[Senate Hearing 118-403]
[From the U.S. Government Publishing Office]
S. Hrg. 118-403
TAX POLICY'S ROLE IN INCREASING AFFORDABLE HOUSING SUPPLY FOR WORKING
FAMILIES
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FINANCE
UNITED STATES SENATE
ONE HUNDRED EIGHTEENTH CONGRESS
FIRST SESSION
__________
MARCH 7, 2023
__________
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Printed for the use of the Committee on Finance
__________
U.S. GOVERNMENT PUBLISHING OFFICE
56-714-PDF WASHINGTON : 2024
COMMITTEE ON FINANCE
RON WYDEN, Oregon, Chairman
DEBBIE STABENOW, Michigan MIKE CRAPO, Idaho
MARIA CANTWELL, Washington CHUCK GRASSLEY, Iowa
ROBERT MENENDEZ, New Jersey JOHN CORNYN, Texas
THOMAS R. CARPER, Delaware JOHN THUNE, South Dakota
BENJAMIN L. CARDIN, Maryland TIM SCOTT, South Carolina
SHERROD BROWN, Ohio BILL CASSIDY, Louisiana
MICHAEL F. BENNET, Colorado JAMES LANKFORD, Oklahoma
ROBERT P. CASEY, Jr., Pennsylvania STEVE DAINES, Montana
MARK R. WARNER, Virginia TODD YOUNG, Indiana
SHELDON WHITEHOUSE, Rhode Island JOHN BARRASSO, Wyoming
MAGGIE HASSAN, New Hampshire RON JOHNSON, Wisconsin
CATHERINE CORTEZ MASTO, Nevada THOM TILLIS, North Carolina
ELIZABETH WARREN, Massachusetts MARSHA BLACKBURN, Tennessee
Joshua Sheinkman, Staff Director
Gregg Richard, Republican Staff Director
(II)
C O N T E N T S
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OPENING STATEMENTS
Page
Wyden, Hon. Ron, a U.S. Senator from Oregon, chairman, Committee
on Finance..................................................... 1
Crapo, Hon. Mike, a U.S. Senator from Idaho...................... 3
Cantwell, Hon. Maria, a U.S. Senator from Washington............. 5
WITNESSES
Scott, Denise, president, Local Initiatives Support Corporation
(LISC), New York, NY........................................... 6
Walker, Steve, executive director, Washington State Housing
Finance Commission, Seattle, WA................................ 7
Geno, Sharon Wilson, president, National Multifamily Housing
Council, Washington, DC........................................ 9
Calabria, Mark A., Ph.D., senior advisor, Cato Institute,
Washington, DC................................................. 10
Watson, Garrett, senior policy analyst and modeling manager, Tax
Foundation, Washington, DC..................................... 12
ALPHABETICAL LISTING AND APPENDIX MATERIAL
Calabria, Mark A., Ph.D.:
Testimony.................................................... 10
Prepared statement........................................... 41
Responses to questions from committee members................ 46
Cantwell, Hon. Maria:
Opening statement............................................ 5
Crapo, Hon. Mike:
Opening statement............................................ 3
Prepared statement........................................... 48
Geno, Sharon Wilson:
Testimony.................................................... 9
Prepared statement........................................... 49
Responses to questions from committee members................ 66
Scott, Denise:
Testimony.................................................... 6
Prepared statement........................................... 83
Responses to questions from committee members................ 93
Walker, Steve:
Testimony.................................................... 7
Prepared statement........................................... 99
Responses to questions from committee members................ 107
Watson, Garrett:
Testimony.................................................... 12
Prepared statement........................................... 113
Responses to questions from committee members................ 116
Wyden, Hon. Ron:
Opening statement............................................ 1
Prepared statement........................................... 117
Communications
Affordable Housing Tax Credit Coalition.......................... 119
AHEPA Senior Living.............................................. 120
American University, Kogod Tax Policy Center..................... 123
Center for Fiscal Equity......................................... 125
Manufactured Housing Institute................................... 131
National Association of Federally-Insured Credit Unions.......... 133
National Association of Realtors................................. 134
National Community Renaissance................................... 136
National Low Income Housing Coalition............................ 136
Olsen, Ed........................................................ 143
UMH Properties................................................... 148
Urban Homesteading Assistance Board.............................. 150
U.S. Mortgage Insurers et al..................................... 151
Western Governors' Association................................... 155
TAX POLICY'S ROLE IN INCREASING
AFFORDABLE HOUSING SUPPLY
FOR WORKING FAMILIES
----------
TUESDAY, MARCH 7, 2023
U.S. Senate,
Committee on Finance,
Washington, DC.
The hearing was convened, pursuant to notice, at 10:05
a.m., in Room SD-215, Dirksen Senate Office Building, Hon. Ron
Wyden (chairman of the committee) presiding.
Present: Senators Stabenow, Cantwell, Menendez, Carper,
Cardin, Warner, Whitehouse, Hassan, Cortez Masto, Warren,
Crapo, Grassley, Thune, Young, Johnson, and Tillis.
Also present: Democratic staff: Ursula Clausing, Tax Policy
Analyst; Alice Lin, Senior Tax Policy Advisor; Sarah Schaefer,
Chief Tax Advisor; Joshua Sheinkman, Staff Director; and
Tiffany Smith, Deputy Staff Director and Chief Counsel.
Republican staff: Jamie Cummins, Senior Tax Counsel; Kate
Lindsey, Tax Policy Advisor; and Gregg Richard, Staff Director.
OPENING STATEMENT OF HON. RON WYDEN, A U.S. SENATOR FROM
OREGON, CHAIRMAN, COMMITTEE ON FINANCE
The Chairman. The Finance Committee will come to order. In
recent memory, the Finance Committee has a proven record of
working together, Democrats and Republicans, to solve big
national challenges. Recently, we helped more Americans save
for a dignified retirement. We cut taxes for families and small
businesses. We updated the Medicare guarantee with the CHRONIC
Care Act. We made progress on helping Americans get mental
health care when they need it. And we passed the historic
Family First Act with groundbreaking new policies to promote
kinship care.
I strongly believe the next opportunity for a big,
bipartisan initiative is affordable housing. Few things unite
Americans quite like the feeling that the rent is too damn high
or saving for a down payment is a pipe dream. This is an issue
in all 50 States: in big urban downtowns, medium-sized cities,
in the suburbs, even in smaller communities and rural areas.
Let's look at what 5 years of rent increases have done in a
handful of cities relevant to this committee. In my hometown of
Portland, data from Zillow shows the average monthly rent
jumped by $335, nearly 23 percent; Charlotte, NC, $558 increase
or 46 percent; Memphis, TN, a $428 increase or nearly 50
percent; Boise, ID, a $639 increase, sending monthly rates 57
percent higher.
The outlook isn't much better for people looking to buy a
home, particularly young people looking to buy a first home.
According to a new report from the National Association of
Realtors, the share of sales going to first-time home buyers
fell last year to the lowest level on record. Whether it's
unaffordable rents or unattainable mortgages, oftentimes it is
Blacks and Latinos who are hit the hardest. So how should
Congress go about solving this challenge?
For a long time, you were pretty much breaking the rules if
you said you had some supply-side ideas. I want everybody to
know I'm a supply-sider when it comes to housing, colleagues.
We have to create more housing supply.
Now, for many years Senator Cantwell has been the champion
of the Low-Income Housing Tax Credit, what's known as LIHTC. It
is the most successful Federal program for affordable housing
that there is. The bill she and Senator Young have put forward,
the Affordable Housing Credit Improvement Act, would expand
LIHTC to create 2 million new units nationwide.
Yesterday, Senator Cardin and Senator Young introduced the
Neighborhood Homes Investment Act, which is all about giving a
private investment boost for housing in blighted and struggling
neighborhoods that need it most. I am pleased to be a cosponsor
of both of their bills. They're both priorities that we include
in a comprehensive bill I've offered called the DASH Act, the
Decent, Affordable, and Safe Housing for All Act. I am
reintroducing DASH today.
Another component of DASH is what I have named the Middle-
Income Housing Tax Credit, so we would have LIHTC in America,
but for firefighters and nurses and teachers and all these
hard-hit middle-income folks we'd have MIHTC. And I've heard so
often at home, particularly in Portland, but all around the
State, how important middle-income housing is.
