Will Federal Budget Reconciliation Ease Nation’s Housing Affordability Crisis?

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U.S. lawmakers are on the cusp of adopting the most far-reaching affordable housing legislation the nation has seen in decades. Expanded tax credits under a pending budget agreement could pave the way to creating thousands of additional rental units for households with low and median incomes, helping to address a housing supply gap that has dashed hopes and opportunities for a large and growing segment of the population.

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Affordable housing initiatives expected to soon become law along with the 2022 federal budget range from an expansion of low-income housing tax credit (LIHTC) allocations to states to the creation of several new tax credits to incentivize development and rehabilitation of affordable housing in a wider range of product types and income levels. Those could include a middle-income housing tax credit to promote affordable rentals for families with incomes closer to their local median but who struggle to afford median rents. A neighborhood homes tax credit would target development and rehabilitation of affordable single-family homes. Existing tax credits for preserving historic structures, investments in new markets and for renewable and clean energy may also expand.

Discussion of these much-needed improvements to community development and housing programs has been overshadowed in the news by recent coverage of delayed votes and ongoing intraparty negotiations on a $1.2 trillion infrastructure bill and a social spending measure that has yet to be finalized. On Oct. 1, President Biden urged Democrats to scale back the reconciliation plan, which would include boost to affordable housing, from $3.5 trillion to about $2 trillion to gain support for its passage from the party's moderate members.

On its surface, the ongoing drama on Capitol Hill could appear discouraging for proponents of housing reform, who in recent years have seen promising efforts to expand the LIHTC and other programs fail to reach decisive votes. The good news is that many of those earlier provisions influenced the budget reconciliation legislation still under discussion, and both the White House and the majority Democratic Party have made passage of the social spending package a priority.

What is more, the current debate is focused on spending, while the federal approach to promoting affordable housing is chiefly through tax credits rather than an allocation from the treasury. Factor in strong bipartisan support for addressing housing affordability, and the housing and community development initiatives currently on the table have excellent prospects to take effect with a 2022 budget accord.

These improvements could collectively channel billions of dollars to the creation of affordable housing. It could not come at a time of greater need.

Affordability Grows More Elusive

For decades, the United States has struggled to bring safe residential rental units within the financial reach of low-income households. Despite limited success since the LIHTC's introduction in 1986, affordability remains elusive for a growing segment of the population.

Ideally, a household should spend no more than 30 percent of its income on housing. The White House estimates that before the pandemic, 11 million families or nearly a quarter of U.S. renters paid more than half their income on rent.

The ability to lease a home is down 29 percent from a peak in 2001, according to the HUD Rental Affordability Index. In the first quarter of this year the index reached a new low of 99.7. That is a heartbreaking milestone, because any value below 100 on the index means a renter household with median income will not qualify for median-priced rent.

The lack of available housing affects not only the jobless but also the working class. In many cities, median apartment rents strain the resources of full-time wage earners including service industry workers, skilled laborers and even civil servants.  Rising costs for land, materials and construction have simply made it financially infeasible to develop multifamily product that is affordable to working-class families without some form of incentives to mitigate development costs.

Turning The Tide

While authors of the reconciliation legislation have not yet published a draft, the plan is expected to draw housing priorities from recent proposals including the Biden administration's Build Back Better Agenda, the Affordable Housing Credit Improvement Act of 2021, and three bills submitted in July by Rep. Maxine Waters, a California Democrat who chairs the House Financial Services Committee. Another bill, the Decent, Affordable, Safe Housing for All Act (DASH), was introduced in September by Sen. Ron Wyden, D-Oregon, who chairs the Senate Finance Committee.

These measures vary in their approaches, but all reflect a sense of urgency and the conviction that the nation must do more to address increasing homelessness and an intensifying crisis in the availability and affordability of housing. And they provide concrete steps to make a greater impact on these pressing issues. Authors of the Affordable Housing Credit Improvement Act, for example, estimate their plan would generate 2 million new affordable housing units over the next decade. By way of comparison, the LIHTC program currently produces a little more than 100,000 low-income units per year.

Currently the LIHTC program produces a little more than 100,000 low-income housing units per year, and those units serve households making at or below 50 percent or 60 percent of local median income. Sweeping changes are likely under reconciliation legislation for the Fiscal 2022 budget, however.

Because both congressional houses have approved a budget resolution, lawmakers will be able to include these or other housing objectives along with other provisions as they reconcile the House and Senate versions. The LIHTC program has historically enjoyed strong bipartisan support as a way to stimulate community investment without direct federal funding, so its proposed expansion is unlikely to draw opposition.

Whatever the housing initiatives ultimately adopted along with reconciliation legislation, new and expanding programs will translate into additional private and institutional capital flowing into communities. As they meet urgent needs for housing, projects made possible through tax credits will also create jobs and opportunities associated with the development, design, finance, construction, and management of affordable residential properties.

Developers may find that obtaining development approvals for affordable housing becomes easier when they can target a wider variety of income levels. Real estate developers and investment funds will have more freedom to build tax-credit housing portfolios that appeal to a variety of investors, increasing the geographic diversity of properties within markets.

The new investment vehicles that emerge to propel affordable housing initiatives will likely find an attentive and growing investor base. Given the Biden administration's efforts to increase taxation of capital gains and limit tax-deferred exchanges under Section 1031 of the IRS code, many individuals and institutions looking for ways to reduce their tax exposure may gravitate to tax-credit bonds.

What is certain is that housing affordability is a formidable national challenge that supersedes partisanship, and the expected changes to the LIHTC program have the potential to bring tangible improvements for American households. The finance and real estate industries should prepare now for the crucial roles they will play in supporting and carrying out this noble effort.

Article By Robert Walton, Managing Director of Credit and Asset Management, Trimont

About the Author

Robert Walton is Managing Director of Credit and Asset Managing at Trimont Real Estate Advisors, a globally integrated loan servicer and credit manager to the commercial real estate finance industry.