supply-side affordable housing resource. LIHTCs come in two forms: a 9% tax credit to incentivize new development and a 4% tax credit for rehabilitating and preserving existing properties. According to the National Housing Preservation Database, LIHTCs supported approximately 2.6 million rental units in 2023. In recent years, developer funding gaps have limited the use of the 9% LIHTC. Construction costs have soared while the 9% LIHTC tax credit, which developers can sell to finance their projects, has declined in value. Following the 2016 election, LIHTC equity prices dropped in value by about 10% as investors anticipated (and eventually received) a decrease in tax liabilities (Chart 2). Since 2021, 9% LIHTC equity prices have stabilized between $0.87 and $0.89 per credit, according to CohnReznick’s Housing Tax Credit Monitor.

Meanwhile, the rehabilitation tax credit became more appealing after the December 2020 passage of the Consolidated Appropriations Act established a minimum 4% floor on the applicable federal tax credit rate for tax-exempt multifamily housing private activity bonds (PABs). The minimum floor made the 4% tax credit more valuable and increased how much funding developers can raise to finance construction. As a result, the 4% LIHTC tax credit for rehabilitation became more attractive compared to the ground-up development 9% credit, leading to a greater share of rehabilitation activity. In 2023, the 4% credit accounted for 59.5% of newly HUD-insured LIHTC mortgages — a new high.

 

In 2023, the dollar volume of investor equity closed into housing tax credit funds reached another record high of $26.3 billion — an increase of 6.6% year-over-year, according to CohnReznick (Chart 3). In its Housing Tax Credit Monitor Report, CohnReznick notes that two factors were largely responsible for the volume increase: increased use of the 4% tax credit and the Community Reinvestment Act (CRA). Amended in October 2023, the CRA encourages banks to help meet the credit needs of low- and moderate-income neighborhoods.

Despite the federal LIHTC program’s overwhelming importance, LIHTC’s complexity and incremental funding expansions have made it more difficult for it to keep pace with the growing national need for new housing. However, progress has been moving faster at the state level. According to Novogradac, 29 states now have state-level LIHTC programs, more than double the amount just a decade ago, with 17 state-level programs introduced since 2013. This trend likely has staying power after Texas and Rhode Island both introduced LIHTC programs in the past year.

Project-Based Section 8

The Section 8 Project-Based Rental Assistance (PBRA) program is one of the largest affordable housing initiatives in the U.S., supporting an estimated 1.4 million rental units through 2023. It is open to low-income households earning at most 80% of their local area median income. Landlords participating in the PBRA program receive the fair market rent (FMR) for each occupied unit, as established by the local public housing agency. Tenants are responsible for paying up to 30% of their adjusted income toward rent and utilities or $25 — whichever is greater. The Federal PBRA subsidy will then cover the difference between the FMR and the tenant contribution.

 

For decades, this program has successfully attracted large numbers of private, for-profit owners. Between 1990 and 2023, the share of owners entering Section 8 PBRA that are profit-motivated has grown from 3.4% to 91.2% (Chart 4). The U.S. Department of Housing and Urban Development has also made a series of updates and rule changes in the past year that make the program more attractive to the private market and make it easier for owners to rehabilitate and re-capitalize their properties. In 2024, the PBRA is slated to receive a much-needed boost in federal support as HUD’s FY 2024 budget included a 7.4% increase above FY 2023 levels.

Housing Choice Vouchers (HCV)

LIHTC is the largest supply-side affordable housing program in the U.S., but the Housing Choice Voucher (HCV) program is the biggest overall and continues to grow. It accounted for nearly 2.8 million units or 53.7% of all federally subsidized rental units2, climbing 59 basis points (bps) from 2022 (Chart 5). The next largest program by unit count, Project-Based Section 8, is a distant second at 25.6%. (Note: LIHTCs are excluded from this analysis.)

The HCV program is primarily a form of tenant-based housing assistance in which renters spend 30% of their adjusted monthly income on rent, and the balance is covered through a subsidy — much like in the PBRA program. However, the HCV program allows tenants to move to a new location and maintain their voucher, which promotes housing mobility and greater access to economic opportunities. In 2023, the average household income for renters in this program was $17,835. Both major political parties and the private market broadly support the HCV program.

 

Unlike rent control, which places the subsidy burden on the landlord, HCVs interact openly in a market setting. The program gives households the option to retain their subsidy should they move, encouraging positive housing mobility. However, the HCV program has been slow to expand in recent years, failing to keep pace with the growing needs of low-income renters. Between 2019 and 2022, the program grew an average of 1.8% annually (Chart 6). The pace of its increase slowed to 1.3% in 2023, as federal government operations were funded through a series of short-term spending bills. But with more support from the federal government promised, next year’s projections are brighter. Funding for the HCV program is set to expand by nearly 7% (or $2.1 billion) in 2024.   

In October 2023, HUD announced that it was expanding its Small Area Fair Market Rents (SAFMR) rule to an additional 41 metropolitan areas. Under the SAFMR rule, the maximum rent covered by the voucher is determined by rent prices within local zip codes — rather than at the metro level. The updated policy allows the voucher program to track local market conditions more closely, improving their usability and utility. By extension, tenants can more easily use vouchers to access higher-rent neighborhoods with better-performing schools and improved economic opportunities.

Zoning

Zoning law reform has emerged as a favored policy tool among both tenant and industry advocates searching for a solution to the ongoing housing supply shortage. Recently, NPR called up-zoning the “hottest trend in U.S. cities,” with roughly 20 municipal-level reforms being considered nationwide as of April 2024.

 

Up-zoning allows an increase in the density of housing units in a given area. Experts consider it to be a way to lift the artificial cap on the amount of housing that can exist in a local area. The idea behind up-zoning is that allowing more new construction and improving the supply of rental units will decrease competition for housing and slow rent growth.

 

In recent years, states such as California, Vermont, and Montana, alongside numerous localities, have implemented generational changes to zoning laws. According to the University of California, Berkeley’s zoning reform tracker, Washington has had the most up-zoning reforms since 2007, with 15 adopted or ongoing. California follows closely behind, with 14 adopted or ongoing up-zoning reforms, while North Carolina, Minnesota, and Michigan round out the top five.

 

Although the Federal government doesn’t hold jurisdiction over zoning, Congress funded a new grant program in its 2023 budget through the Department of Housing and Urban Development (HUD) called the “Yes In My Back Yard” initiative. It aims to incentivize states and localities to reform their zoning laws. The program’s initial $85 million in funding was raised to $100 million in the recently passed FY 2024 budget as part of HUD’s Community Development Block Grant (CDBG) program.

Naturally Occurring and Workforce Housing

While public attention often centers on regulation and policy, naturally occurring affordable housing (NOAH) makes up a much greater share of the total affordable supply. According to an analysis of Freddie Mac lending data and other estimates, NOAH outnumbers regulatory-supported units by a factor of four. In 2023, NOAH properties accounted for nearly 75% of multifamily originations of units affordable at 80% or below the local area median income (AMI) (Chart 7)3.

In 2024, Fannie Mae and Freddie Mac each have a $70 billion multifamily lending cap — down from $75 billion in 2023. However, the FHFA is maintaining its direction that at least 50% of the agencies’ loan volume needs to be mission-driven lending, such as supporting the creation and preservation of affordable housing. Loans classified as supporting workforce housing properties are exempt from the volume caps, which should generate more liquidity within the workforce housing segment.

 

Nationally, workforce housing, which is often called the ‘missing middle,’ is starting to attract the policy attention it deserves. In December 2023, the Workforce Housing Tax Credit Act was introduced to both chambers of Congress. If passed, the bill would establish a middle-income housing tax credit (MIHTC), which is modeled after the success of the LIHTC program, to help finance the construction of an estimated 344,000 rental units. In addition to the bill receiving support from both Republicans and Democrats, the National Multifamily Housing Council and the National Apartment Association have also endorsed the proposed legislation.

Rent Control

Over the past few years, rent control has reemerged as a political issue. Cities like San Francisco, San Diego, and Washington, D.C., have imposed new restrictions on landlords in recent years, while new state-wide regulations in Washington could potentially follow those already in place in Oregon and California. But, rent control continues to be a contentious topic of discussion.
The long-standing position of housing market economists remains that rent control tends to adversely impact the same renters the policy intends to help.