America has fallen behind in building housing for decades,
and the housing shortage has extended into the middle class, so
I want to see middle-income housing supplement low-income
housing, what's known as LIHTC. If a given State housing agency
wants to use its MIHTC credits for low-income housing, my bill
says it could allow those resources into LIHTC.
And I'd just like to say, colleagues--and we're going to be
talking, I think, a lot about this--it's my view that in 2023
providing the States with this kind of flexibility is
absolutely essential to increasing housing supply where it is
needed most. You can't talk now about housing without
addressing homelessness, a priority in the DASH Act.
It's clear that those experiencing homelessness need more
help than they're getting. Furthermore, building more
affordable housing today is going to reduce homelessness
tomorrow, which would prevent a lot of individual suffering and
save taxpayers' dollars.
I know we're also going to talk about the importance to
keep pushing State and local authorities to cut back on the
thicket of zoning rules that get in the way of building the
housing that is so essential. This is another area Senator
Crapo and I have talked about, essentially all these areas
where there's an opportunity for bipartisan agreement in the
tradition of those several bills that I talked about in my
opening statement. These restrictive zoning laws can hurt local
economies--and what is even worse, they often amount to a back-
door method of segregation.
So, there's lots for the committee to talk about today. My
view is, along with mental health care, rural health, and a
number of other topics, affordable housing is one of the areas
where this committee, as has been our tradition, can come
together in a bipartisan way and make real progress.
[The prepared statement of Chairman Wyden appears in the
appendix.]
The Chairman. Senator Crapo?
OPENING STATEMENT OF HON. MIKE CRAPO,
A U.S. SENATOR FROM IDAHO
Senator Crapo. Thank you very much, Mr. Chairman, and you
have well laid out the issue today. I appreciate not only your
focus on this issue and supply-side solutions, but the fact
that you recognized the bipartisan work that we do in this
committee and identify this as one of the key areas where we
ought to be able to accomplish similar solutions.
When this committee held a hearing on housing last summer,
we had just learned that consumer price inflation had spiked to
9.1 percent, the highest in more than 40 years. The shelter
component of the consumer price index was up 5.6 percent
relative to a year earlier, and rents were up by nearly 6
percent.
Unfortunately, for renters and potential homeowners, the
mislabeled Inflation Reduction Act did nothing to address
inflation and rising costs, but is in fact projected to
exacerbate inflation in the near term. As the Federal Reserve
attempts to control price growth with interest rates hikes,
mortgage rates have hit highs not seen since the 2008 financial
crisis and are now hovering at 6.5 percent, slowing investment
in the housing market and pricing many buyers in Idaho and all
across the country out of the market.
January's overall consumer price inflation is still
significantly above normal, hitting 6.4 percent annually.
Shelter accounts for over half of the core increase, up 7.9
percent over the last year. Inflation is also eating away at
the value of wages. Real hourly earnings have declined 1.8
percent. Across the country, Americans are faced with
unaffordable housing. Specifically, lower-income Americans are
facing a shortage of about 7 million affordable homes, and the
supply of affordable housing continues to fall short of demand,
with the gap increasing every year.
One tax tool used to address the supply shortage and
incentivize builders to create affordable homes is the Low-
Income Housing Tax Credit, or LIHTC. It is responsible for
generating a majority of all affordable rental housing created
in the United States today and generally enjoys bipartisan
support in Congress. Several members of this committee have
been working across the aisle to find affordable housing
solutions.
Senator Wyden has very well described those efforts. Again,
these proposals include changes to LIHTC and new tax
incentives. Senators Young and Cantwell, as well as several
other members, are working to reintroduce the Affordable
Housing Credit Improvement Act, which would bolster LIHTC for
developing and preserving affordable housing.
Senators Young and Cardin introduced the Neighborhood Homes
Investment Act, which would create a Federal tax credit to
finance home building and rehabilitation in urban and rural
neighborhoods. Other Finance Committee members have expressed
interest in addressing the affordable housing supply shortage,
including one of our newest members, Senator Blackburn. And
obviously, as he indicated, our chair, Senator Wyden, has
introduced the Decent, Affordable, and Safe Housing for All (or
DASH) Act, which brings the concept of middle-income housing
tax credits into play. I thank you all for your hard work.
Targeted tax policies such as LIHTC are an important part
of solving housing affordability and supply issues, but we must
also address the drivers that are raising the cost of housing
generally. When input and regulatory costs are high, LIHTC is
less effective. Zoning laws and regulatory barriers are often
uncoordinated, unnecessary, or overly cumbersome, and can
ultimately work against the goal of providing affordable
housing by creating excessive development costs.
States and localities with the most restrictive zoning laws
and regulatory barriers often have the most severe shortages in
affordable housing. As a result, Federal, State, and local
leaders must work together to reduce regulatory barriers, and
they should look to success stories around the country.
In Houston, local leaders reduced the minimum lot size from
5,000 to 1,400 square feet. After initial success, the reform
was expanded to cover the entire city. Due in part to the
ability for small-lot construction, Houston's median house
price is below the national median. Further, it is estimated
the average Houston household benefited from this reform by
roughly $18,000.
In order to make it economically viable to build across
price points in the market, these supply-side factors need to
be addressed. Overall tax costs, regulations, supply chain
bottlenecks, and financing expenses all enter into investment
decisions. Overall, there is no better cure to housing
affordability than a healthy, thriving economy. The pro-growth
policies in Republicans' 2017 tax reform led to one of the
strongest economies in decades: low unemployment, a low poverty
rate, strong wage growth, high median incomes, increased
investment, and record Federal tax revenues.
We should preserve these policies and explore additional
opportunities to promote growth, increase investment, and
encourage research and development in the United States. I look
forward to discussing with today's witnesses ways to ensure
that affordable housing is accessible and that the American
dream of home ownership remains attainable.
Thank you, Mr. Chairman.
[The prepared statement of Senator Crapo appears in the
appendix.]
The Chairman. Thank you, Senator Crapo, and I especially
appreciate the fact that, as we get out of the gate in this new
Congress, on housing we've got a lot of opportunities to bring
the committee together in our long-time tradition.
Let me introduce our witnesses. Our first witness will be
Ms. Denise Scott. She's president of Local Initiatives Support
Corporation, where she has investments nationwide, with over 3
decades of experience in community development. She's also a
member of the board of directors of the Federal Reserve Bank of
New York and has taught at Columbia University.
Next, I'm pleased that we've got our colleague from
Washington, who is noted for and has been a long-time advocate
of these crucial issues, and she's going to introduce our next
witness, Steve Walker.
OPENING STATEMENT OF HON. MARIA CANTWELL,
A U.S. SENATOR FROM WASHINGTON
Senator Cantwell. Thank you, Mr. Chairman. I thank you and
Senator Crapo for having this important hearing and for all the
work last year when we engaged in conversations, both on the
Chips and Science Act and year-end packages to try to get the
Low-Income Housing Tax Credit addressed, and I look forward to
working with you this year.
We're here today to listen to Steve Walker, who's executive
director of the Washington State Housing Finance Commission and
he has been working on affordable housing projects for 30
years. In 1996, he joined the Washington Housing Finance
Commission and oversaw the financing of affordable apartments
and projects for families, and became their executive director
in 2019.
As you both mentioned, the shortage of 7 million rental
homes nationwide is extremely important for low-income renters.
And last week the Washington State Department of Commerce
reported that our State will need to add 1.1 million homes over
the next 20 years, and more than half of those must be
affordable for residents at the lowest income levels to meet
our population growth.
I can't tell you how astounding that is just to hear,
because we already knew in Washington that we need an
incredible investment in workforce housing. I think, if
anything, our committee could address the challenges that our
economy faces by making sure that we have workforce housing to
make sure that people can afford to live where the jobs are.
And that is part of the efforts in the expansion of Chips and
Science, or just in general, as our economy returns.
So together--you mentioned our colleagues, Senators Young
and Blackburn and myself, continuing to work on this
legislation. I look forward to working with both of you, but
Mr. Steve Walker will address the Low-Income Housing Tax
Credit, tax-exempt Private Activity Bonds, and how they've
played a crucial role in providing housing to millions of
families.
So, thank you, Mr. Chairman.
