Affordable Housing. Who is going to fill the funding void?
Affordable housing development has been disrupted by the new tax reform legislation leaving a void in funding for this market.
The Section 42 Housing Tax Credit Program (LIHTC) will be significantly impacted by the changes to the tax code. These credits encourage affordable housing and funding over three million affordable housing units since 1986 in every state across the US in both urban and rural areas.
Buying a passive Housing Tax Credit has traditionally been the safest and most profitable way to make an investment in local disadvantaged communities. The credits are popular with financial institutions, major corporations in the financial field and banks. Housing Tax Credits are typically bought to both offset future corporate tax liability and satisfy CRA credits from the Community Reinvestment Act through a limited partnership interest.
However, the new tax reform legislation lowered the corporate tax rate from 35% to 21% thus making the Housing Tax credits worth less and affecting their overall value.
The Housing Tax Credits currently account for 90% of all affordable rental housing created in the United States today. “The new tax law will reduce the growth of subsidized affordable housing by 235,000 units over the next decade, compounding an existing shortage” according to an analysis by Novogradac & Company, a national accounting firm based in San Francisco
THE NEED FOR AFFORDABLE HOUSING:
The need for affordable housing is greater than ever today. According to the Pew Research Center, more U.S. households are renting than at any point in fifty years. The number of renter households jumped by nearly a third between 2004 and 2016 and country has added about one million renters since 2010 alone according to the Harvard Joint Center for Housing Studies.
Housing prices continue to increase, however wages remain stagnant. This creates an affordability issue for most people interested in purchasing a home. Nearly forty million Americans live in housing they cannot afford. Too much of their gross monthly income is dedicated to housing payments. More than eleven million people who rent pay half their income for housing and over thirty-eight million households can’t afford their housing. These numbers are not only staggering but unsustainable according to the The State of the Nation’s Housing 2017, an exhaustive report from the Joint Center for Housing Studies of Harvard University.
Low-income renters have especially seen their residual income decline by eighteen percent since 2001 according to America’s Rental Housing report. This is due in part to a shortage in the low cost housing market.
THE FUNDING GAP
The pricing of the Housing Tax Credits credits have already dropped 10% creating a funding gap for future development. That combined with an overall decrease in funding for US-HUD has squeezed the already limited resources of state and local governments.
In addition, there has already been a shift in funding goals for many states from locating affordable housing projects in areas with a high concentration of low income and minority residents to less impacted areas where the costs to build projects are higher – which is adding additional stress to the widening the funding gap. As interest rates rise, the gap will rise as well.
It’s clear there is a demand for affordable housing that’s not being met and this provides an excellent opportunity for organizations like CDFIs to service the market. A CDFI is a Community Development Financial Institution which supports economically disadvantaged communities by creating housing opportunities and affordable financing options in these underserved communities. DRI Fund is one such CDFI.
DRI Fund is concerned about the implications the new tax bill will have on affordable housing development, as the lack of affordable housing in low and moderate income communities is already significant issue. “Financial resources to preserve or expand the current affordable housing stock will become more scarce under the new tax plan. However, these changes will also create new financing and affordable lending opportunities in that sector, which were not available previously.” says Steven Kirsch, Managing Director of DRI Fund.