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The Role of Tax Incentives in Affordable Housing

This week’s blog post is the testimony of Benson “Buzz” Roberts for the U.S. Senate Committee on Finance hearing titled The Role of Tax Incentives in Affordable Housing. 

Thank you, Chair Wyden, Ranking Member Crapo, and members of the committee.

The National Association of Affordable Housing Lenders is the alliance of major banks and mission-driven lenders and investors in affordable housing and inclusive community revitalization. NAAHL member banks provided more than $180 billion in financing for low- and moderate-income people and communities in 2020. NAAHL member banks make most Low-Income Housing Tax Credit investments.

I have good news and bad news.

The Bad News

First the bad news: Housing is less affordable now than it has been in 15 years. Home prices rose 18.8% and rent climbed 17.6% in 2021.2 Last October, about half of Americans (49%) called the availability of affordable housing in their local community a major problem. That is more than cited drug addiction (35%), COVID-19 economic and health impacts (34% and 26%), and crime (22%), according to Pew Research. Housing is the single largest cost the average household faces.

Housing costs are not just a casualty of inflation, but also a driver of inflation. Home prices rose 11% in 2020,4 when overall inflation was 1.4%.5 Housing represents more than 30% of the CPI. As economists Mark Zandi and Jim Parrot recently wrote: “If policymakers are serious about reining in inflation, then they have little choice but to take on the shortfall in housing supply…. While the other drivers of inflation are set to ease in the coming months, the shortfall in housing isn’t going anywhere unless policymakers do something.”

The affordability problem started in high-growth coastal markets but is now nationwide. From 2012 to 2019, supply worsened in 47 states and the District of Columbia. Among 310 metropolitan areas nationwide, supply was shrinking or shortages were growing worse in three-quarters of them heading into the pandemic. Boise, for example, was short 13,000 housing units in 2019, equivalent to about 5% of the region’s housing stock.

This problem has been building for years because we have not been building enough housing for years, especially lower cost homes and apartments. “Total housing stock grew at an average annual rate of 1.7% from 1968 through 2000,” but only 0.7% over the last decade. The shortfall over the past 20 years is as much as 6.8 million units.8 And, although multifamily construction is now rising, it is mostly aimed at the luxury market, while the worst supply shortages are for lower cost housing.

Moreover, in the past, supply increases at the top end of the market would “filter down” to ease affordability at all price points, but now we are seeing some markets where supply shortages are so great that prices for older properties are “filtering up.”

In other words, we are literally paying the price for failing to produce and preserve enough housing, especially for low- and moderate-income people and communities, where the needs are greatest. Because the obstacles to housing production will take years to address, we must get started right away.

The Good News

The good news is that we do know how to expand housing supply for the people and communities that need it most. The Low-Income Housing Tax Credit (Housing Credit) has produced more than 3.6 million affordable rental apartments, virtually all the affordable production over the past 35 years. This total is equivalent to more than one-third of the entire multifamily stock with similar rents. The Housing Credit is widely considered the U.S. government’s best affordable housing production program ever. The proposed Neighborhood Homes Investment Act would apply the Housing Credit’s successful approach to a different challenge: to revitalize struggling communities and expand homeownership opportunities by building and rehabilitating starter homes.

NAAHL urges Congress to pass the bipartisan Neighborhood Homes Investment Act (S. 98) and the Affordable Housing Credit Improvement Act of 2021 (S. 1136). Together, these bills would produce up to 2.5 million additional affordable homes.

The Housing Credit and Neighborhood Homes have earned bipartisan support because they are based on the same broadly embraced principles:

Private Market Discipline

  • Project sponsors use tax credits to raise capital from investors to finance home building and rehabilitation.
  • Private investors – not the federal government – bear construction and marketing risks. Investors claim the tax credits only after development is successfully completed.
  • Tax credits are limited to the minimum amounts required for financial feasibility.
  • A competitive and efficient investment market minimizes investor returns and maximizes public impact.
  • Investments leverage other project funds, further improving cost-effectiveness.