 

A recent NMHC Report, Rent Regulation Policy in the United States, explores how, in the long run, rent control policies reduce the number of housing units in a market, exacerbating affordability issues. Rent control regulations can also negatively impact land values, reducing local communities’ tax revenues. A 2024 review of rent regulations by the Federal Reserve of St. Louis found that following rent control implementation, rental stock typically declines as landlords and developers pivot towards owner-occupied properties, undermining potential benefits to tenants.

 

At the Federal level, the rent control debate remains intense, especially concerning LIHTC. Earlier this year, HUD announced an update to its formula for the maximum allowable rental increase for units in properties receiving LIHTCs. Under the new methodology, the maximum annual rent increase is lowered to 10% — down from 14.7% using the previous methodology. Novogradac estimates that the share of units that the rent cap will impact will rise from 10% to 30%. Industry groups broadly oppose the rule change. Mortgage Bankers Association noted that the updated rent cap policy severely suppresses the LIHTC program and “contradicts many of the Administration’s other efforts to increase affordable rental housing.”

What to Watch

Looking ahead, increasing the affordable housing supply will continue to require an all-hands-on-deck approach. The bi-partisan Tax Relief for American Families and Workers Act of 2024 passed the House with overwhelming support earlier this year, although its fate remains uncertain in the Senate. If passed, the bill would restore higher allocation increases for LIHTC, which could lead to the creation of an additional 200,000 affordable rental units.

 

The path forward may differ depending on which major political party controls the White House and Congress in 2025. The Biden-Harris Administration’s proposed FY 2025 budget calls for meaningful expansions of key policy programs, including HCV, LIHTC, and PBRA. Meanwhile, the Republican Study Committee recently released its FY 2025 Budget Proposal, which calls for combining and re-purposing current Federal subsidies for programs such as LIHTC and PBRA into increased funding for Housing Choice Vouchers.

 

Although housing affordability is a national concern, state and local lawmakers continue demonstrating their worth in easing the crisis. As myriad solutions aimed at expanding supply begin building upon one another, fundamental change will be next to follow.

Terms and Definitions

Sources: U.S. Department of Housing and Urban Development; Tax Policy Center; Chandan Economics

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1 Housing cost burden measured as gross rents, including contract rents and utilities. For this analysis, households with no recorded gross rent are considered non-cost-burdened and households with positive gross rents and negative or no incomes are considered severely cost-burdened.

2 The total is based on data retrieved from HUD’s Office of Policy Development and Research as of the end of 2023.

3 According to a Chandan Economics analysis of Freddie Mac K-Deals.

 

Disclaimer
All content is provided herein “as is” and neither Arbor Realty Trust, Inc. or Chandan Economics, LLC (“the Companies”) nor their affiliated or related entities, nor any person involved in the creation, production and distribution of the content make any warranties, express or implied. The Companies do not make any representations regarding the reliability, usefulness, completeness, accuracy, currency nor represent that use of any information provided herein would not infringe on other third party rights. The Companies shall not be liable for any direct, indirect or consequential damages to the reader or a third party arising from the use of the information contained herein.

Affordable Housing Trends – Spring 2023

Affordable Housing

Trends Report

Spring 2023

About This Report

The Arbor Realty Trust Affordable Housing Trends Report, developed in partnership with Chandan Economics, offers a wide-ranging lens into the complex, though critically important, affordable and workforce housing sectors. The aim of the report series is to provide a comprehensive primer for industry stakeholders to better understand the major trends shaping the market.

 

This series focuses on affordable housing supported by government subsidies or tax incentives like the Low-Income Housing Tax Credit (LIHTC), as well as the Naturally Occurring Affordable Housing (NOAH) segment. It addresses the significant changes observed both in terms of policy decisions and market dynamics and describes opportunities for investment and financing in the space.

Key Takeaways

  • The Inflation Reduction Act of 2022 provided $4 billion in additional funding for the Housing Choice Voucher program, though further increases have met resistance.
  • The shortage of affordable rental housing units grew by 500,000 from 2019 to 2021, reaching 7.3 million units.
  • The 2024 Federal budget includes higher funding levels and rules changes to the Low-Income Housing Tax Credit program to encourage more affordable housing development.

Table of Contents

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Terms and Definitions

Sources: U.S. Department of Housing and Urban Development; Tax Policy Center; Chandan Economics

State of the Market

The creation and preservation of affordable housing units in the U.S. have made great strides in recent years, but there has also been a fair share of setbacks. The affordable housing gap has widened even as funding levels for targeted programs have increased. As calls for change grow louder, economic headwinds are presenting a new set of challenges. 

 

The Gap: A Shortage of Affordable Rental Homes, the National Low Income Housing Coalition’s (NLIHC) 2023 annual report, looked into how many units are affordable and available to extremely low-income (ELI) renters.1 No state in the U.S. and no major metropolitan area currently has enough supply to meet demand (Chart 1). South Dakota leads the nation with 58 units available per 100 ELI renters, while Nevada (17 units per 100 renters), Florida (23 units), and Texas (25 units) have the fewest affordable housing options. The NLIHC’s analysis shows that as public awareness of the affordable housing crisis in the U.S. grew so has the need for action. Between 2019 and 2021, the U.S. shortage of affordable rental homes increased by 500,000 units, reaching 7.3 million.

The federal government has made progress in expanding the Housing Choice Voucher (HCV) program, though recent additions have yet to prove to be transformational. Moreover, the Low-Income Housing Tax Credit (LIHTC) has faced a shortfall. The White House made an overhaul to both programs a priority in its 2024 budget proposal. The National Multifamily Housing Council (NMHC) applauded the Biden administration for its affordable housing focus and its “multi-faceted approach to meet housing demand”; however, NMHC also noted that the proposal’s call to have developers pay for the program expansions through higher taxes would work against the policy’s intention.

 

Rent control has remained a hot-button policy issue throughout the country. At least eight states (Massachusetts, Minnesota, Montana, New Hampshire, New Mexico, South Carolina, Virginia, and Washington) are actively considering new rent control measures at the state or local level. These types of corrective actions can have the unintended effect of reducing the incentive for private developers to add new housing supply. As a result, rent controls may do more to treat the symptoms, not the causes, of local affordable housing challenges, potentially exacerbating long-term supply-demand mismatches. Still, state legislatures are fluid incubators for creating new policy models for reaching higher equilibriums of affordable supply. California, which has the most restrictive statewide rent control in the country, recently authorized $7.2 billion in new spending over the next three years to encourage affordable housing and combat homelessness. Florida recently signed into law a provision that bans statewide rent control while also providing its state-sponsored Housing Finance Corporation $711 million in new funding to increase workforce housing options. New York State also recently announced a new affordable housing plan, which targets zoning code changes to encourage the development of new supply.

LIHTC: Policy Initiatives Aim to Close Financing Gaps

The Low-Income Housing Tax Credit (LIHTC) is the nation’s single-largest affordable housing program that directly addresses supply. It comes in two forms: a 9% tax credit to incentivize new development and a 4% tax credit for the rehabilitation and preservation of existing properties. According to the National Housing Preservation Database, LIHTCs support approximately 2.5 million rental units. However, new unit additions in the LIHTC program have slowed, according to the U.S. Department of Housing and Urban Development (HUD). Between 2007 and 2020, the number of new low-income units placed into service under the LIHTC program gradually dropped off from an annual high of 126,796 units to a recent low of 44,732 units.2

 

A key reason for the limited growth of new units in the LIHTC program is that developers often experience significant funding gaps for new projects. Construction costs have soared while the 9% LIHTC tax credit, which developers will sell off to finance their projects, has declined in value. LIHTC equity prices took a significant hit after the 2016 election, dropping by roughly 10% as investors anticipated and eventually received a decrease in tax liabilities (Chart 2).3 LIHTC equity prices eventually stabilized between $0.87 and $0.89 per credit, where they remain today, according to CohnReznick. The drop-off in LIHTC equity prices after 2016 meant that developers could not raise as much project capital by trading their tax credits. As a result, the adoption of a 4% LIHTC tax credit for rehabilitation became more attractive than the 9% tax credit for ground-up development, leading to a surge in its utilization in 2017.

The rehabilitation tax credit became more attractive after the December 2020 passage of the Consolidated Appropriations Act, which established a minimum 4% floor on the applicable federal tax credit rate for tax-exempt multifamily housing private activity bonds (PABs). The minimum floor made the 4% tax credit more valuable and increased how much funding developers can raise to finance construction. Through the fourth quarter of 2022, the share of LIHTC mortgages utilizing the tax credit remained elevated at 4.1%.