The Chairman. Thank you, Senator Cantwell. And you're spot-
on about the urgency of this workforce issue. I was home for
town meetings recently--got some more coming up this weekend--
and when I walked into a room where I expected a host of kind
of economic issues I'd heard before, I was told by school
officials that school districts are having to actually buy
houses--buy houses--so they can make them available to their
teachers. So the urgency you have stressed is spot-on.
We're very pleased that the committee is going to be joined
by Sharon Wilson Geno, president of the National Multifamily
Housing Council. She also brings an extensive background: three
decades working various areas of housing law. She also teaches
courses on housing law at George Washington and Georgetown.
Next is Mark Calabria. He's a senior advisor at the Cato
Institute. He served as Director of the Federal Housing Finance
Agency, as Chief Economist to Vice President Pence, and as an
aide to the Banking Committee here in the Senate.
Garrett Watson is a senior policy analyst and modeling
manager at the Tax Foundation, where he conducts research on
Federal and State tax policy.
Ms. Scott, we're glad you're here, and we'll begin with
your testimony.
STATEMENT OF DENISE SCOTT, PRESIDENT, LOCAL INITIATIVES SUPPORT
CORPORATION (LISC), NEW YORK, NY
Ms. Scott. Thank you, and good morning, everyone. I'm
really pleased to be here. Mr. Chairman and Ranking Member
Crapo and members of the committee, I'm honored to join you
this morning to discuss the urgent need to expand our Nation's
affordable housing supply and the measures this committee must
take to address the housing crisis.
My name is Denise Scott, as you heard, and I work for LISC,
one of the largest nonprofit housing community development
organizations in the country, and we're also a certified CDFI.
And I thank you, Senator Crapo, for joining Senator Warner in
founding the Senate's Community Development Finance Caucus.
LISC has offices in over 38 urban markets, stretching from
Richmond to Toledo, Houston, and Seattle. And we also have a
rural program reaching 2,000 rural counties in 49 States and
including Puerto Rico.
If there is one unifying truth across all these markets,
it's that the lack of housing supply is hampering the ability
of families of modest means to achieve financial stability.
Nearly half of all renters are cost-burdened, meaning that rent
eats up at least 30 percent of their monthly income; and one in
four renters pays more than 50 percent of their income in rent,
leaving little money available each month for groceries,
medicine, child care, and other basic necessities.
And it's not just the lowest-income populations that are
struggling, as you have heard, although they are feeling the
greatest pain. We are also hearing from municipalities around
the country that they're having difficulty housing teachers and
firefighters and health-care workers. And we know that an
inadequate supply of quality, affordable housing in many rural
communities is hampering their ability to attract employers.
In addition, historic home prices since the pandemic have
combined with high interest rates and limited supply to keep
home ownership out of reach for far too many families. This is
effectively shutting down the main path to wealth across
generations, particularly households of color. The good news is
that this committee has under its jurisdiction powerful tools
to address the housing crisis and there is bipartisan support
to do so.
First and foremost, the committee can enhance the Low-
Income Housing Tax Credit. The Housing Credit is the Nation's
most successful housing tool. It has been responsible for the
production of most of the country's affordable housing, and
more than 50 percent of the households in tax credit properties
are extremely low-income families.
Congress could spur the creation of over 2 million more
rental units over the next decade by enacting the Affordable
Housing Credit Improvement Act, bipartisan legislation
introduced last session by Senators Cantwell and Young; and by
restoring the 12.5-percent increase to the formula to the
allocated tax credits--an increase that was enacted through
bipartisan legislation in 2018, but expired in 2021.
As detailed in my testimony, the committee could consider
other measures to improve the program that emphasize long-term
preservation of affordability, including the Qualified Contract
and the right of first refusal provisions. In addition,
Congress can pass the Neighborhood Homes Investment Act, which
would create 500,000 new homes over the next decade. This
bipartisan legislation, just introduced by Senators Cardin and
Young, would attract private capital to support investments in
single-family homes in rural and urban communities suffering
from displacement and high vacancies.
In these communities, the cost of developing and
rehabilitating homes often exceeds the value of the homes. The
Neighborhood Homes Tax Credit fills the gap between the cost of
construction and the value of the property. It would therefore
fill a void in our affordable housing tax financing ecosystem,
providing an effective and necessary tool for revitalizing and
repopulating communities, while also providing affordable home-
ownership opportunities for first-time, first-generation home
buyers.
In closing, there is a supply gap of approximately 3.8
million homes in this country, more depending on how you count.
And this gap is only likely to grow in the near term in light
of high interest rates and the spike in the cost of
construction. Enacting both the Housing Credit Improvement Act
and Neighborhood Homes will spur the production of 2.5 million
housing units over the next decade, cutting into a sizable
portion of that supply gap and getting us much closer to
ensuring that all families in this country are able to enjoy
the health, well-being, and financial security that an
affordable home provides. We just need Congress to act and to
act quickly.
Thank you, and I'm happy to answer any questions that you
may have.
[The prepared statement of Ms. Scott appears in the
appendix.]
The Chairman. Thank you very much, Ms. Scott.
Mr. Walker from the Northwest.
STATEMENT OF STEVE WALKER, EXECUTIVE DIRECTOR, WASHINGTON STATE
HOUSING FINANCE COMMISSION, SEATTLE, WA
Mr. Walker. Good morning. Thank you for convening this
hearing, Chairman Wyden and Ranking Member Crapo. And thank
you, Senator Cantwell, for your years of steadfast leadership
in affordable housing. It's an honor to be here. My name is
Steve Walker. I currently have the privilege of serving as the
executive director of the Washington State Housing Finance
Commission.
I am a public servant with the charge of meeting my State's
affordable housing challenges, and our number one challenge is
the lack of enough decent, affordable apartments that low-
income folks can reasonably afford. My peers, the officials who
run their own State housing finance agencies, would say the
same thing.
The Housing Credit program is our Nation's most effective
tool. It's not the only tool, but it is the most effective tool
for this challenge: building affordable housing. And the truth
is that the private sector simply cannot and does not produce
apartments at rents that low-income folks can afford.
Low-income folks include people like baristas and warehouse
workers, bank tellers, teachers, and retired seniors. In
Washington State, as in many others, the shortage of housing
has caused rents to rise so far out of proportion to incomes
that thousands of families, especially families of color, are
being pushed further and further away from their jobs and from
their communities in search of affordable rents.
Rents take up a larger and larger part of the household
budget. Those who are struggling can easily fall into
homelessness, and they do, at rates that we have not ever seen
before; yet the majority of apartments coming online today,
almost anywhere you look, are only affordable to the top of the
market. Simply providing rental vouchers, as some have
suggested, would do nothing to change this dynamic.
We need to produce affordable housing, and that's what the
Housing Credit does. In fact, the credit is the only Federal
program that makes it economically feasible for developers to
do that. It made possible 3.7 million apartments for low-income
households across the U.S., 130,000 in Washington State alone.
As in other States, you will find these homes in urban,
suburban, and rural neighborhoods in every part of Washington.
They include family-sized apartments in our agricultural Yakima
Valley, studio apartments in downtown Seattle and in Spokane,
senior buildings with health-care clinics on site, and family
buildings with child care on site.
Many of you have seen these successes with your own eyes
and have met residents who share how having a safe, affordable
apartment has changed their lives. That is why the Housing
Credit has earned so much support in Congress for nearly 40
years, because members clearly see the benefit to their States
and to their districts from this highly effective, proven tool.
Literally, hundreds of Democrats and Republicans in both
chambers have cosponsored bills to expand and strengthen the
program; 252 members in the last Congress alone. Because the
Housing Credit is working, we simply need more of it.
Unfortunately, in the last few years we've gone the other way--
for example, letting the temporary increase to the credit
lapse.
The good news is that Senator Cantwell from my State--along
with Senator Young, Senator Blackburn, and Chairman Wyden--is
poised to reintroduce the Affordable Housing Credit Improvement
Act. Cosponsoring this bill is the single most important thing
each member of this committee and every member of the Senate
can do to support affordable housing in your State.
I ask that you support complementary legislation. Chairman
Wyden, Senator Cortez Masto, Senators Cardin and Young have
introduced legislation that would support both affordable
rental housing and affordable home ownership. Because safe,
affordable housing is the most important foundation that
families and communities can have, I urge you to support the
Affordable Housing Credit and ensure that all communities
throughout our country can build on this foundation.
Thank you for this opportunity to testify.
[The prepared statement of Mr. Walker appears in the
appendix.]