State Administration

  • States have proven to be excellent stewards of the Housing Credit and other affordable housing programs. They define their specific needs and priorities; allocate tax credit authority on a competitive basis; and monitor compliance.
  • The federal government’s role is limited. The IRS develops regulations and monitors state and investor compliance.

Targeting and Flexibility

  • The Housing Credit and Neighborhood Homes are targeted to ensure that rigorous policy goals are met while providing flexibility so states, communities, and the private market can address local needs, maximize efficient execution, and adapt to changing conditions.
  • Metropolitan and rural communities are equitably served.

Positive Economic and Community Impact

  • The Housing Credit’s 3.6 million apartments have generated 5.7 million jobs, $643 billion in wages and business income, and $223 billion in tax revenue.
  • Neighborhood Homes is projected to produce 500,000 homes over 10 years, generating $100 billion in development activity, nearly 800,000 jobs, $43 billion in wages and business income, and $29 billion in tax revenue.
  • Other benefits include crime reduction, more income diversity in low-income neighborhoods,13 and the physical and economic stabilization of neighborhoods.

Neighborhood Homes Investment Act

National home price data mask an incredible diversity among and within regional housing markets. In 2021, the median home value was more than $1.6 million in San Jose but less than $160,000 in Toledo. Moreover, every state has struggling urban and rural communities where homes are in poor condition and the cost of rehabilitating them or building new homes exceeds their market value. Development is not financially feasible in these circumstances without governmental support.

The absence of quality housing for homeownership has been driving economic distress in these communities. Single-family homes are the predominant land use in most of these communities, so it is hard to revitalize them without attractive, affordable homes. We hear from rural communities that they cannot retain or attract growing businesses without quality affordable housing for workers. We hear from urban neighborhoods that the absence of good housing drives out middle-income families, while concentrating poverty and limiting the disposable income required to support shopping, services, economic development, and a sustainable local tax base. Conversely, we also hear from urban and rural communities alike that new or improved housing can replace decline with revitalization.

As Christopher Herbert, Managing Director at the Harvard Joint Center for Housing Studies, told the House Ways and Means Committee last week:

Expanded public subsidies are needed to increase the supply of deeply affordable housing available both for rent and to own. Particular attention should be given to efforts that expand the supply of affordable housing in lower-income communities where the depressed value of homes impedes both new construction and substantial rehabilitation of existing homes as the costs of these investments exceed current market values. Not only would these communities benefit from such investments, it would also provide residents of these areas with opportunities to own or rent good quality homes in their own neighborhoods. For this reason, the Neighborhood Homes Investment Act deserves serious consideration as a tool for expanding the supply of good quality homes and homeownership opportunities in these communities.

The bipartisan Neighborhood Homes Investment Act is carefully targeted to these struggling communities, based on their lower incomes, elevated poverty, and low home values. About 22% of metro census tracts nationwide, and 27% of non-metro census tracts would qualify, with additional flexibility for certain other non-metro census tracts. Maps of eligible communities in each state are available at

Neighborhood Homes meets these communities where they are by offering tax credits sized to cover the gap between the cost of developing homes and the price at which they can be sold. The credits would be capped at 35% of development costs for starter homes; prices would be limited so they are broadly affordable; and high-income buyers would be excluded. These guardrails promote revitalization without gentrification.

Neighborhood Homes is limited to homeownership, but it is otherwise very flexible. It can build new homes or acquire and rehabilitate homes for sale, and special provisions would also allow using credits to rehabilitate homes for current homeowners. It can be used for detached homes, townhomes, two- to four-unit homes, condominiums, and cooperatives. Manufactured homes are eligible, provided they are permanently attached to a foundation and are titled as real property. A minimum level of rehabilitation prevents merely superficial improvements.

The credit is also simple enough to accommodate even small-scale developments. Homes must only be in eligible communities, meet cost and sales price standards, and be occupied by eligible homebuyers (or existing owners). The tax credits are claimed when the homes are completed and owner-occupied. No further compliance is required of investors. If a homeowner re-sells their home within five years, they would pay a declining portion of their profit to the state for use on future homes.