 

The dollar volume of HUD-insured LIHTC mortgages grew substantially over the past decade. However, there was an inflection in 2022 (Chart 3).4 In the fourth quarter of 2022, the dollar volume of newly issued mortgages utilizing LIHTC tax credits covered under insurance from HUD declined again — falling 16.3% to $955 million, according to HUD’s Insured Multifamily Mortgages Database. The removal of temporary factors that boosted volumes in 2021, including the 12.5% expansion of the 9% tax credit and other disaster-related credit allocations, may partially explain the 2022 inflection. Moreover, widening financing gaps are also limiting the volume of newly insured LIHTC mortgages.

More recently, the Federal Housing Authority (FHA) has shared positive updates, but there is widespread recognition that the program needs a more sizable overhaul. In September 2022, the FHA announced that it was increasing the frequency of allowable surplus cash distributions with most FHA-insured multifamily mortgages, making HUD-insured mortgages more like private debt instruments, boosting investor appeal. A late-2022 bipartisan push to lower private-activity bond financing requirements from 50% to 25% failed to make it into the 2023 budget resolution. However, the White House has called for the rule change as part of its 2024 budget proposal, in addition to a $28 billion expansion of the program over the next decade.

HCV: Marginal Annual Gains Fail to Keep Pace with Demand

While LIHTC is the largest supply-side affordable housing program, the Housing Choice Voucher (HCV) program is the largest overall, accounting for 2.7 million units.5 The HCV program accounted for 53.1% of all federally subsidized rental units in 2022, a rise of 70 basis points (bps) from 2021 (Chart 4).

The next largest program by unit count, Project-Based Section 8, is a distant second, accounting for 25.6% of federally subsidized units.

 

The HCV program is primarily a form of tenant-based housing assistance, where renters spend 30% of their adjusted monthly income on rent, and the balance is covered through a subsidy. It provides targeted assistance to very low-income households. The average household income for renters in this program in 2022 was $16,019.

 

HUD’s policy guidelines dictate that 75% of new families accepted into the program must earn at most 30% of the local area median income (AMI). The balance of households in the program may earn up to 80% of AMI. HCVs are widely supported by private-market advocates. Unlike rent control, which places the burden of the subsidy on the landlord, HCVs interact openly in a market setting. Moreover, a renter household can retain their subsidy should they move, encouraging positive housing mobility.

 

The HCV program has expanded slowly in recent years, failing to keep pace with growing market needs. Aside from 2017 and 2018, the number of units covered under the program has expanded between 1.1% and 2.7% per year since 2012 (Chart 5). While recent White House efforts for a more significant expansion of vouchers have failed to garner enough congressional support, momentum has been building over the past year. Within the signed version of the Inflation Reduction Act of 2022, HUD was provided an additional $4 billion for HCV expansion.

 

Since then, $23.5 billion has been provided for the 2023 fiscal year, which would cover all current in-place vouchers through this year. The 2023 budget bill also set aside a separate $4 billion that will become available to the agency in October 2023 if the previous amount is expended. The additional funding is estimated to be enough to expand vouchers to an additional 12,000 new households.

 

With the election season approaching, legislative compromise on affordable housing outside of budget reconciliation debates is less likely. Still, there remains enough bipartisan support for voucher expansion that it may pick up support in the upcoming 2024 budget negotiations. In a recent summary of the Administration’s housing proposals, HUD detailed a proposed $2.4 billion funding addition to the HCV program, which would maintain existing contracts and expand coverage to an additional 50,000 households.

 

On the congressional level, Senators Chris Coons (D-Del.) and Kevin Cramer (R-N.D.) re-introduced the Choice in Affordable Housing Act, in January 2023, which aims to increase the number of landlords that accept vouchers and expand overall access to affordable housing. The Coons-Cramer bill proposes to designate $500 million towards creating a new Housing Partnership Fund that would allow local housing authorities to award “signing bonuses” to a landlord of a unit in an area with a poverty rate below 20% and allow prospective tenants to receive security deposit assistance. The act would also require HUD to expand its use of Small Area Fair Market Rents to determine rents in a given area while removing some red tape from the approval process.

 

The Coons-Cramer bill has picked up several bipartisan co-sponsors and enjoys the endorsement of key national interest groups, such as the National Apartment Association, the National Low Income Housing Coalition, and the National Multifamily Housing Council, among others.

 

NOAH: Investors Rally Behind Workforce Housing

While most of the attention paid to the affordable housing sector focuses on regulation and policy intervention, the scale of the naturally occurring affordable housing (NOAH) supply is greater. By some estimates, NOAH outnumbers regulatory-supported units by a factor of four — a figure supported by Freddie Mac lending data. For multifamily loans originated in 2022, 87% of the units affordable at 80% or below of local AMI are NOAH properties (Chart 6).6 Moreover, on a quarterly basis, this share has ranged between 78% and 93% over the past three years.

In 2023, both Fannie Mae and Freddie Mac will have a $75 billion multifamily lending cap, with a direction that at least 50% of their loan volume is mission-driven lending, such as support for the creation and preservation of affordable housing, including NOAH. Given the lower regulatory burden associated with NOAH and the ample liquidity available in the space, investors remain optimistic about the growth of this sector in 2023. According to the 2023 ULI-PwC Emerging Trends in Real Estate, no residential sub-sector had a higher favorability rating for investment or development prospects than moderate-income/workforce housing.

 

What to Watch: Affordable Housing Creation Faces Challenges

Industry and advocacy-based priorities have uniquely converged on the issue of affordable housing in recent years, and the momentum has so far carried through 2023. On March 7, 2023, NMHC President Sharon Wilson Géno testified in front of the U.S. Senate Committee on Finance to discuss how tax policy could help reduce the supply-demand gap and increase housing affordability. In her remarks, Géno affirmed the multifamily industry’s push for an expansion of LIHTC incentives for adaptive reuse projects and easing regulatory rules for construction.

 

Géno’s testimony is timely, given the upcoming negotiations concerning the 2024 federal budget, which will likely include a significant push for affordable housing legislation. On March 13, HUD released the details of the Biden administration’s proposed budget for the agency that includes an expansion of the HCV program and a proposal to increase housing supply through a $300 million increase in the HOME Investment Partnerships Program (HOME), which is tasked with constructing and rehabilitating affordable rental housing.

 

Today’s divided U.S. Congress may make it more challenging to enact all of these spending priorities, but bipartisan interest in solving housing’s affordability crisis should give the issue traction on Capitol Hill.

 

Politics aside, market developments, including material cost inflation and tightening financial conditions, present potential headwind risks that investors should keep on their radar. Last year, vital progress was made toward affordable housing goals, but inflation and rising economic uncertainty threaten to weaken its long-term impact. As the affordable housing shortage continues growing, it will be critical for industry and political consensus to coalesce and translate into meaningful action.

 

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For more affordable housing research and insights, visit arbor.com/articles

arbor.com/affordable-housing
844.951.4915

1 NLIHC defines ELI renters as those with “incomes at or below either the federal poverty guideline or 30% of their area median income, whichever is greater.”.

2 These data are released by the U.S. Department of Housing and Urban Development (HUD) and can be retrieved here. According to HUD, 2021 data are scheduled for release in Spring 2023.

3 LIHTC Equity Pricing Trends are calculated as a quarterly series by Chandan Economics. 4% LIHTC usage is displayed as a four-quarter moving average. Novogradac data are from Q1 2016 through Q4 2019. CohnReznick data are from the first quarter of 2020 through the fourth quarter of 2022.

4 Data presented in Chart 5 are displayed as a four-quarter moving average based on the date of initial endorsement.

5 Total is based on data retrieved from HUD’s Office of Policy Development and Research; data are through 2022.

6 According to a Chandan Economics analysis of Freddie Mac K-Deals.

Disclaimer
All content is provided herein “as is” and neither Arbor Realty Trust, Inc. or Chandan Economics, LLC (“the Companies”) nor their affiliated or related entities, nor any person involved in the creation, production and distribution of the content make any warranties, express or implied. The Companies do not make any representations regarding the reliability, usefulness, completeness, accuracy, currency nor represent that use of any information provided herein would not infringe on other third party rights. The Companies shall not be liable for any direct, indirect or consequential damages to the reader or a third party arising from the use of the information contained herein.

Affordable Housing Trends Report – Fall 2022

Affordable Housing
Trends Report

Fall 2022

About This Report

The Arbor Realty Trust Affordable Housing Trends Report, developed in partnership with Chandan Economics, offers a wide-ranging lens into the complex, though critically important affordable and workforce housing sectors. The aim of the report series is to provide a comprehensive primer for industry stakeholders to better understand the major trends shaping the market.


