A continuing and pervasive concern within the affordability issue is the lack of supply of affordable housing to households with the greatest need. Affordable units currently in place are typically supported by either a federal housing program or tax subsidy. As such, these properties adhere to a low-income restriction as defined by HUD for a designated period of time. While millions of units have been supported through various designated affordable housing programs, many existing affordable units are set to expire under low-income restrictions. Upon expiration, most affordable product will become middle-to-low end market-rate product, shrinking the volume of affordable product, and potentially exposing low income renters who already at the greatest risk.
An annual average of just over 200,000 affordable units are expected to lose federal funding due to expiration under their respective affordable programs over the next 10 years, with the majority of those units conceived under the Low Income Housing Tax Credit (LIHTC). All told, over 10 years, that volume translates to almost 2.2 million units that are at risk of expiring. Below highlights notable programs with the greatest number of affordable units at risk:
- LIHTC: One of the most effective tools to incentivize development, rehabilitation and preservation affordable housing. Established in 1986, units under the LIHTC program has reached the 30-year mark, many properties initially developed are set to reach the term limit of their low income restrictions. The volume of expiring units is expected to continually grow as the LIHTC has become an effective instrument to the affordable housing market.
- Project-based rental assistance: Primarily composed of Section 8 vouchers, this includes rental subsidies for households that fall under respective income restrictions as defined by HUD for both “newly constructed, rehabilitated and existing rental and cooperative apartment projects,” according to Center on Budget and Policy Priorities.
- Other noteworthy programs: The HOME Investment Partnerships Program, FHA Insured multifamily properties and affordable programs specific to rural markets (such as USDA Section 515) and rental markets focused on the elderly demographic (this includes Section 202 Direct Loans). The HOME program provides grants through partnerships with state and local housing authorities to build, purchase or rehabilitate affordable rental housing for low-income households. The other programs highlighted are essentially mortgage based, tailored to specific market types. Over time, these loans will come to term, the owner may repay the mortgage and the units would be removed from existing affordable supply unless there is a continuation of an affordable subsidy in place.
Nationally, there are approximately 215,000 affordable units at risk of losing federal funding over the next 10 years. But some states’ affordable unit supply is more vulnerable to expiration over this time horizon than others. The chart below illustrates which states’ affordable housing supply is at greatest risk of expiring with respect to the national rate.
Emphasis on Preservation
Even with a large portion of the affordable market threatened, efforts to support the affordable market by creating new units have dampened. With respect to developing new affordable units, it is difficult to keep up with demand. It is even more difficult to incentivize developers to create new affordable units as these deals typically yield smaller margins in terms of ROI than conventional development. With no significant additions on the horizon, preserving the existing affordable units remains a crucial tactic to support affordable supply. Preservation is often advocated by many industry leaders, affordable housing agencies and housing advocacy groups as part of a broader strategy to maintain supply levels as many affordable projects age.
There are a few programs in place to support this strategy, ensuring low-income renters and households remain insulated from the conventional market. Specifically, HUD recently expanded the Rental Assistance Demonstration (RAD) Program in 2014. The program enables public housing authorities to use public debt and equity to reinvest in the nation’s 1.2 million public housing units – the agency estimates $26 billion is required to repair and maintain this existing affordable stock.
With respect to the LIHTC, the 9% tax credit for new construction was made permanent in late 2015 through the tax and spend program. Previously a floating rate, the move makes the 9% tax credit (or 70% subsidy) a reliable tool to developers and those seeking to rehabilitate affordable properties. As a next step, affordable housing advocates are seeking to expand the 4% subsidy (30% subsidy) for rehabilitation construction. Moving forward, the LIHTC remains a key investment tool for new and existing affordable product and its expansion is critical, based on continued demand from the affordable end of the market, to incentivize investment into this market segment.