State housing agencies will administer the credits, by setting their own priorities and standards for costs and profits, running a competitive process for allocating the credits, and ensuring compliance. The states’ experience and excellent record of administering Low-Income Housing Tax Credits qualifies them well to take on these responsibilities.

No current tax incentive is designed to fill this gap. Tax-exempt bonds and the mortgage interest deduction can lower effective mortgage payments, but they do not close development cost/sales price gaps. Opportunity Zones incentives require long-term investments, not the development and immediate sale of properties.

Neighborhood Homes has support from a wide range of national associations representing the housing industry, financial services, affordable housing and community development, civil rights, and state agencies.

Low-Income Housing Tax Credits

The Housing Credit is America’s primary tool to create and preserve affordable rental housing.

There is a vast and growing demand for affordable housing. More than 10 million low-income households spend more than half of their monthly income on rent, cutting into other essential expenses like childcare, medicine, groceries, and transportation. Meanwhile, there is a growing shortage of affordable housing. For every 100 extremely low-income households, there are only 37 affordable homes available. In total, there is a shortage of 7.1 million rental homes affordable and available for households making 50% of area median income and below, according to the National Low Income Housing Coalition.

However, the need for affordable housing has skyrocketed. According to the Harvard Joint Center for Housing Studies’ just-released “State of the Nation’s Housing” report, last year brought the largest year-over-year increase in the cost of rental housing in over 20 years, with rent increases in some metro areas over 20%.

As already noted, the Housing Credit has financed the development of 3.6 million affordable rental homes in urban, suburban, and rural areas since its inception in 1986. In 2019 and 2020, the Housing Credit produced or preserved roughly 130,000 apartments annually.
In total, the Housing Credit has housed over eight million low-income households, including low-wage workers, veterans of the armed forces, senior citizens, formerly homeless families and individuals, people recovering from opioid addiction, and people with disabilities. The median income for households living in Housing Credit properties is less than $18,200, and approximately 52% of households are extremely low-income, making 30% or less of the area’s median income, according to the Department of Housing and Urban Development. If forced to pay market-rate rent, many of these households would be just one unforeseen event away from losing their housing.

The Housing Credit works in all types of communities, including large and small urban areas, suburban communities, rural towns, and on tribal land. Roughly 22% of properties are in non-metropolitan counties, where it has historically been challenging to develop affordable housing. The Housing Credit has also been important for communities recovering from natural disasters – from California wildfires to Hurricane Katrina to the floods in Iowa.

“Housing Credit properties are financially sound and stable for the long term,” according to the accounting firm CohnReznick. “Our survey showed only a 0.57% cumulative foreclosure rate, which to the best of our knowledge is lower than any real estate asset class. This included only one new reported foreclosure in 2020, despite the challenges of COVID-19. The industry’s remarkably low foreclosure rate is attributable primarily to the effective public-private partnership and oversight, the pent-up demand for affordable housing, and the industry’s collaborative efforts to enhance underwriting and asset management quality.”

The Housing Credit remains vastly oversubscribed. In 2020, Housing Credit developers requested nearly 2.5 times as many Housing Credits as there was available allocation. Further, a growing number of states, including California, New York, Massachusetts, Washington, Georgia, Tennessee, and close to 20 others, are already using or close to using all of their bond volume cap, which limits their ability to finance 4% Housing Credit developments.

Here are the most important steps Congress should take to support Housing Credits:

  • Restore the temporary 12.5% increase in Housing Credit allocation authority enacted in 2018, which expired at the end of 2021. We are losing production now because of this expiration.
  • Increase state allocation authority by 50% over two years. This expansion would boost production and preservation nationwide.
  • Allow Housing Credits in conjunction with tax-exempt multifamily bonds if bond proceeds exceed 25% of expected project costs, a reduction from 50% under current law. This change would allow private activity bonds to support more affordable housing.
  • Reform the Qualified Contract rules to prevent the premature loss of affordability and nonprofit Right-of-First-Refusal rules to extend public-mission control of Housing Credit properties. These provisions would actually raise federal revenues by $1 billion, according to the Joint Committee on Taxation.24 I am appending a more detailed explanation of why these changes are urgently needed.

This concludes my testimony. I would be happy to answer your questions.

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