This series focuses on Affordable housing supported by government subsidies or tax incentives like the Low-Income Housing Tax Credit (LIHTC), as well as the Naturally Occurring Affordable Housing (NOAH) segment. It addresses the significant changes observed both in terms of policy decisions and market dynamics and describes opportunities for investment and financing in the space.

Key Takeaways

  • Rising construction costs have slowed new Affordable construction as financing gaps for LIHTC developers have widened.  
  • A sizeable expansion of the Housing Choice Voucher program was removed from the Inflation Reduction Act of 2022, though the White House continues to call for increased funding in its annual budget resolutions.
  • Nearly 90% of developers reported they will avoid markets with mandatory affordability requirements as local rent control measures are under consideration in five states.   

Table of Contents

Download PDF
Terms and Definitions
Source: U.S. Department of Housing and Urban Development; Tax Policy Center; Chandan Economics

State of the Market

As heightened housing demand and soaring inflation challenge low-income households, the affordable housing market sits at a critical juncture. Affordability has emerged as a primary concern for low-income earners living in naturally occurring affordable housing (NOAH). According to Moody’s Analytics CRE, apartment asking rent growth peaked at 16.9% between mid-2021 to mid-2022, compared to an increase of 2.3% in the average hourly wages over the same period. 


Even renters who are in regulatory-protected units that insulate rents from market forces have not been immune from growing economic pressures, as the persistence of overall inflation relative to wages has eroded the purchasing power of America’s most income-constrained earners. Through the second quarter of 2022, the Consumer Price Index (CPI) has outpaced wage growth for five consecutive quarters. (Chart 1). 

The Federal Finance Housing Agency’s (FHFA) mission-driven mandate given to Fannie Mae and Freddie Mac continues to support liquidity for affordable units. With multifamily underwriting standards tightening generally, some borrower demand may shift to where the Agencies are padding new loan production. At the same time, higher construction costs have made the financing of Affordable housing more difficult, including those properties utilizing Low-Income Housing Tax Credits (LIHTCs). While investor demand for affordable projects remains intense, economic factors have limited the breadth of new development. The National Low Income Housing Coalition’s most recent estimate found that the U.S. has a shortage of 7 million affordable and available rental homes — a far cry from market equilibrium. 


Rent control has remained a hot-button policy issue throughout the country. According to the National Multifamily Housing Council, at least five states (Florida, Nevada, New York, Minnesota, and California) have localities that are actively considering new rent control measures. These types of corrective measures often reduce the incentive for private developers to add new housing supply. As a result, rent controls may do more to treat the symptoms, not the causes, of local affordable housing challenges, ultimately exacerbating long-term supply-demand mismatches. 


Where lasting progress has been made in the affordable segment over the past several decades, it has been through goal-aligned tax incentives and public investment programs. Initiatives aimed at boosting the housing supply have garnered support from industry groups, activists, and policymakers in recent years. In September, the National Association of Realtors President Leslie Rouda Smith participated in a White House meeting on housing supply and affordability where she “conveyed to the Administration and my colleagues our support for a comprehensive plan that includes investment in new construction, zoning reforms, expansion of financing, and tax incentives to spur investment in housing and convert unused commercial space to residential.” Thus far, transformational progress at the federal level remains elusive.

LIHTC: Financing Gaps Widen as Construction Costs Soar

The Low-Income Housing Tax Credit (LIHTC) is the nation’s single-largest Affordable housing program that directly addresses supply. It comes in two forms: a 9% tax credit to incentivize new development and a 4% tax credit for the rehabilitation and preservation of existing properties. According to the National Housing Preservation Database, LIHTCs support roughly 2.5 million rental units.


The number of new low-income units placed into service under the program topped out at 126,796 in 2007. Since then, the number of new units placed into service fell in nine of the next 12 years, gradually sliding to 44,732 new units through 2020 — a 65% drop from its peak (Chart 2).1  According to a September 2022 National Council of State Housing Agencies (NCSHA) report, the costs associated with Affordable construction have risen by about 30% since 2019, creating significant funding gaps that have limited new projects. However, in July 2022, the U.S. Treasury Department announced new guidance, allowing State and local governments to unlock coronavirus fiscal recovery funds to support the financing of Affordable housing projects, creating a temporary funding-gap relief.    

After the 2016 Presidential election, LIHTC’s equity price per credit dropped from $1.04 to $0.95, as investors anticipated, and eventually received a decrease in tax liabilities (Chart 3).2 After stabilizing near $0.93 between 2017 and 2019, LIHTC equity prices gradually compressed to sub $0.90 levels by the end of 2020, where they remain today.

Through the second quarter of 2022, LIHTC equity prices averaged $0.89 per credit, according to Cohn Reznick’s LIHTC Equity Pricing Trends data. Over the last seven quarters, LIHTC equity prices have ranged narrowly between $0.87 and $0.89 per credit. The drop off in these prices after 2016 meant that Affordable developers could not raise as much capital by trading their tax credits. As a result, the adoption of a 4% LIHTC for rehabilitation became
a more attractive option than the 9% LIHTC for ground-up development, leading to a surge in its utilization in 2017. 

 

The tax credit became more attractive after the December 2020 passage of the Consolidated Appropriations Act, which established a minimum 4% floor on the applicable federal tax credit rate for tax-exempt multifamily housing private activity bonds (PABs). The minimum floor made the 4% tax credit more valuable and increases how much funding developers can raise to finance Affordable construction. Through the second quarter of 2022, the share of LIHTC mortgages utilizing this tax credit remained elevated at 38%. 

 

The dollar volume of newly HUD-insured LIHTC mortgages grew substantially over the past decade, though there has been an inflection in 2022 (Chart 4).3  
In the second quarter of 2022, the dollar volume of newly issued mortgages utilizing LIHTC covered under insurance from the U.S. Department of Housing and Urban Development (HUD) declined – falling 13.9% to $1.1 billion, according to HUD’s Insured Multifamily Mortgages Database. The removal of temporary factors that boosted volumes in 2021, including the 12.5% expansion of the 9% tax credit and other disaster-related credit allocations, may partially explain the 2022 inflection. Moreover, widening financing gaps may also have limited the volume of newly insured LIHTC mortgages.

More recently, the FHA has shared positive updates, but there is a widespread and bipartisan recognition that the program needs a more sizable overhaul. In September 2022, the FHA announced that it was increasing the frequency of allowable surplus cash distributions with most FHA-insured multifamily mortgages, making HUD-insured loans more like private debt instruments and thereby boosting their investor appeal. The Affordable Housing Credit Improvement Act of 2021, which is currently stalled in Congress, would increase per capita allocations and improve the usability of LIHTC credits. While the bill has yet to receive a formal vote in either chamber of Congress, it has continued to pick up co-sponsors throughout 2022, and it could receive renewed attention after a LIHTC expansion was removed from the Inflation Reduction Act of 2022.

HCV: Substantial Progress Remains Elusive, Modest Increases

While LIHTC is the largest supply-side Affordable housing program, the Housing Choice Voucher (HCV) program is the largest overall, accounting for 2.7 million units.4 As a share of all federally subsidized rental units, the HCV Program accounted for 52% in 2021, a rise of 66 basis points (bps) from 2020 (Chart 5). The next largest program by unit count, Project-Based Section 8, is a distant second, accounting for 26% of federally subsidized units. 

 

The HCV program is primarily a form of tenant-based housing assistance, where renters spend 30% of their adjusted monthly income on rent, and the balance is covered through a subsidy. It provides targeted assistance to very low-income households. The average household income for renters in this program in 2021

was $15,577.

HUD’s policy guidelines dictate that 75% of new families enrolled in the program must earn at most 30% of the local area median income (AMI). The balance of households in the program may earn up to 80% of AMI. HCVs are widely supported by private-market advocates. Unlike rent control which places the burden of the subsidy on the landlord, HCVs interact openly in a market setting. Moreover, a renter household can retain their subsidy should they choose to move, encouraging positive housing mobility.

The HCV program has expanded slowly in recent years, failing to keep pace with growing market needs. Between 2015 and 2020, the number of units covered under the program expanded between 0% and 2% per year. However, some meaningful progress is underway. Announced on September 23, 2022, HUD awarded 19,359 new HCV vouchers to 1,945 Public Housing Authorities — the most expansive allocation in nearly 20 years. HUD also recently announced its 2023 Fair Market Rent (FMR) estimates, a criteria benchmark used to determine whether a unit qualifies for an HCV renter to reside in. FRMs are set to go up by an average of 10% around the country next year, which should help to offset the impact of the inflationary rise in housing costs experienced throughout 2022.  