The Chairman. Thank you very much.
Next is Ms. Geno.
STATEMENT OF SHARON WILSON GENO, PRESIDENT, NATIONAL
MULTIFAMILY HOUSING COUNCIL, WASHINGTON, DC
Ms. Geno. Chairman Wyden, Ranking Member Crapo, members of
the committee, thank you for the privilege of testifying on
behalf of the National Multifamily Housing Council and the
National Apartment Association.
My name is Sharon Wilson Geno, and I'm the president of
NMHC. For more than 30 years, NMHC and NAA have partnered to
provide a single voice for the American apartment industry that
provides apartment homes for 38.9 million Americans, accounting
for almost one-third of the U.S. housing stock and contributing
$3.4 trillion of economic value to our economy annually.
America is facing a housing affordability crisis without a
doubt. While challenges differ from community to community,
many families, seniors, and people with disabilities are unable
to rent homes due to increased costs driven by a lack of
supply, barriers to development, and regulatory burdens. The
total share of cost-burdened households--those paying more than
30 percent of their income--has increased dramatically over the
last several years as wages have not kept pace with costs,
while others are priced out of communities all together.
Put simply, we have a housing supply shortage. And while
it's taken decades to get to this point, it will take time to
reverse. We must begin addressing this issue today. NMHC and
NAA estimate the U.S. needs to build 4.3 million more apartment
homes by 2035 to make up for decades-long underbuilding to meet
future demand and avoid increasingly expensive housing.
We have kicked the can down the road long enough. We urge
Congress to act on a variety of legislative proposals that will
generate housing resources for Americans of today and tomorrow.
The apartment industry stands ready to help meet the rising
need for attainably priced rental housing, but we cannot do it
alone. It requires strong partnership between the public and
the private sectors.
There is no magic silver bullet here, but a multifaceted
approach can be effective in easing current market conditions.
On the tax policy front, we strongly recommend passage of the
Affordable Housing Credit Improvement Act of 2021, as this
bipartisan bill would increase the availability of Low-Income
Housing Tax Credits to develop nearly 2 million homes, and
would help across the U.S. in rural, urban, and suburban
communities.
In addition to the acute need for low-income housing,
affordability also threatens the middle-income tier, including
teachers, firefighters, nurses, and police officers. That group
has an increasing percentage of folks who are cost-burdened
right now--up to 26 percent of that population.
We urge Congress to finance an additional 344,000
affordable homes by enacting Chairman Wyden's proposed Middle-
Income Housing Tax Credit, which builds off the success of the
Low-Income Housing Tax Credit.
Additionally, NMHC and NAA support proposals that would
build on Senator Tim Scott's Opportunity Zones proposal, as
well as Senator's Stabenow and Brown's legislation to encourage
adaptive reuse of underutilized commercial space. While tax
laws would help spur development and preservation of affordable
housing, we must also deliver short-term solutions and enhance
assistance for residents who are struggling. This includes
increasing the supply of section 8 housing choice vouchers, as
well as other supports for families in need.
Regulatory obstacles at all levels of government also
prevent us from delivering housing our country so desperately
needs. NIMBYism and antiquated and discriminatory zoning laws
make it difficult for developers to develop in many communities
across the country, thereby impeding our ability to increase
supply.
There are a number of proposals to cut some of the
regulatory red tape in the administration's Housing Supply
Action Plan issued last May. These efforts, among other things,
would reward jurisdictions that have reformed zoning and land
use policies with higher scores in certain Federal grant
processes and deploy new financing mechanisms to build and
preserve more housing where financing gaps currently exist.
Access to stable quality housing in communities of choice
has been proven time and time again to be critical to achieving
economic stability, positive health outcomes, educational
attainment, good nutrition, and other indicators. For that
reason, it has always been a bipartisan issue. For the sake of
the residents who live in rental housing today and those who
don't have access to it, we urge you to work across the aisle
with urgency to enact these proposals and others described in
our testimony.
Thank you, Mr. Chairman, and I look forward to hearing the
committee's questions.
[The prepared statement of Ms. Geno appears in the
appendix.]
The Chairman. Thank you for finishing with urgency, because
that's what we're trying to convey.
Dr. Calabria?
STATEMENT OF MARK A. CALABRIA, Ph.D., SENIOR ADVISOR, CATO
INSTITUTE, WASHINGTON, DC
Dr. Calabria. Thank you, Chairman Wyden, Ranking Member
Crapo, and distinguished members of the committee. Thank you
for the invitation to appear at today's hearing.
Too many working families face significant housing cost
burdens. The dramatic increase in mortgage rates, along with
inflation and building and materials costs, have created
historic price pressures. Let me also say, while I come from a
Banking Committee background, I've always been impressed with
the Finance Committee's commitment to housing.
I will note we have the unique advantage that the chairman
and ranking member of Banking are also members of Finance, so
perhaps we can not only have something bipartisan, but bi-
committee working across housing issues. I think this is
particularly important, because the development of assisted
housing has become so overly complex, with multiple layers of
subsidies, different rules, different application cycles.
For instance, most tax credit developments are often used
in conjunction with non-tax subsidies such as HOME or CDBG.
Considerable expense is incurred coordinating, combining these
various subsidies. Perhaps you would like to think about it
this way. I'm suggesting we put a few lawyers out of work and
maybe streamline some of these programs so we can actually
deliver those benefits to the renters themselves.
So I would really encourage any changes to the tax credit
to be coordinated with other housing programs under the
jurisdiction of the Banking Committee, particularly section 8,
which is widely used by tax credit renters. I would also urge
the committee to take a broader perspective of where we may be
in the multifamily construction cycle. To quote a recent
Freddie Mac report, multifamily is at an inflexion point.
The bulk of evidence suggests the national rental market
has been softening, and we may be entering an actual oversupply
of multifamily--I do want to emphasize an oversupply at these
price points; not a structural oversupply, but more a cyclical
oversupply. And while of course forecasting is always
difficult, most indicators suggest that rents will decline over
the next 12 to 18 months. So, I would just urge some
cautiousness to thinking about adding stimulus to additional
construction at a time when we are likely passing the peak of
this cycle.
The primary drivers, of course, of housing costs nationally
are land cost, labor costs, material costs. And I would really
urge Congress--perhaps out of the jurisdiction of this
committee--but one area where Congress can make a really big
difference is to convert federally held land into land that
could be used to develop housing. I would urge members to take
a look at the model that's been used in Nevada. Las Vegas would
be considerably more expensive if we did not have former
Senator Reid to thank for helping convert Federal lands to
developed lands--again, outside the jurisdiction of this
committee, but an important ability to add supply to the
marketplace.
A little bit back to the jurisdiction of this committee, I
think we can make a big difference in material costs if we can
make some differences and resolve some of our trade disputes,
particularly with Canadian lumber and aluminum. And while I
would mostly recommend caution at this point in the cycle, if
the committee were to revisit the legislative framework for the
tax credit, I would make the following recommendations.
First, I would make the tax credit look a little bit more
like HUD's HOME program. The purpose for this is that HOME
offers a wide variety of uses. It can pay for security
deposits, it can pay for rental assistance; and really keep in
mind, while we do have a national housing crisis, every market
is different.
And to me, the more flexibility we can have for local
market conditions, the better in terms of meeting needs on the
ground. And so that's just an important consideration, from my
perspective. I also want to first commend the number of State
housing finance agencies that go above and beyond the Federal
income targeting requirements in the tax credit, but my view is
I think we can make additional success in helping prioritize
those families most in need.
And while of course there are rental burdens across the
income spectrum, those at the bottom are so severely out of
line with those in the middle or the top. I would urge the
committee, for instance, to consider the addition of a sub-goal
of having a certain percentage of units going to households
under 30 percent of area median income.
As one of the Banking Committee staffers responsible for
drafting and negotiating the 2005 reauthorization of the
Violence Against Women Act, I do want to be very clear that I'm
disappointed in Treasury's slow movement in meeting its
obligations under VAWA in response to tax credit properties.
Let me also say there are a large number of rental units
outside of the footprint of the tax credit, and we have a large
number of vacant properties. So one of the things I would
lastly suggest is, let's ask about how we get all of these
small properties--half of renters live in units and properties
under five units. How do we start bringing them into the cycle?
And one thing I would suggest is we directly allow, say, the
first $500 in monthly rent to be tax-free so as to encourage
those subsidies beyond the traditional tax credit, higher-
density properties.
