Tuesday, February 18, 2014

Housing Finance and Tax Reform Can Expand Affordable Rental Options

by Bill Apgar
Senior Scholar
Today, when more than one in three American households live in rental housing, ongoing erosion in renter incomes combined with ever rising rents has pushed the number of renter households paying excessive shares of income for housing to record levels.  Unfortunately, efforts to expand the supply of affordable rental housing remain mired in congressional wrangling over budget deficits and failure to reach consensus over how best to reform the nation’s housing finance sector. Although proposed changes to the single-family mortgage sector have captured most of the headlines, equally important reforms are now being discussed that will fundamentally alter the regulation of multifamily housing finance, including the operations of the Federal Housing Administration (FHA) and the government-sponsored enterprises (GSEs), as well as tax and subsidy mechanisms to expand affordable rental housing options through the Low Income Housing Tax Credit (LIHTC), public housing, and rental assistance programs.

As I discussed in my recent research brief, The Changing Landscape for Multifamily Finance, tax reform can play an important role in balancing the national budget and reducing the national debt. But in seeking to create a path forward, Congress should be careful not to short circuit tax expenditures that reduce the cost of capital for multifamily rental production and that enable developers to offer units at rents affordable to lower-income households. As one of the nation’s largest corporate tax expenditures, however, LIHTC is vulnerable to elimination or substantial cuts to help pay for lower corporate tax rates or any one of several deficit-reduction proposals now under consideration.

Supporters argue that LIHTC is a premier example of a successful public-private partnership. When combined with housing vouchers or other forms of rental assistance, the tax credit plays an important role in providing decent housing that is affordable to the nation’s poor. Opponents, however, counter that LIHTC’s complex rules scare away many financially-motivated private developers.  Moreover, critics contend that all too often LIHTC’s benefits go to moderate-income, as opposed to the nation’s lowest income, renters.

To improve the program’s ability to assist a broader range of renters, it is important to expand the ability of developers to combine LIHTC resources with housing vouchers or other tenant-based subsidies.  Currently, LIHTC requires developers to meet one of two standards: either 20 percent of units must be rent-restricted and occupied by tenants with incomes less than 50 percent of area median income (AMI).  Alternatively, at least 40 percent must be rent-restricted and occupied by tenants with incomes less than 60 percent of AMI. For this purpose, “rent-restricted” means that the tenant pays no more than 30 percent of their monthly income on rent. 

In practice, these criteria have led to multifamily housing developments that serve a very narrow band of tenants with incomes falling between 40 and 60 percent of AMI.  One proposal to extend the reach of the LIHTC program to serve more of the nation’s lowest income renters would require LIHTC developments to serve a larger share of households with incomes less than 40 percent of AMI while limiting the number of residents earning more than of 80 percent of AMI living in LITHC developments.  Another would award additional project-based housing vouchers to developments that have at least 30 percent of units occupied by tenants with incomes of less than 30 percent of AMI.  

Similarly, efforts to reform FHA and the housing GSEs must link access to government guarantees to requirements that a substantial portion (say, 60 percent) of the total rental housing units in developments are affordable to households earning 80 percent or less of AMI.   Such proposals would encourage developers to more aggressively search out available rental assistance options, and in doing so widen the income band of residents able to affordably live in LIHTC and other rental housing developments. Mixed-income buildings that offer rental housing options serving a broad range of incomes are especially important in low income communities that are being revitalized and/or are located in sparsely populated areas. These proposals could be structured to be revenue neutral, but would be enhanced by increasing the funding for housing vouchers and other rental assistance efforts

In another recent effort to harness private capital to expand the supply of affordable housing, HUD’s Rental Assistance Demonstration (RAD) program was designed to stem the loss of public housing and certain other at-risk, federally assisted properties. The program allows owners to pledge a portion of cash flow derived from existing long-term, project-based Section 8 contracts as collateral to support public and private lending to make much-needed improvements. At a time when the backlog of public housing repairs stands at $25.6 billion and other federally assisted properties have yet to recover fully from the Great Recession, RAD helps both public and private owners of multifamily housing address critical rehabilitation needs by borrowing against their future income streams on the private market. 

