Apartment construction in the U.S. is at the highest levels since the 1980s, but very little targets a critical and rapidly growing segment of the market: affordable housing. While developers compete to target the trendy niche of college-educated Millennials, the supply/demand gap continues to widen in the designated affordable housing space. And there’s little to suggest a shift anytime soon.
The supply/demand gap in affordable housing has been overshadowed by discussion of rent growth in conventional apartments outpacing incomes in recent years. But a strong case can be made that the biggest affordability challenge is the lack of designated affordable housing supply that limits rents to a defined percentage of income. The Joint Center for Housing Studies at Harvard illustrated the issue in their report, “America’s Rental Housing: Evolving Markets and Needs.” The center’s research outlines the growing number of “extremely low-income renters” (defined as rent beyond 30% of area median income), while the existing stock of affordable units remains mostly unchanged from 1999 through 2011 – meaning that new affordable supply levels are enough only to replace units lost to obsolescence. According to the National Low Income Housing Coalition, the U.S. needs to add another 4.4 million affordable units for those extremely-low renters alone.
With a limited stock of designated affordable rental units for a growing population of low-income renters, what is being done to fill the gap? Not much. A review of various programs and policies shows that federal agencies have been more focused on the preservation of affordable units. And at the local level, it appears cash-strapped governments are struggling to make affordable housing development financially feasible for developers.
At a federal level, there are several players who are engaged on the affordable multifamily housing issue. These include Housing and Urban Development (HUD) as well as Fannie Mae and Freddie Mac under the conservatorship of the FHFA. Below are details around recent activity from each entity.
Housing and Urban Development
HUD plays the greatest role in providing financing incentives for affordable multifamily projects. The bulk of which includes the Low-Income Housing Tax Credit (LIHTC), which provides tax credits that can be bought and sold on a trading platform administered by the IRS through respective state housing or finance entities. Introduced in 1986, these tax credits are used to reduce the debt of developing and building affordable housing, as well as rehabilitation and preservation of existing affordable properties through a public/private partnership. The end goal is to provide affordable rental housing to economically constrained households with specific income limits as defined by HUD. Since its inception, the program has financed development or rehabilitation of 2.2 million affordable units. In addition, HUD is also focused on regionalized rental assistance programs. Also under the purview of HUD is the National Housing Trust Fund. Established from the Home and Economic Recovery Act of 2008, the fund is intended to help develop, preserve, renovate, and operate affordable rental properties. However, this provision is not fully funded to date due to a suspension of funding, though the FHFA recently signaled this suspension will be lifted and funding will begin in 2016.
Fannie Mae and Freddie Mac
Both agencies played a larger role in affordable multifamily coming out of the housing crisis; this is especially true as private capital continues to flow into multifamily. Mel Watt, the new director of the FHFA, recently put in place affordable housing goals for Fannie and Freddie. Watt said the agencies have an “ongoing critical role in the multifamily sector, particularly for affordable multifamily properties.” These goals are intended to ensure the affordable market is being served, especially as market competition in conventional multifamily accelerated from private capital. Overall these goals translate primarily into providing liquidity for loan purchases, development, and construction, as well as rehabilitation and preservation. But it’s unlikely enough to spur a boom in affordable housing development. Watt also indicated the affordable housing goals would particularly focus on rural areas and small properties. Agency lending for conventional apartments should not be impacted by the affordable housing focus, according to Watt.
Are these programs enough?
The general view in the industry is that the HUD and FHFA programs are doing more to preserve the affordable housing market than to expand it. But the supply problem is very much on the radar for multifamily industry leaders, who are pushing several plans they say would alleviate the problem.
Ron Terwilliger, former CEO of Trammell Crow Residential, called the issue a “silent housing crisis” and proposed growing the production of designated rental supply through expansion of LIHTC as well as financing programs from federal agencies. He also criticized the federal government’s strong preference to propping up the for-sale housing market, which he says isn’t helping low-income households.
“It makes no sense that about three-quarters of the federal government’s housing spending through tax breaks and direct appropriations is devoted to supporting homeownership when homeowners have more than twice the income of renters on average,” Terwilliger said at AHF Live: The Affordable Housing Developers Summit in October, according to a recent article in Affordable Housing Finance. The article went on to summarize Terwilliger’s remarks, stating: “The largest subsidy for housing is the mortgage-interest deduction, with a projected cost of between $70 billion and $100 billion annually … explaining that the deduction benefits homeowners with higher incomes while do nothing to help lower-income families.”
Local governments, too, could be major players in spurring affordable housing development. Developers are often discouraged from building affordable apartments due to costs of land and construction. Given that affordable units, by definition, mean lesser rent for renters and lesser revenue for owners, developers need help to make the numbers work, noted Doug Bibby, the president of the National Multifamily Housing Council, in a recent commentary piece posted on the NMHC website.
“If local governments truly want more units affordable to more of its citizens, then they also need to get in the game and find ways to help the private multifamily sector bring down costs so they can parlay those savings directly into lower asking rents,” Bibby wrote.
But, as Bibby noted in his column, many local governments have been cash-strapped, struggling with budget shortfalls. Given those structural problems at the local level and the popularity of federal programs encouraging home purchase over renting, there appears no immediate fix in sight for the shortage of affordable housing.
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