Again, I thank you for your time this morning and look
forward to your questions and comments.
[The prepared statement of Dr. Calabria appears in the
appendix.]
The Chairman. Thank you.
Mr. Watson?
STATEMENT OF GARRETT WATSON, SENIOR POLICY ANALYST AND MODELING
MANAGER, TAX FOUNDATION, WASHINGTON, DC
Mr. Watson. Chairman Wyden, Ranking Member Crapo,
distinguished members of the Senate Finance Committee, thank
you for the opportunity to provide testimony on how to improve
tax policy to increase affordable housing supply and serve
working families. I'm Garrett Watson, senior policy analyst of
the Tax Foundation, where I focus on how we can improve our
Federal tax code.
Today I'll recommend ways to improve the Low-Income Housing
Tax Credit, known as LIHTC, to ensure that it is effective at
providing affordable housing to low-income Americans. I'll also
discuss how broader improvements to the tax code, such as
providing better cost recovery for residential structures,
would be an effective way to grow the supply of affordable
housing.
We should consider three big picture points when evaluating
the effectiveness of LIHTC as a tool to help working families
and low-income households. First, while LIHTC has helped expand
housing affordability, the credit's administration could be
improved. More detailed information could be provided on the
credit's effectiveness, as recommended in a 2018 report by the
Government Accountability Office.
Notably, GAO recommends that policymakers designate an
agency to collect data to better understand project development
costs. Such data would help inform future reform efforts,
ensuring agencies impose limits on costs, root out fraud, and
reform often opaque and discretionary credit allocation
processes.
The data we have so far, for example, shows that
developments supported by the credit can suffer from higher
than average constructions cost. A 2017 GAO study, for example,
found that only 30 percent of allocating agencies at the State
level put limits on development costs. That potentially
undercuts the credit's efficiency.
While the U.S. Department of Housing and Urban Development
provides valuable project-level data, additional data such as
information on fees paid to developers and syndicators, as well
as outcomes for properties and tenants over time, will be
valuable for assessing LIHTC.
Second, it's important to evaluate LIHTC's broader policy
effectiveness before considering options to expand LIHTC. One
area of concern is how much of LIHTC's benefit goes to low-
income households. Several studies have found that between one-
third and three-quarters of the subsidy provided by LIHTC does
go to low-income households, while the rest accumulates to
other stakeholders in the process, such as developers and
investors.
Similarly, LIHTC projects can tend to be located in higher-
poverty neighborhoods, which deprives tenants of the benefit of
living in places with more opportunity and more amenities.
Finally, many of LIHTC's administrative challenges are
rooted in using the tax code to tackle important social
problems that may be outside the proper scope of the tax
system. The array of programs that we have supporting housing--
ranging from Federal grants, tax credits for historic
rehabilitation, and tenant-facing assistance--all overlap with
LIHTC, both in their policy goals and benefiting stakeholders.
That overlap can make it harder to evaluate the
effectiveness of the credit compared to alternatives such as
housing vouchers, an option considered by CBO and many others
going back decades. In addition to LIHTC, a supplementary
approach to expanding the supply of affordable housing is to
reduce the tax burden of investment in housing.
One way to reduce that tax burden is increasing or
improving the cost recovery of structures in the Federal tax
code. Currently, investors in residential structures must
depreciate those structures over periods of up to 27\1/2\
years, which limits the economic value of depreciation
allowances.
Ideally, all investments should be fully and immediately
deducted from taxable income, but this can pose a challenge for
structures that create a net operating loss, given the large
size of that investment. One solution is to provide neutral
cost recovery, which adjusts depreciation deductions to
maintain their value in real terms. This would improve the
economic incentive to invest in structures, expand the housing
supply, while also avoiding the challenges posed by fully
expensing those types of investments.
According to the Tax Foundation's estimates, providing
neutral cost recovery to residential structures could lead to
the construction of up to 2.3 million additional housing units
in the long run, lower construction costs by about 11 percent,
and raise long-run economic output by 1.2 percent.
Pairing better cost recovery with efforts to improve land
use and zoning rules at the State and local levels, as has been
already mentioned today, would magnify the positive effects of
both LIHTC and neutral cost recovery. Reforming LIHTC and
providing neutral cost recovery for residential structures are
just two important steps that policymakers can take to ensure
the Federal tax code is not a barrier to solving America's
affordable housing challenge.
Thank you, and I look forward to answering any questions.
[The prepared statement of Mr. Watson appears in the
index.]
The Chairman. All right. Thank you all. You all have been
very helpful.
Let me begin, if I might, and I'm going to ask this of you,
Ms. Geno, because I was struck--Dr. Calabria says we're passing
through a cycle. Basically, ``All you Congress folks shouldn't
get too worked up, because we're passing through a cycle.''
Now, I've had the honor to represent Oregon for a while in
the U.S. Congress. I have never in my time in public service
seen school districts having to buy houses to rent to their
employees because the housing crunch is so serious. So I think
it is kind of disconnected from the facts to say that we're
passing out of a cycle. And I want to follow up on a point I
heard you make, because your views--and particularly
representing such a major business association--are very
valuable.
I gather you think that the number of firefighters and
middle-income people who are--I guess the technical housing
jargon for it is ``cost-burdened''--is increasing, and is not
increasing by a modest amount. It's increasing in a significant
way. So, can you sort this out, because what you said surely
doesn't seem to me like we're passing through a cycle. I think
your comments reflect what I'm hearing in town hall meetings,
what my colleagues are hearing, which is that middle-income
people--and I just hate the idea of a policy debate that would
pit the needs of middle-income people against the needs of low-
income people. My goodness, that's the last thing we need in
America. We've got to get shelter to people who need it. So
tell us your assessment of how serious the situation is for the
missing middle; let's refer to it that way.
Ms. Geno. Sure. I appreciate your question. And I agree, in
part, with my colleague Dr. Calabria's assessment: there are
parts of the real estate segment that are passing through a
cycle, mostly on the higher end of the income scale. We are
seeing a supply of housing that had been delayed due to COVID
that will be coming on the market in 2023.
We're already seeing rents start to come down in that
segment as it's pushing down the line. But to your point,
Senator, there is simply not enough at the low- and middle-
income levels. We are not building for those components, other
than housing that is being supported by the Low-Income Housing
Tax Credit. And what happens often in this case--and I've
operated this housing before--is that as families start to have
the opportunity to save a little bit because they've been
supported through the Low-Income Housing Tax Credit or some
other subsidy and they're moving up the economic scale, they
get priced out of those markets.
That happens to families that are taking advantage of job
opportunities. It happens sometimes to veterans whose benefits
just exceed a qualifying income level. It happens sometimes to
seniors who have a small pension from a prior job opportunity,
but their pension has not kept pace with the cost of housing.
So, for those kinds of groups, there really is no support, and
the Middle-Income Housing Tax Credit would truly provide an
opportunity to create housing for those groups of people.
The Chairman. So your judgment, again, is this question of
being cost-burdened is basically you can't afford to start
becoming part of the American dream. I mean the American dream
has always been to work hard and play by the rules and get that
first home and get started. And unless I'm missing something,
your testimony indicates that that problem is getting more
serious. It is more serious today than it was before.
And yes, I'm sure that some people can still get housing,
but I appreciate your making the case for the missing middle
because, based on what I hear at home, so many people who work
hard want to have a chance. That's one of the reasons we give
the tax break for your first home. They want to make a
difference.
One question, if I might, very quickly for you, Mr. Walker.
The DASH Act closes some pretty serious loopholes. We closed
the Qualified Contract and right of first refusal loopholes in
order to protect low-income housing long-term. How important is
that?
Mr. Walker. Well, I'll start by saying ``very important,''
and I appreciate you putting a bright light on it. The right of
first refusal, both of these are long-existing parts of the
statute that was created in the mid- to late 80s, and what we
have seen is, we've seen some bad behavior--some ambiguities in
both the statute and some imprecise language in the partnership
agreements.
The right of first refusal, which was anticipated when
there was a nonprofit partner alongside the investor owning and
operating these properties--at year 15, the investor would
quietly exit under a formula. And the behavior that we are
seeing is that either that investor--or actually an investor
that has stepped in the shoes of that investor--getting close
to that 15th year, is starting to really jam the exit strategy
and trying to extract quite a bit of capital out of the deal.
