The United States has lost more than half a million affordable housing units since 2020, roughly 8 percent of the nation’s total, even as the nation’s affordable housing crisis continues to intensify, according to a report from Moody’s Analytics.
Two primary factors led to this loss. First, many of these affordable properties were funded by Low Income Housing Tax Credits (LIHTC), a program started in the late 1980s that offers developers tax credits in exchange for keeping their properties affordable, usually for 30 years.
“The big concern is the 30-year compliance period,” said David Caputo, a data scientist at Moody’s and the report’s co-author, told Commercial Observer. “The program started 30 years ago [so] we’re now seeing, for the first time, compliance periods coming to an end.”
And over the last few years, just as the program was coming up on 30 years, rents began skyrocketing across the country, so property owners at the end of their compliance periods had the option to convert the units to market rate.
“Combined with the pandemic and rents increasing, that puts buildings in the position where they might want to take advantage of that,” Caputo said.
Owners of LIHTC-subsidized properties don’t have to convert their units to market rate. They can also reset their compliance period by renovating their buildings funded by additional LIHTC credits. Property owners can apply for the retrofit credits any time after 15 years in the program, but it resets their compliance period for an additional 30 years.
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In certain markets, where rents are rapidly increasing, the incentive to do that is low.
Within the next five years, another 188,000 LIHTC units are expected to expire, according to the report, though it’s not evenly distributed. In certain markets where a large number of these units are set to expire and the rents are on the up, there’s a high likelihood more owners will opt to convert those units to market rate.
Those markets include Las Vegas; Omaha, Neb.; Colorado Springs, Colo.; Charleston, N.C.; Tucson, Ariz.; Albany, N.Y. and Buffalo, N.Y., none of which have an adequate supply of affordable housing in the pipeline, according to the report. Of these, Charleston and Buffalo are most at risk because of their spectacular rent growth, increasing 16.8 percent and 12.6 percent, respectively, over the last year, and both have some of the highest gaps between rent and income growth.
“It’s a problem everywhere,” said Matt Reidy, Moody’s director of CRE economics, and another of the report’s authors. “We’re so dramatically undersupplied in affordable housing.
In most states we’re hundreds of thousands of units undersupplied.”
The loss of these units is exacerbating the affordable crisis, but it is certainly not the only matter that needs to be addressed.
“We need more comprehensive solutions on affordable housing,” Reidy said. “We need an all-of-the-above type of approach, and preservation is an important piece of that. If you can’t keep the existing stock, how can you grow it?”
On the plus side, the 30-year expiration date means affordable housing players have a much easier path to getting into the space, said Caputo. “Now is a great time for companies that want to get involved in affordable housing … by acquiring these properties that will be ending their compliance.”
Instead of building LIHTC units from scratch, affordable players or nonprofits can acquire these properties and restart the compliance periods via the retrofit program. “You will see more people who want to be a part of a solution to the social crisis. They now have a better opportunity than ever to rehabilitate properties that already exist,” Caputo added.