 

The HCV program looked like it was in line for a significant expansion as part of the White House’s proposed “Build Back Better” plan, though the earmarked funding was left out of the Inflation Reduction Act. Still, the White House’s proposed 2023 fiscal year budget currently calls for a 9.4% step up in HUD appropriations — a request that would bring the Department’s annual budget up to $71.9 billion. The proposal includes a request for $1.6 billion in funding for the creation of an additional 200,000 new vouchers. A new piece of bipartisan legislation that was introduced to Congress in March 2022 aims to boost private-market participation in the HCV program through grant funding incentives. However, the bill has not been brought forward for a vote in either chamber of Congress. Further, U.S. Representative John Katko (R-NY), one of the bill’s sponsors, is retiring at the end of this term, likely stalling the legislation’s advancement. 

NOAH: Agencies Supporting Liquidity, Regulations Limiting Supply

While most of the attention paid to the affordable housing sector focuses on regulation and policy intervention, the naturally occurring affordable housing (NOAH) supply is proportionally more significant. For Freddie Mac multifamily loans originated in 2021, 81% of the housing units that are affordable at 80% or below local AMI are NOAH properties (Chart 6).5  These data align with previous estimates that suggest NOAH units account for about three-quarters of all of the affordable housing supply.

Under FHFA guidelines, Fannie Mae and Freddie Mac each have lending caps of $78 billion for the 2022 calendar year, with the direction that half of the total allowance must be directed towards mission-driven lending, which includes a primary focus on support for affordable housing. Notably, the NOAH share of affordable units in Freddie Mac K-Deals has grown considerably since 2021, surging from 78.8% in the second quarter of 2021 to 92.3% in the second quarter of 2022 (Chart 7).

An argument often supported by housing industry advocates is that by reducing the regulatory costs of construction, developers could add more units, thereby creating more NOAH supply. According to a report released in June 2022 by the National Multifamily Housing Council and the National Association of Home Builders, regulatory compliance accounts for a staggering 40.6% of multifamily development costs. Moreover, 47.9% of developers report avoiding localities with inclusionary zoning mandates, and a consensus (87.5%) report avoiding areas with rent control measures on the books.   

What to Watch

In the months ahead, there are several developments to watch that could impact the landscape of affordable housing heading into 2023. As was the case heading into 2022, the White House’s proposed budget calls for a larger HUD funding increase than the Department received in the passing resolution. As 2022 comes to a close and Congress sets its sights on FY 2023, the HUD budget increase is an item to watch for because it may influence the potential expansion of the HCV program. The collective $16 billion increase in Agency lending caps in 2022 meant, at minimum, an additional $8 billion in liquidity for mission-qualifying housing. The lending caps for 2023 are expected to be announced later this year.


Elsewhere in Washington, D.C., there has been a renaissance in policy ideas aimed at improving affordable housing outcomes, though no substantive legislation has advanced as of late. In July, the Senate’s Housing, Transportation, and Community Development Subcommittee held the Opportunities and Challenges in Addressing Homelessness hearing, which “showcased bipartisan support for addressing the affordable housing crisis.” An expansion of the LIHTC was among the solutions supported by both a majority of witnesses and committee members. The creation of a Neighborhood Home Tax Credit and a Middle-Income Tax Credit to support ownership opportunities in distressed communities and housing affordability for workforce renters, respectively, were two other proposed solutions of note. 

 

All else equal, 2022 marks a unique and challenging moment for the affordable housing landscape. Policymaking priorities, public sentiment, and investment preferences are aligned in support of the creation of affordable housing. Still, the economic conditions over the past year have distinctly eroded affordability, making the prospect of adding new supply more difficult. The temperature gauge has risen for the affordable sector, and to turn the tide, 2023 will need to be a year where consensus solutions translate into substantive actions. 

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1 These data are released by the U.S. Department of Housing and Urban Development (HUD) and can be retrieved here. According to HUD, 2020 data are scheduled for release in Spring 2022.

2 LIHTC Equity Pricing Trends are calculated as a quarterly series by Chandan Economics. 4% LIHTC usage is displayed as a four-quarter moving average. Novogradac data are utilized from Q1 2016 through Q4 2019. Cohn Reznick data are utilized Q1 2020 through Q4 2021.

3 Data presented in Chart 5 are displayed as a four-quarter moving average based on the date of initial endorsement.

4 Total is based on data retrieved from HUD’s Office of Policy Development and Research; Data are through 2021.

5 According to a Chandan Economics analysis of Freddie Mac K-Deals

6 An additional 36% of respondents in 2021 indicate that affordable housing is a minor problem in their local area.

Disclaimer
All content is provided herein “as is” and neither Arbor Realty Trust, Inc. or Chandan Economics, LLC (“the Companies”) nor their affiliated or related entities, nor any person involved in the creation, production and distribution of the content make any warranties, express or implied. The Companies do not make any representations regarding the reliability, usefulness, completeness, accuracy, currency nor represent that use of any information provided herein would not infringe on other third party rights. The Companies shall not be liable for any direct, indirect or consequential damages to the reader or a third party arising from the use of the information contained herein.

Affordable Housing Trends Report – Spring 2022

Affordable
Housing
Trends Report
Spring 2022

About This Report

First introduced in Fall 2021 and updated on a semiannual basis, the Arbor Realty Trust-Chandan Economics Affordable Housing Trends Report offers a wide-ranging lens into the critically important affordable and workforce housing sectors. The affordable housing market is a complex but vital part of the housing industry. 

This report series provides timely research and analysis that connects the many disparate data points into a single source for multifamily investors, owners, developers, and other industry stakeholders. The aim of the series is to provide a comprehensive and digestible primer for readers to better understand the major trends shaping the affordable housing market.

This series focuses on Affordable housing supported by government subsidies or tax incentives like the Low-Income Housing Tax Credit (LIHTC), and the Naturally Occurring Affordable Housing (NOAH) segment. It will address some of the significant changes observed both in terms of policy decisions and market dynamics, and describe some of the opportunities for investment and financing in the space. 

As Affordability Crisis Deepens, Policies and Market Shift in Support of Affordability

Key Takeaways

  • The Housing Choice Voucher program is receiving increased attention and funding. The proposed 2023 federal budget calls for a 17.4% increase in program allocations, and bipartisan lawmakers are pushing legislation to retain private landlords.
  • States are increasingly adopting new measures to encourage the development of affordable supply, including supplemental state-level low-income housing tax credits and updates to zoning codes to allow for higher-density residential construction.
  • After the CDC’s eviction moratorium was struck down in August, evictions remained well below their pre-pandemic averages as Emergency Rental Assistance funding saw an accelerated rollout, supporting 1.4 million households in Q4 2021.

Table of Contents

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Affordable Report Spring 2022

State of the Market

To understand the affordable housing market in Spring 2022, one needs to first assess how the sector weathered the pandemic and then assess the current state of housing affordability across the country.

Terms and Definitions
Source: U.S. Department of Housing and Urban Development; Tax Policy Center; Chandan Economics

When it comes to the pandemic response, federal policymakers proved effective at defusing a largescale increase in homelessness from financially insecure households. The Center for Disease Control and Prevention’s (CDC) eviction moratorium, while unpopular among industry advocates, prevented an estimated 1.6 million evictions, according to an analysis by Eviction Lab. After the Supreme Court struck down the federal moratorium in August 2021,1 the wave of evictions that many were forecasting did not immediately materialize. Nationally, tracked eviction filings ticked up but remained well below their prepandemic averages, according to Eviction Lab. A key reason why many at-risk renters have remained in their homes is the deployment of funds allocated in the Emergency Rental Assistance Program (ERA)— a funding pool designed to assist households that are unable to pay rent or utilities. The ERA Program was established as part of the Consolidated Appropriations Act of 2021, where it recived $25 billion in funding (ERA1), and then was reinforced with a second round of nearly $22 billion of funding (ERA2) in the American Rescue Plan. Through Q4 2021, ERA funding was supporting 1.4 million households, according to the U.S. Treasury Department (Chart 1). 2

Despite expanding public and public-private responses focused on addressing affordable housing initiatives, including federal Affordable program expansions in the Consolidated Appropriations Act of 2022 and a growing level of lender participation, a structural affordability crisis still exists. The National Low Income Housing Coalition estimated that the U.S. had a shortage of 6.8 million affordable rental homes in 2021. According to U.S. Department of Housing and Urban Development (HUD), rental affordability took a significant hit due to the pandemic. Even as conditions have started to improve over the past year, the pace of rent increases around the country has kept HUD’s Rental Affordability Index well below where it entered 2020. 