And the effect of that is either litigation--which is very
expensive and jeopardizes both the nonprofit operator and the
property itself--or simply having to acquiesce to those
demands, which again jeopardizes the property and ultimately
puts at risk the residents for whom the property is intended to
be----
The Chairman. My time is up, but obviously we're also
concerned about it in the context of the trend of private
equity firms acquiring housing and taking advantage of these
loopholes, so I appreciate your response.
Senator Crapo?
Senator Crapo. Thank you, Mr. Chairman.
And, Dr. Calabria, industry's decision to invest in new
housing is the culmination of many factors we've discussed
today: input costs, impact on the return of investment, along
with rent and sales prices. Regulations, taxes, and financing
are all components of the calculation.
Dr. Calabria, how does the overall state of the economy
impact the decision to invest, and how can Congress support
housing affordability without contributing to inflationary
pressures?
Dr. Calabria. Thank you, Senator Crapo. That's a terrific
question, and let me emphasize, to clarify something Senator
Wyden raised. Just because you may be in a cycle doesn't mean
you don't do anything. It just means you may do something
different. When we tend to see changes in the cycle, we tend to
see shifts where income burdens--people lose their jobs, people
suffer income losses, and so you may have a different style of
support in a weaker economy than you would have in a booming
economy.
But I do think we need to be concerned about--go back to
Econ 101. Since the number one constraint structurally in the
housing market is a lack of supply, we need to be cautious
about adding demand subsidies that simply run up prices, which
is how we've gotten the inflationary pressures we face today.
So we need to be cautious about how we think about this in an
economic sense so that we're actually achieving our objectives.
Senator Crapo. Well, thank you very much.
And, Mr. Watson, as mentioned in your testimony, LIHTC is
an important tax tool to encourage investment in affordable
housing. However, as you noted, there are ways to improve this
credit and its administration and oversight. Could you just
give us a review of the specific recommendations you have to
improve the credit's efficiency that Congress should consider
in future LIHTC legislation?
Mr. Watson. Thank you, Senator, for that question. I think
one major theme when looking at credit effectiveness is, we
really need to have a clear understanding of the baseline--from
the data--of how the credit is doing and how it's actually
connecting the credit with outcomes for low-income tenants and
for folks who own those developments. And so, I think we have a
good base with what HUD is already collecting. There's a lot of
great information there that has been leveraged in research and
elsewhere, but we can really build on that, I think, by
providing more granular data to be able to answer some of these
questions about how the credit is doing and building on either
reform efforts considered now or reforms in the future to
ensure that we're maximizing the amount of benefit that's
actually going to those tenants, rather than all the folks who
are in that process who are necessary, but could be doing a
better job of passing through more efficiently.
Senator Crapo. Thank you.
And, Ms. Geno, do you believe that addressing affordable
housing supply requires pro-growth tax policies more generally,
in addition to housing-specific initiatives? And if so, can you
discuss some of the recent proposals before Congress in the tax
arena that could actually negatively impact the supply of
affordable housing?
Ms. Geno. Sure. So absolutely, the private market simply
cannot afford to provide housing in the amounts that we need it
in the lowest-income tiers and also in the middle-income tiers.
So those tax incentives are incredibly useful. I was looking at
some recent data from HUD that $8 billion annually is generated
from the Low-Income Housing Tax Credit in budget authority.
That is critically important to offsetting what the true cost
of developing that housing is and making it affordable for
folks who need it.
Senator Crapo. And so, are there tax policies that you've
seen proposed here in Congress that could actually undercut
that?
Ms. Geno. Well certainly, anything that's going to adjust
the tax rates will make a difference in the use of the Low-
Income Housing Tax Credit. We saw a little bit of that happen
when the corporate tax rate was adjusted downward. Now the
market has adjusted for that, but we're not seeing the full
value of what the tax credit could be and could generate now as
we had previously before the corporate tax rate dropped. So
that is one issue that does impact the Low-Income Housing Tax
Credit.
Senator Crapo. All right. Thank you.
And finally, Mr. Walker, aside from the increases to LIHTC,
are there any reforms to the program that would be helpful to
you and fellow State housing authorities in administering the
credit?
Mr. Walker. Thank you for that question. I think stepping
back and looking for opportunities to improve a 40-year-old
program is always important to do, and Congress has done that a
few times over the years. I think there's legislation speaking
to the student rule to recognize that folks living in credit
housing often need to go back to school or retool their skills.
And so, both HUD and the credit have two different definitions
of the student rule.
I think there's been testimony today about bringing things
into alignment, but opening up that is an example of how we can
improve the program. So I think there are always opportunities
to look at doing that. Right now, because it's such a proven
tool, I think the opportunity on the table is to make it the
power tool that it needs to be.
Senator Crapo. Thank you. I see my time is up.
The Chairman. Tools and power tools. Okay. Thank you.
Senator Stabenow?
Senator Stabenow. Well, thank you, Mr. Chairman and Ranking
Member. Such an important topic.
I was not long ago up in Traverse City, MI meeting with 15
different chambers of commerce all across northern Michigan.
The number one priority was housing, and for so many reasons. I
mean, we can see this, whether it's in Detroit or northern
Michigan or any part of our State certainly.
I do have a question, Ms. Geno, that relates to where we're
going after the pandemic as it relates to remote work because,
on top of everything else, we are seeing certainly different
ways in which people want to work, which creates challenges,
underutilized office buildings, but also opportunities to
convert some of those buildings to residential, as you know,
and create more housing.
And so, to capitalize on this, I appreciate your mentioning
our bill, the Revitalizing Downtowns Act, which would create a
tax credit to help convert commercial buildings into affordable
housing and mixed-use properties. So I know that your Housing
Council recently released an in-depth report on the feasibility
of converting commercial real estate to multifamily and that
you detail many of the challenges of that. So I wonder if you
might describe some of the biggest obstacles to doing that and
also speak to how tax policy could address some of these
obstacles and how we can capitalize on the opportunity to
create more affordable housing through this process?
Ms. Geno. Sure. Thank you for that question. The National
Multifamily Housing Council in partnership with the Urban Land
Institute, as you mentioned, recently issued a study. It's
really a case study report on different ways that developers
have been able to convert office properties to multifamily
residential.
There is opportunity to do that. The challenges include, in
some cases zoning, in some cases just the way the buildings are
constructed. A lot of office buildings are not constructed for
residential use. Therefore, the cost of doing those
conversions, which could be critically important to the
revitalization of communities downtowns, may be cost-
prohibitive.
That's why the tax incentive is very important. This is not
just about creating housing, which is a really important
component, but it's also about revitalizing communities that
are going to need that economic support. Our organization and
NAA look forward to working with you and your staff. We think
there are some opportunities to even expand and grow that,
ensuring that REITs can use those tax incentives, and ensuring
that shopping malls and other retail uses can be converted. We
look forward to working with you.
Senator Stabenow. Well, thank you so much. And we really
are at a point where we need to be leaning in on all of these
changes and creating opportunities, whether it's big cities or
small towns, and we really need to be doing that. I look
forward, Mr. Chairman and Ranking Member, to working on this
particular policy of how we do this kind of conversion.
And then quickly to Ms. Scott, I think it's so important
we're talking about the Low-Income Housing Tax Credit and the
fact that it has produced over 4 million affordable housing
units and housed 8 million low-income families. I wonder if you
might talk a little bit more about the connection, not only of
housing, but the connection between housing and jobs and what
access to affordable housing means to families and their
ability to find and maintain a job?
Ms. Scott. Thank you, Senator, for that question. I think
this is a very important issue, and I would approach it from
two angles. First of all, that stable housing provides for
families the opportunity to achieve tenure in jobs that they
have. Many employers are telling us that they're having
difficulty maintaining a workforce that's housed unstably, that
people have to move around frequently and so they're unable to
move up in the jobs that they have.
Another side of the jobs issue is that the housing
production actually creates jobs, both short-term and long-term
jobs. And the numbers are something we could give you, share
with you, but it's substantial in terms of the volume of
activities that housing production produces. So it's both the
individual family that benefits, but it's also the broad
economy that is benefiting from the production of housing.
Senator Stabenow. Okay.
Thank you, Mr. Chairman.
The Chairman. Thank you, Senator Stabenow.
Senator Grassley is next.
Senator Grassley. Thank you, Mr. Chairman.