Market fundamentals suggest that the multifamily finance sector should remain strong in the near term. Coordination of rules governing utilization of existing long-term, project-based Section 8 contracts with ongoing GSE and tax policy reform efforts could unleash private sector expertise to serve broader segments of today’s renters. This would help turn the energy of the multifamily finance sector toward reducing the rental cost burdens that undermine the well-being of millions of US households. 

Tuesday, February 11, 2014

A Disappointing Report on Recent Household Growth Leads to More Questions than Answers

by Dan McCue
Research Manager
Although household growth is the major driver of housing demand, getting an accurate picture of recent trends in this measure is difficult, especially when Census surveys show conflicting trends.   On January 31, the most recent Housing Vacancy Survey (HVS) was released with Q4 numbers and some annual data for 2013.  As one of the few surveys that provide timely measures of household growth, the release was much anticipated in hopes that it would shed more light on trends of a recovery seen elsewhere in the housing market, but the results were disappointing, if not somewhat confusing. 

In its recent release, the HVS reported annual household growth of just 448,800 in 2013.  This represents a 48 percent drop in household growth relative to that from 2012 and marked the lowest annual household growth measure since 2008, in the depths of the Great Recession (Figure 1).

Source: US Census Bureau, Housing Vacancy Survey

In September we noted that the HVS was showing a disconcerting slowdown in household growth after finally having picked up in 2012.  With the annual number now in, this low measure of household growth in the HVS is puzzling, at odds with an assortment of other housing market indicators that have been painting a more positive picture for housing overall.  In particular, the drop in household growth did not mesh with several other trends:

  • The much higher 1.375 million annual growth reported in the 2013 Current Population Survey Annual Social and Economic Supplement (CPS/ASEC);
  • The same, steady increase in jobs in 2013 as during the previous year; and
  • Increased momentum in the housing market, including a further decline in vacancy rates, an increase in new home sales, and an increase in housing construction during the year.

The divergent measure of household growth from the HVS is also troubling because while the HVS is known to have a downward bias in its estimated count of households, it has been useful in tracking short-term trends in that it provides more timely estimates than other sources and has generally been subject to less sampling error.  Indeed, while the CPS/ASEC and HVS both originate from monthly CPS surveys, the HVS annual household growth number is a 12-month rolling average of year over year growth, whereas annual growth in the CPS/ASEC is year over year growth for the single March survey, making it more volatile and less reflective of trends throughout the entire year.

But this is not the only—or most important—source of difference between HVS and CPS/ASEC household counts.  These two surveys differ more fundamentally in that CPS/ASEC arrives at its estimate of households based on weights derived from estimates of the total population and the share who are heads of household, while the HVS estimates households using weights that add up to estimates of the total housing units in the country, with the household count derived as the number of housing units that are not vacant (see Note on Table 3).  During census years, the CPS/ASEC head-counting method has generally produced totals much closer to the decennial Census –the Census Bureau’s benchmark survey of people and housing--while the HVS stock-controlled method has generally produced estimates that are lower by around 3-4 million households. This suggests the HVS household estimates are generally biased lower to begin with.

With its household estimates pinned to estimates of the housing stock, the surprisingly low HVS household growth estimate may be at least in part due to overly low estimates of growth in the total housing stock.  As shown in Figure 2, over the past few years, the total housing stock estimate used by the HVS has been growing slowly and very steadily since 2011, gaining around 350,000 units a year.  At the same time the Census Bureau’s New Residential Construction surveys show a significant upturn in the number of new housing units completed in 2012 and 2013, reaching 762,000 units.  In order for the HVS estimates of changes in the housing stock to be accurate, this would suggest a surge in demolitions that roughly offset the recent surge in new construction, which seems unlikely. 

Source: JCHS tabulations of US Census Bureau, Housing Vacancy Survey and New Residential Construction data.

There is a third census survey from which household growth can be measured, the American Community Survey (ACS), that might shed more light on the recent trend. The ACS is not as timely, however, and the results for 2013 are not due to be released until late 2014.  Still, for 2012 the ACS reported household growth levels in between the HVS and CPS counts (978,000), suggesting it might prove a moderate and viable tie-breaker between the other two surveys on the direction of the recent trend. But since the ACS household estimates are linked to the same housing stock estimates as the HVS chances are the ACS, too, will be subject to a downward bias.

Overall, the discrepancies in these surveys are troubling given the importance of household growth as an indicator of the health of the economy and the housing market.  For the time being, housing analysts are flying in the dark on this key metric.