 

Housing affordability advocates are increasingly calling for an all-hands-on-deck approach to easing affordability. In their America’s Rental Housing 2022 Report, the Joint Center of Housing Studies of Harvard University (JCHS) outlined federal, state, and local policies needed to address the growing affordability gap. On the federal level, JCHS noted that policy “must not only support expansion of the subsidized stock, but also make it possible for private developers to build affordable units.” Large increases in area median incomes (AMI) across the country should offer some relief to Affordable developers, allowing for increased project feasibility on the margin (Chart 2). However, increased public support for the private creation of new affordable housing supply is necessary. According to the National Low Income Housing Council, “without public subsidy, the private market is unable to produce new rental housing affordable” to low income households as the rents in these units are unable to cover development costs.

Affordable housing policy is growing in both scope and ambition. The enacted 2022 Federal Budget allows for an 8.9% increase in HUD funding, and the 2023 budget proposal released March 28th calls for another aggressive expansion (+9.4%). The bipartisan Choice in Affordable Housing Act of 2022, which was introduced in the U.S. House of Representatives this past March offers a mechanism for retaining private landlords in the Housing Choice Voucher program. Additionally, many states are increasingly turning to updates in zoning codes to allow for more naturally occurring affordable housing development. All else equal, policy responses across all levels of government are ramping up as the market need is both substantial and growing. 

Number of LIHTC Units in Service Declining

The single-largest Affordable housing program that directly addresses supply is the LowIncome Housing Tax Credit (LIHTC). It comes in two forms: a 9% tax credit to incentivize new Affordable development and a 4% tax credit for the rehabilitation and preservation of Affordable supply. According to the National Housing Preservation Database, LIHTCs collectively support roughly 2.5 million rental units.

 

The number of new low-income units placed into service under the program topped out at 126,796 in 2007. Since then, the number of new units placed into service fell in nine of the next 12 years, gradually sliding to 42,895 new units through 2019 — a 66% drop from its peak (Chart 3).3

After the 2016 election, the LIHTC equity price per credit dropped from $1.04 to $0.95, as investors anticipated and eventually received a decrease in tax liabilities (Chart 4).4  After stabilizing near $0.93 between 2017 and 2019, LIHTC equity prices started gradually compressing again in early 2020. Through the fourth quarter of 2021, LIHTC equity prices averaged $0.88 per credit, according to Cohn Reznick’s LIHTC Equity Pricing Trends data.

The dropoff in LIHTC equity prices between fourth-quarter 2016 and third-quarter 2017 meant that Affordable developers could not raise as much project capital by trading their tax credits. As a result, the adoption of a 4% LIHTC for rehabilitation became more attractive than the 9% LIHTC for ground-up development.

 

Between the first quarter of 2017 and the first quarter of 2018, the share of new mortgages on LIHTC properties utilizing the 4% tax credit surged from 22% to 52%. The tax credit became more attractive after the December 2020 passage of the Consolidated Appropriations and Recovery Act, which established a minimum 4% floor on the applicable federal tax credit rate for tax-exempt multifamily housing private activity bonds (PABs). The minimum floor made the 4% tax credit more valuable and increases how much funding developers can raise to finance Affordable construction. Through fourth-quarter 2021, the share of LIHTC mortgages utilizing the tax credit was 38%. While this share represents a retrenchment from the first-quarter 2018 of 52%, but still elevated from the levels seen through all of 2016 and much of 2017.

 

Despite the slowdown in new units placed in service utilizing LIHTC, the dollar volume of newly issued mortgages utilizing LIHTC covered under insurance from the U.S. Department of Housing and Urban Development (HUD) is accelerating. According to HUD’s Insured Multifamily Mortgages Database, the dollar volume of newly HUD insured LIHTC mortgages grew substantially post-Great Recession, from a quarterly average of $254.7 million in 2011 to $1.3 billion in 2021 (Chart 5).5 As of the rolling four quarter period ending in fourth quarter 2021, the volume of HUD insured LIHTC mortgages grew by 49%. Directionally, these data line up with Cohn Reznick’s tracking of the LIHTC market’s annual equity volume, which reached an estimated $22.4 billion in 2021—a 22% increase from the year before.

The increase in total mortgage volume has been driven, in part, by structural forces, namely HUD’s policy and procedures. HUD’s most substantial change was the launch of its LIHTC Pilot Program in 2012. The Pilot Program initially allowed for higher per-unit rehabilitation costs under Section 223(f) and streamlined mortgage application requirements, resulting in quicker approval timelines. From 2012 to 2018, HUD’s loan volume of LIHTC transactions increased from 5% to 34%, according to Novogradac. Updates to the program in 2019 included allowing substantial rehabilitation and new construction (9% LIHTC) under the 221(d)(4) and 220 loan programs. These changes made a majority of LIHTC transactions eligible for HUD insured mortgage financing.

 

With investor demand for LIHTCs dramatically exceeding the supply of available credits, states are increasingly adopting supplemental tax credits for new Affordable construction to fill the void. Last year, Arizona became the 23rd state to introduce a state-level low-income housing development program. Five other states (Iowa, Kansas, Kentucky, North Carolina, and Ohio) currently have pending legislation to introduce similar versions of the program.

 

In addition to the supplemental tax credits at the state level, there is growing support for increasing the program’s reach by adjusting the current law. Under current law, the owner of a development project is generally eligible to claim tax credits that do not count towards a housing agency’s LIHTC volume cap, so long as the new development is being financed by 50% or more with tax-exempt private activity bonds. Lowering this “financed-by” threshold to something lower than 50% allows for more development projects to qualify for these credits. The National Council of State Housing Agencies conducted an analysis with Novogradac and found that by lowering this threshold, up to 1.5 million additional affordable rental homes could be created this way if the threshold were halved.

Housing Choice Voucher Program Accounts for Majority of Units

While LIHTC is the largest supplyside affordable housing program, the Housing Choice Voucher (HCV) program is the largest overall, accounting for 2.7 million units.6 As a share of all federally subsidized rental units, the HCV Program accounted for 52% last year, a rise of 66 basis points (bps) from 2020 (Chart 6). The next largest program by unit count, Project Based Section 8, is a distant second, accounting for 26% of federally subsidized units.

The HCV program is primarily a form of tenant-based rental assistance, where renter families spend 30% of adjusted monthly income on rent, and the balance is covered through subsidy. The policy focus of the HCV program is on assisting very low-income households. The average household income for HCV renters in 2021 was just $15,577—increasing a slight 2.4% year-over-year, though failing to keep pace with inflation by a significant margin.

 

HUD’s policy guidelines dictate that 75% of new families admitted into the program must earn at most 30% of the local area median income (AMI). The balance of admitted families may earn up to 80% of AMI. HCVs are widely supported by private-market advocates. Unlike tools such as rent control that place the burden of the subsidy on the landlord, HCVs interact openly in a market setting. Moreover, a renter household retains their subsidy should they choose to move, encouraging positive housing mobility.

 

While the HCV program is the majority of the federally subsidized rental universe, it has expanded slowly in recent years, failing to keep pace with growing market needs. Between 2015 and 2020, the number of units covered under the program expanded annually between 0% and 2%. However, some meaningful progress is underway. While Congress failed to authorize the full $68.7 billion for HUD’s annual budget requested by the Biden Administration, it did greenlight a significant $5.34 billion increase (+8.9%) from the 2021 appropriations, bringing HUD’s 2022 budget up to $65.7 billion. The HCV program will receive an additional $1.6 billion (+6.2%) in funding this year compared to 2021, accounting for 30% of the total HUD budget increase.

 

On March 1, 2022, a group of bi-partisan congresspersons, introduced a bill titled the “Choice in Affordable Housing Act.” The resolution focuses on the HCV program, and seeks to address declining private-landlord participation. According to a press release from Representative John Katko (R-NY), who introduced the bill with Emanuel Cleaver (DMO), the Act would reform the HCV program “by providing grant funding that allows local Public Housing Agencies […] to offer landlords strategic incentives to accept vouchers and conduct recruitment efforts with local property owners. The bill would also remove burdensome property inspection regulations and allow more vouchers to be used in higher-opportunity neighborhoods.” Both the National Multifamily Housing Council and the National Apartment Association are firmly supportive of the house resolution, claiming it has the power to move the needle for the efficacy of the HCV program.