I'm going to start out with Ms. Geno. At my request, the
Government Accountability Office issued two reports on the Low-
Income Housing Tax Credit. Their reports found there is a
minimum of Federal oversight of the program and lack of quality
data. As a result, it was difficult to evaluate efficiency and
effectiveness of the program.
To address this, the Government Accountability Office
recommended designating HUD to assist IRS in oversight of the
program and to collect project cost data. Would you support HUD
being designated as a joint administrator to the program, and
if not, what would you recommend to be done to increase Federal
oversight and ensure data collection necessary to evaluate the
program?
Ms. Geno. Well, thank you for that question. I believe a
lot of data is actually already collected, but it's collected,
to your point, at the State level with the State housing
finance agencies. There isn't a centralized funnel on all of it
for the Federal Government to take a look at it. I would
suggest continuing to work with those State agencies in
partnership with them to be sure that those data points are
collected at the Federal level, through the Internal Revenue
Service and/or through HUD. The data that HUD has collected, I
think, has been effective. The National Council of State
Housing Finance Agencies also has a series of best practices
for State housing finance agencies to report data, and
following those, I think, would also be an effective tool.
Senator Grassley. Okay.
Dr. Calabria, you expressed concern that this tax credit is
too focused on large, multiunit structures in urban areas. In
my home State of Iowa, we have many small towns and rural
communities that are sorely in need of housing. In fact, I
don't know how many times I hear this when I'm going around in
my county meetings, particularly from employers that are
looking for more employees, and housing is an impediment. How
could the tax credit be improved to better serve the needs of
suburban and rural communities?
Dr. Calabria. Great question, Senator. As I mentioned,
about half of renters live in properties with under five units,
so again, the average tax credit is for about 40 units. So one
option would, of course, be a set-aside for a certain number of
units. You could require that a third of tax credit dollar
volume goes to either units under 20 or 10. I mean, this is
certainly something where you can look at where the touch point
is, but I think ultimately--and again, I don't want to dismiss
the efforts that housing finance agencies are taking, but I
think, at this point, having a set-aside for smaller properties
is appropriate.
Senator Grassley. Mr. Watson, one recommendation you made
to increase available housing at lower costs was to shorten the
cost recovery period for residential structures. Specifically,
you expressed support for providing neutral cost recovery. Can
you elaborate on what you mean and how it would work?
Mr. Watson. Thank you, Senator, for the question. So, under
neutral cost recovery--it effectively is emulating providing
the full value of the depreciation deduction for those types of
investments. Because right now, when you make that investment
and you have this deduction against your income because you
have that big expense, you could take that over 27 years. And
both because of inflation and because the value of a dollar is
higher now than it would be in the future, the real value of
those deductions is eroded.
Of course, we saw this through other types of investments
by just allowing folks to immediately expense those
investments, as was done with the bonus depreciation measures
adopted in 2017. That's really hard to do with structures,
given how large they are. And there's concern about--for
example, we tried this in the early 80s, and there were some
distortions in the market.
Neutral cost recovery is a way to get around that by just
allowing for an adjustment to preserve the real value of those
deductions without needing to expense them. And that would of
course increase the incentive to invest and preserve the value
of those deductions over time.
Senator Grassley. Dr. Calabria, although there are housing
shortages across the country, it's clear that some States and
localities are doing worse than others. Governments and States
like Iowa have encouraged development in the construction
sector. One town like Pella, IA has even gained national
recognition for private efforts to increase housing
availability. However, other areas have gone the other
direction and increased barriers to building or renovating
homes.
Federal programs do have an impact, but it is ultimately
these local decisions that have the greatest effect. What
should State and local governments do to ensure that our
Federal housing programs work as intended and bring down the
cost of housing?
Dr. Calabria. That's a great question, Senator, and I think
we should commend those States that are making progress. I
think just this week Washington State, for instance, made a
change--or at least the Senate made a change--to its
environmental approval process for housing. Obviously,
Minnesota has made a number of changes. There have been great
examples of where States have been leaders, and I think many
other States should follow those examples.
Senator Grassley. Okay.
Thank you, Mr. Chairman.
The Chairman. Okay. Thank you, Senator Grassley.
Senator Johnson would be next.
Senator Johnson. Thank you, Mr. Chairman.
Full disclosure: I'm not a real fan of using the tax code
to socially and economically engineer. I think we oftentimes do
far more harm than good, and I want to lay out an example. In
Milwaukee--for Mr. Watson, because you kind of touched on
this--there was a great program, this was a number of years
ago, called the ACTS, ACTS, Housing program.
There was an opportunity, because there were all these
homes built in the 20s, 30s, wonderful construction, but they
were in foreclosure. And so this program could buy these homes,
literally for a few thousand dollars. Then, working with the
banks making low-interest loans available to low-income
individuals, literally, for 30, 40 thousand bucks, they could
renovate a home, put a lot of sweat equity in--and it worked
great.
I mean, they were cutting their rental payments by hundreds
of dollars a month. It was a great program working. When I
visited them a couple years ago, they were complaining that
these tax credits, Federal tax credits going in the pockets of
developers, were causing developers to dramatically increase
the cost of that housing. And that was going to mean more
gentrified neighborhoods, and all of a sudden, they couldn't
buy these homes. It was really hampering a really successful
program. That's just one example.
But I want to focus my questions on, I think a statement
that Ms. Geno made about how we simply can't--the market simply
can't supply low-cost housing. Why? Again, I see the cost.
You've got land. You've got labor. You've got construction.
Let's go through that. I mean, for example, in Wisconsin the
average cost for a family home is somewhere around 250,000
bucks.
With the trade wars, the cost of lumber was a year or so
ago--$35,000 was the increase per new home construction. The
lack of workers--so again, Mr. Calabria, can you just talk
about those factors? What is government potentially doing that
is making it impossible for the marketplace, which should not
be impossible?
Dr. Calabria. I very much share your frustration, Senator.
Let's set aside the number of households that would have zero
or near zero income, who can't afford anything--and we'll come
back to them--but the reason the market is not filling the
needs of affordable housing is because we aren't letting it.
And we need to remove those barriers, predominately at the
State and local level, some at the Federal level.
And then for those households that could not afford it
because their income is zero or near zero, we could----
Senator Johnson. Let's zero in on those barriers. I mean,
how much do we drive up construction costs by all of the
environmental regulations we've put on products, driving up the
cost of a washing machine or a range or whatever? Again, the
trade wars and driving up the price of lumber--can you
specifically talk about how government drives up the cost of
every component of construction?
Dr. Calabria. So, a recent National Association of
Homebuilders study, I think done in association with Sharon's
organization, found that the cost of regulation was about 40
percent of the cost of development of multifamily housing.
Personally, I think that's probably an underestimate in terms
of taking zoning into account. But we can see----
Senator Johnson. Put that in dollar terms: 40 percent. So,
if a standard multi is a million bucks, I mean that's $400,000
added cost that wouldn't have to be there. Now some of those
regulations may be necessary; you know, maybe the cost of some.
I'm not sure all.
Dr. Calabria. I think a good way of looking at this is, we
can see very similar units in places like Texas that are built
for $200,000 that in places like California may even approach
$1 million, as you've mentioned. So there are places where
we've shown that you can build houses, and you can build them
affordably. You can be accessible. We know how to do this.
Senator Johnson. So again, just for ease of calculation,
let's say a million-dollar piece of property, if the cost of
regulation is $40,000, what is the benefit of a tax credit, Mr.
Watson?
Mr. Watson. So, clearly the low-income tax credit and these
other credits are just offsetting some of these regulatory
costs.
Senator Johnson. That's the point I'm trying to make here.
We're a dog chasing its tail.
Mr. Watson. Exactly.
Senator Johnson. We're causing the problem, driving up the
cost by 40 percent, and then we're offering what percent relief
from that burden? That's the question I'm asking. Can you put a
percentage to it?
Mr. Watson. I'm not sure there's a strict percentage. I
think you mentioned this is not only that there are the
regulatory and these other costs, material costs, but we really
should be talking policies that magnify that. I think you
mentioned the trade war being one, and others that are just
going to erode the value of the credit. And I think the zoning
issue is really important too because--and Dr. Calabria said
this--the supply is constrained. That may actually magnify the
amount of the benefit that's just going to the developers and
not to the low-income housing.