Naturally Occurring Affordable Housing Units Climb Above 80%

While most of the attention paid to the affordable housing sector focuses on regulation and policy intervention, the naturally occurring affordable housing (NOAH) supply is proportionally more significant. For Freddie Mac multifamily loans originated in 2021, 81% of the units affordable at 80% or below of local AMI are NOAH properties (Chart 7).7 These data align with previous estimates that suggest NOAH units account for about three-quarters of all of the affordable housing supply.

Increasingly, state governments are grappling with the use of zoning codes as a policy tool to influence the creation of NOAH supply. Many states are taking approaches similar to that of Oregon, which in 2019, moved to codify the allowance of duplexes in cities with more than 1,000 residents and four-family dwellings in all cities with more than 25,000 residents. Arizona is the latest state to push a zoning overhaul, introducing legislation in February 2020 that, if passed, would override some stringent local codes, allowing for more residential construction.

 

Conversely, the use of rent control policies at the state and local levels continues to be popular— a tool that industry housing advocates and economists strongly oppose because of its supply-limiting effects. St. Paul, Minnesota passed rent control legislation in November 2021, and new construction in the metro has declined by more than 80% in the lead up to its implementation. According to a January 2022 NMHC Survey, 58% of multifamily investors are actively reducing or avoiding investments in rent control markets and another 15% are considering reducing their investments.

What to Watch

As we move further into 2022, attention will increasingly shift to the White House’s proposed 2023 budget. According to a Novogradac analysis, the proposal calls for raising HUD’s annual budget to $71.9 billion— a $6.2 billion increase from the enacted 2022 budget. A majority of the proposed increase in funding would be earmarked for a sizable 17.4% (+$4.8 billion) expansion of the Housing Choice Voucher program.

 

Beyond the anticipated discretionary budget request, the 2023 proposal also calls on a one-time spend of $40 billion for housing and community development requests to be overseen by HUD and the U.S. Treasury’s Community Development Financial Institutions Fund.

 

Elsewhere in Washington, D.C., there are pending legislative reforms with the potential to strengthen the country’s ability to maintain and add affordable rental housing. In addition to the previously discussed “Choice in Affordable Housing Act,” on March 28th, 2022, Senators John Thune (R-SC) and Jerry Moran (R-KS) introduced the “Housing Supply Expansion Act.” The bill, which could ease both labor and administrative costs in the construction process if passed has gained the support of industry groups.

 

According to a 2021 Pew Research Survey, 49% of all Americans believe that affordable housing in their local area is a major problem— up from 39% in 2018.8 Further, there is a growing sense of priority tracked across all age groups, races, genders, income brackets, education levels, geographies, and political affiliations. With home prices and apartment rents pressing to new highs, it is likely that the affordability crisis will continue to get worse before it gets better. At the same time, 2022 marks a unique moment where policymaking priorities, public sentiment, and investment appetites are aligned— providing some hope that this year could be a true turning of the tides.

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For more affordable housing research and insights, visit arbor.com/blog

arbor.com/affordable-housing
844.951.4915

1 While the CDC’s eviction moratorium was lifted, many states still had state-wide moratoria in place in and after August 2021.

2 The Displayed Number of Households displays include both ERA1 and ERA2 funding.

3 These data are released by the U.S. Department of Housing and Urban Development (HUD) and can be retrieved here. According to HUD, 2020 data are scheduled for release in Spring 2022.

4 LIHTC Equity Pricing Trends are calculated as a quarterly series by Chandan Economics. 4% LIHTC usage is displayed as a four-quarter moving average. Novogradac data are utilized from Q1 2016 through Q4 2019. Cohn Reznick data are utilized Q1 2020 through Q4 2021.

5 Data presented in Chart 5 are displayed as a four-quarter moving average based on the date of initial endorsement.

6 Total is based on data retrieved from HUD’s Office of Policy Development and Research; Data are through 2021.

7 According to a Chandan Economics analysis of Freddie Mac K-Deals

8 An additional 36% of respondents in 2021 indicate that affordable housing is a minor problem in their local area.

Disclaimer All content is provided herein “as is” and neither Arbor Realty Trust, Inc. or Chandan Economics, LLC (“the Companies”) nor their affiliated or related entities, nor any person involved in the creation, production and distribution of the content make any warranties, express or implied. The Companies do not make any representations regarding the reliability, usefulness, completeness, accuracy, currency nor represent that use of any information provided herein would not infringe on other third party rights. The Companies shall not be liable for any direct, indirect or consequential damages to the reader or a third party arising from the use of the information contained herein.

Affordable Housing Trends Report – Fall 2021

Affordable
Housing
Trends Report
Fall 2021

About This Report

Arbor Realty Trust and Chandan Economics’ newest joint report series, Affordable Housing Trends Report, focuses on a critically important segment of the multifamily residential market in the United States: affordable housing. The affordable housing market is a complex but vital part of the housing industry that is increasingly receiving attention from the public and private sectors.

This report series will provide proprietary research and analysis that connects the many disparate data points into a single source for multifamily investors, owners, developers and other industry stakeholders. Our aim is to provide a better understanding of the many facets of affordable housing and the major trends shaping the market.

Published semiannually, this report will mainly focus on Affordable housing supported by government subsidies or tax incentives like the Low-Income Housing Tax Credit (LIHTC), as well as the Naturally Occurring Affordable Housing (NOAH) segment. It will address some of the significant changes we’re seeing both in terms of policy decisions and market dynamics and describe some of the opportunities for investment and financing in the space.

Affordable Housing Garners Greater Attention in Post-Pandemic Environment

Key Findings

  • The pandemic’s economic effects, combined with this year’s surging rent prices, have strained low-income renters, placing housing affordability back in the spotlight.
  • Reduced business income due to the pandemic and related downturn may decrease the value of tax credits and require Affordable developers to seek alternative financing sources.
  • The share of LIHTC mortgages utilizing the 4% tax credit remained elevated at 40% through second-quarter 2021, reflecting the continued attractiveness of rehabbing versus ground-up development.
  • The Housing Choice Voucher program, another major Affordable housing initiative, is set to be expanded in the proposed 2022 federal budget by $3.5 billion – a 13.3% increase from fiscal year 2021.

Table of Contents

State of the Market

Low-Income Housing Tax Credit

Housing Choice Voucher Program

Naturally Occurring Affordable Housing

What to Watch

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State of the Market

Taking the brunt of both long-dated structural and pandemic-related headwinds, housing affordability finds itself at a uniquely challenging crossroads. At the same time, never has the national conversation, the enthusiasm of the commercial real estate sector and the commitment of the federal government ever been so aligned when it comes to addressing the nation’s affordable housing gap.
Terms and Definitions
Source: U.S. Department of Housing and Urban Development; Tax Policy Center; Chandan Economics

The National Low Income Housing Coalition estimates that the U.S. has a shortage of 6.8 million affordable rental homes. Further, the share of U.S. renter households that pay more than 30% of Area Median Income (AMI) on rent – a threshold the federal government uses to define whether or not a unit is affordable – sits at a concerning 42.7%.


States with large populations like Florida and California are particularly rent burdened, with the share of households spending nearly one-third or more of their income on rent totaling 50.0% and 48.4%, respectively, according to the latest American Community Survey (Chart 1).

Chart 1

The troublesome picture of national rental affordability comes after a decade-long stretch between 2011 and 2020 when average annual rent growth topped average hourly earnings growth.1 While the pandemic did temporarily reduce rent prices nationally, it did not result in a permanent reset of rent levels. Rental housing costs are soaring in 2021, with asking rents growing 10.3% from a year earlier through August, according to RealPage.

 

Further exacerbating the affordability crisis, the shutdown’s labor market impacts, both in terms of total employment loss severity and pace of recovery, have asymmetrically affected low-income workers. Due to loss of employment and wages, many low-income households could not make their rent payments. A Chandan Economics analysis of the Census Bureau’s Household Pulse Survey indicated that low-income renters consistently had lower rent payment rates than moderate- and high-income renters throughout the pandemic (Chart 2).2  The recent end of the eviction moratoria adds another layer of pressure to low-income renters as it may present additional negative impacts on this renter population.

Chart 2

1 Based on Chandan Economics Analysis comparing the average hourly earnings wage growth of private sector workers and the Bureau of Labor Statistics (BLS) Consumer Price Index for rent of primary residence.

2 Data are from weeks 2, 14, 22, 30, and 37 of the U.S. Census Bureau’s Household Pulse Survey.

Low-Income Housing Tax Credit

The single-largest Affordable housing program that directly addresses supply is the low-income housing tax credit (LIHTC). LIHTCs come in two forms: a 9% tax credit to incentivize new Affordable development and a 4% tax credit for the rehabilitation and preservation of Affordable supply. According to the National Housing Preservation Database, LIHTCs collectively support roughly 2.5 million rental units.

 

The number of new low-income units placed into service under the program topped out at 126,796 in 2007. Since then, the number of new units placed into service fell in nine of the next 12 years, gradually sliding to 42,895 through 2019 — a 66% drop-off from its peak (Chart 3).

The decade-long slowdown of new LIHTC unit additions comes as changes in the tax code and other forces have reduced some of the incentive for adding new affordable units. Naturally, the implied value of the tax credit is more valuable in a high-tax environment, meaning that when corporate tax rates were reduced following the 2016 election and subsequent passing of the 2017 Tax Cuts and Jobs Act, a LIHTC lost some of its attraction.

 

The LIHTC equity price per credit dropped from $1.04 to $0.95 from fourth-quarter 2016 to first-quarter 2017, as investors anticipated and eventually received a decrease in tax liabilities (Chart 4).3 Since then, the quarterly average for LIHTC equity prices has remained between $0.91 and $0.94, according to Chandan Economics’ analysis of Novogradac’s LIHTC Equity Pricing Trends data.

3 LIHTC Equity Pricing Trends are calculated as a quarterly series by Chandan Economics. The 4% LIHTC usage is displayed as a four-quarter moving average. Novogradac data are reported through May 2021.

As a result of the price drop, LIHTC syndicators and affordable housing developers re-structured transactions to maintain economic yields for investors and to promote continued liquidity in the space. Additionally, the more recent run-up in acquisition, construction and renovation costs has made formerly feasible transactions more challenging and reduced the number of units a tax credit allocation could support.

 

The drop in LIHTC equity prices also meant that Affordable developers faced more competition for the 9% LIHTC, pushing them toward the 4% LIHTC. At the same time, the GSEs expanded their platforms to allow for greater use of debt private placements, leading to further expansion of 4% bond executions.

 

Between the first quarter of 2017 and the first quarter of 2018, the share of new mortgages on LIHTC properties utilizing the 4% tax credit surged from 22% to 52%. The tax credit became more attractive after the December 2020 passage of the Consolidated Appropriations and Recovery Act, which established a minimum credit floor. Through second-quarter 2021, the share of LIHTC mortgages utilizing the tax credit remained elevated at 40%.

 

Despite the slowdown in new units placed in service utilizing LIHTC, the dollar volume of newly issued LIHTC mortgages covered under insurance from the U.S. Department of Housing and Urban Development (HUD) has been accelerating. According to a Chandan Economics analysis of HUD’s Insured Multifamily Mortgages Database, the dollar volume of newly HUD-insured LIHTC mortgages grew substantially post-Great Recession (Chart 5). The volume grew from a quarterly average of $254.7 million in 2011 to $862.0 billion in 2020, an impressive 14.5% compound annual growth rate.4

Chart 5

In addition to overall investor demand for Affordable housing and the growing liquidity in the sector, the increase in total mortgage volume has been driven, in part, by structural forces, namely HUD’s policy and procedures. HUD’s most substantial change was the launch of its LIHTC Pilot Program in 2012. The Pilot Program initially allowed for greater per-unit rehabilitation costs under Section 223(f) and streamlined mortgage application requirements, resulting in quicker approval timelines.

 

From 2012 to 2018, HUD’s loan volume of LIHTC transactions increased from 5% to 34%, according to Novogradac. Updates to the program in 2019 included allowing substantial rehabilitation and new construction (9% LIHTC) under the 221(d)(4) and 220 loan programs. These changes made a majority of LIHTC transactions eligible for HUD-insured mortgage financing.

4 Data presented in Chart 5 are displayed as a four-quarter moving average based on date of initial endorsement.

Housing Choice Voucher Program

While LIHTC is the largest supply-side affordable housing program, the Housing Choice Voucher (HCV) program is the largest overall, accounting for 2.6 million units.5 As a share of all federally subsidized rental units, the HCV Program accounted for 51.7% through the end of 2020 (Chart 6). The next largest program by unit count, Project Based Section 8, is a distant second, accounting for 25.6% of federally subsidized units. The HCV program is primarily a form of tenant-based rental assistance, where renter families spend 30% of monthly adjusted income on rent, and the balance is covered through subsidy. The policy focus of the HCV program is on very low-income households. Additionally, a renter household retains their HCV subsidy should they choose to move, encouraging positive housing mobility.
5 Total is based on data retrieved from HUD’s Office of Policy Development and Research.
The HCV program remains the behemoth of the federally subsidized rental universe, but a meaningful expansion of the program has not materialized in recent years. Between 2015 and 2020, the number of units covered under the program expanded annually between 0% and 2% each year. Still, there is some hope on the horizon. The current federal budget bill would expand HUD’s annual budget by $6.8 billion, including an additional 13.3% increase for the HCV program ($3.5 billion) — a step up that would cover an additional 125,000 low-income households.

Naturally Occurring Affordable Housing

Most of the attention paid to the affordable housing sector tends to focus on regulation and policy intervention, but the Naturally Occurring Affordable Housing (NOAH) supply is proportionally more significant. A recent McKinsey deep-dive into NOAH concluded that the sector is “not well defined, tracked, or understood.”

 

According to a Chandan Economics analysis of Freddie Mac multifamily loans originated since the beginning of 2020, 84% of the units captured in the sample that are affordable at 80% or below of local AMI are NOAH properties (Chart 7).6 These data fall generally in line with previous estimates that suggest NOAH is responsible for about three-quarters of all affordable supply.

Chart 7
6 The surge in refinancing activity during the pandemic may have increased the share of NOAH properties in the sample. The naturally occurring share has decreased in the two most recent quarters of data as refinancing activity has resettled back to a normal level, averaging 75.7% in second-quarter 2021.

On average, NOAH properties tend to support higher rents than the Affordable housing sector, though the difference is slight. On second-quarter 2021 closed Freddie Mac loans, the median rent in NOAH properties was $1,154 — just 4.0% higher than the $1,114 in properties with rental subsidies, per the Chandan Economics analysis.

 

NOAH properties represent a critical cornerstone of the total U.S. affordable housing supply. Yet, because these NOAH properties lack formal agreements or an incentive structure to keep their units affordable, they are the most susceptible to rent increases that would price out low-income renters.

 

Generally, policy makers have paid more attention to addressing the affordable housing needs of the most severely cost-burdened renters. However, any actions taken to address affordable housing in a meaningful way must consider this segment of the market.

What to Watch

Housing affordability will likely persist as the uneven COVID-19 recovery progresses. The employment recovery has not been as robust for those at the lowest ends of the wage spectrum and those that rely on affordable housing the most. Additionally, the impacts of lifting the eviction moratorium remain to be seen.

 

Regarding tax credits, there is growing concern that LIHTCs may see some erosion in value going forward. If business income remains down due to the pandemic and related downturn, the resulting smaller tax bills may mean less demand for the tax credits. With Affordable developers often trading their LIHTCs to finance the equity portion of their capital stack, there may be an increased need for state and local government incentives to make Affordable transactions viable.

 

Still, some recent developments at the federal level could have a positive impact on preservation and creation of new affordable supply. The Federal Housing Finance Agency (FHFA) recently proposed substantially increasing its annual affordable housing goals for multifamily units between 2022 and 2024, which would provide a substantial boost to affordable housing development (Table 1).7 Further, as of Sept. 1, the FHFA announced that it is raising the annual lending caps for each GSE to invest in LIHTCs from $500 million to $850 million.

7 FHFA Proposed 2022-2024 Housing Goals for Fannie Mae and Freddie Mac, August 2021.

Additionally, the House of Representative’s proposed HUD budget expands affordability programs that influence renting for low- and middle-income earners. Expansion of Section 8 coverage should provide some relief to low-income renters and increased HOME Investment Program funding should encourage the development, acquisition and rehabilitation of more affordable housing units. The floor put under the 4% LIHTC should also incentivize developers to increase the supply of Affordable housing.

 

The expansion and modification of existing federal programs is a meaningful step in the right direction. Structural issues are deeply entrenched and adequately addressing the country’s perpetual undersupply of affordable housing will, undoubtably, take significant time. However, a growing conversation and an alignment of public and private ambition are supporting a more positive outlook for a sector where the reward for doing well can also be doing good.

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