Senator Johnson. So it's extremely important to put numbers
to this so we can understand the root cause so, again, we're
not chasing our tails. And again, the root cause is regulation
increasing this, trade wars, a worker shortage. We need to
focus on all that. And by the way, a simpler and more rational
tax code would also reduce costs for people as well. So, rather
than make it more complex--add another barnacle under the ship
of the state, slow it down even further--we ought to talk about
scraping the barnacles off.
Thank you.
The Chairman. Thank you, Senator Johnson.
Senator Carper is next.
Senator Carper. Thank you, Mr. Chair. Welcome, one and all.
Welcome to Delaware. It's an outpost here. [Laughter.] Thank
you for joining us. Thank you for your interest in housing
people in this country.
I'm a recovering Governor, and some of my colleagues are
also recovering Governors. And I know when I was Governor, we
created something called the Family Services Cabinet Council
with about seven different departments of State government that
focused on helping families, strengthening families, and one of
those was our State housing authority.
We focused for 8 years on trying to make home ownership a
priority and a possibility for all kinds of people. I think
when I stepped down as Governor, in terms of the level of home
ownership, I think we might have been number one, and I'm very,
very proud of that.
There's a great scripture in the Bible. I think it's in
Matthew: ``When I was hungry, did you feed me? When I was
naked, did you clothe me? When I was thirsty, did you give me
to drink? When I was a stranger in your land, did you welcome
me?'' It doesn't say anything about ``when I didn't have a
house to live in or I was living in somebody's apartment or I
was living under a bridge or in a car,'' but I think the
inference is the same: did we do anything about it?
And it's not just on the Federal Government. It's not just
our responsibility. It's not just on the State Governments or
county or local governments. It's not just the nonprofits. It's
not the church community. It's really all of us. This is a team
sport and a shared responsibility, and part of that
responsibility is ours. And everything I do, everything we do,
I know we could do better.
The Constitution of our country, which Delaware was the
first State to ratify, starts off with a preamble that says,
``We the people of the United States, in order to form a more
perfect union''; that's what it says. ``We the people of the
United States, in order to form a more perfect union,'' and our
founding fathers knew everything they did, we could do better,
and we know the same is true today. So hopefully, this hearing
today--and I commend the chairman and ranking member for
putting this together.
This is a topic for me and a whole lot of folks that I
represent--and others my colleagues do. I think in Delaware
we've made a fair amount of progress in recent years, including
investing some $78 million from the American Rescue Plan in
affordable housing. While these investments are a big step
forward, I continue to hear from communities in Delaware--and
actually outside Delaware--that need us to do a bit more. And
I'm encouraged that there's bipartisan support on this
committee, as there are on many issues, to tackle this
challenge.
We ought to figure out what works and do more of that. When
I was Governor, I was chair of the National Governors
Association. We had an entity within the NGA called Center for
Best Practices. We used to share ideas with one another, steal
ideas from other States that worked. Fortunately, we have a
number of proven tools to address those challenges, including
tax incentives, including grants, and other financing options.
And these tools often complement each other, working hand in
glove to support new housing construction.
I have a question for--and I hope I don't screw up your
name, Ms. Geno. Has your name ever been mispronounced?
Ms. Geno. Just once or twice.
Senator Carper. Okay. How about today? Hopefully not.
You, Ms. Geno, and also Ms. Scott: what are some of the
existing gaps in financing the development of affordable
housing, and what types of Federal investments will give us the
best, if you will, bang for our bucks to address this
challenge? Ms. Scott, do you want to go first?
Ms. Scott. Sure. Thank you, Senator.
Senator Carper. Where are you from, Ms. Scott?
Ms. Scott. New York.
Senator Carper. Welcome.
Ms. Scott. Thank you. Not far from you.
Senator Carper. Good. That's true.
Ms. Scott. In terms of the gaps, I think the biggest gap--
we've talked about it--is our inability to achieve
affordability across a broader spectrum of people, and that the
range of families that are experiencing unaffordability is
growing. And so, all of the housing programs--the tax programs
and the other housing programs--that exist that provide for
subsidies, for tax credits, and all of that are necessary. But
in addition to everything, we also have the growing concern
today about the rising cost of construction, the cost of labor;
you've heard the list of things. And so I think what we need to
do is to find ways to really increase the value of the credit
and make sure that we can really reach more households. I think
the best programs, the Low-Income Housing Tax Credit, CDGB and
HOME, and a host of other programs like that are providing the
kind of resources we need. It's just that the scale of the
problem is significant, and so we end up with the gaps that
we're talking about in our ability to achieve the greater
outcomes that we're looking for.
Senator Carper. Okay. Thank you.
Ms. Geno, please; same question.
Ms. Geno. Again, I agree with Ms. Scott's response. I've
been at this for 30 years, and I wish we'd found the magic
bullet already, but we haven't.
Senator Carper. Would that be since birth? [Laughter.]
Ms. Geno. Hardly. But we need every tool in the toolbox and
more of them. And given your experience as Governor, I'm sure
you know that all markets are different. Even within the
smaller State of Delaware, a number of the housing markets are
different. So, the ability to have different tools--both
subsidy tools as well as tax tools as well as, to Dr.
Calabria's point, the ability to be flexible about local and
State regulation--is critical. All those things need to be
available, and we need to piece them together in different
communities to make them work for people who need housing.
Senator Carper. Good.
Mr. Chairman, my time is up. Can I have 15 seconds to just
say one other thing? One of the things we did in Delaware when
I was the Governor is, our State housing authority said for
folks who were on welfare and went to work and started making
money, that they did not have to pay taxes on the beginning of
their earnings. That went into a separate fund. They could use
that money for down payments on either an apartment to move
into or a house to buy. So that's just one of the many ideas
that I think are worth pursuing.
Thank you, Mr. Chairman.
The Chairman. Thank you, Senator Carper, for your help
today with very good proposals.
Senator Cardin?
Senator Cardin. Well, thank you, Mr. Chairman. And I just
really want to underscore the point that we do not have enough
stock of affordable housing. Supply and demand issues--it's
just not affordable. So, I first want to thank you, and I want
to thank Senator Young and Senator Cantwell on the Low-Income
Housing Tax Credit. It's an extremely important tool. It's the
strongest tool we have to date, but in and of itself, it's not
enough. So it's usually combined with Historic Tax Credits or
some other stakeholders' investments in order to move forward
with an affordable housing plan in our communities.
So I know in Maryland, we've been able to use the Low-
Income Housing Tax Credits, the Historic Tax Credits. We've had
philanthropic help, the nonprofit community, all combined in
order to deal with affordable housing in our communities. But
one of the things we could do is try to preserve communities so
that we can maintain affordable housing that's commensurate
with the income of the people who live in that community, and
that's been a challenge.
That's why I thank you, Mr. Chairman. I thank Senator Young
in regard to the introduction of the Neighborhood Homes
Improvement Act, because it is aimed at those areas where we
have strong neighborhoods, we have the incomes of that
neighborhood, of the people who live there, are not adequate in
order to renovate or to construct or to buy homes in that
community. So the Neighborhood Homes Investment Act is aimed at
dealing with that.
So, Ms. Scott, if I might, I'm going to start with you.
Tell me how you think such an appraisal gap credit can help in
regard to maintaining the strength of communities and dealing
with the wealth gap that we have here in America.
Ms. Scott. Thank you. Thank you, Senator, and thank you for
your sponsorship of Neighborhood Homes. The bottom line is
that, in the communities that we're talking about, the cost to
build far exceeds the value in the market, and so there's just
no way to get at building these homes without addressing the
gap. And so the credit enables us to do that.
This credit will enable us to probably build, reconstruct,
and rehab about 500,000 homes over the next decade. That's a
big deal in these communities where lower-income families will
benefit--both urban and rural communities. And many of these
neighborhoods are already suffering from the blight of vacancy
and dilapidated homes, so it will go a long way to improve
conditions in the neighborhood.
We estimate about $125 billion of total development
activity. That's going to help in terms of local economy, $26
billion in Federal tax revenue, and another $12 billion in
State and local government revenue. So this credit is going to
spur the market and then generate tax revenue across the layers
of government.
Senator Cardin. I thank you for that.
I want to talk a little bit about the wealth gap, because
home ownership is one of the areas that we deal with in trying
to reduce the wealth gap in this country. Tell us how home
ownership can help us deal with the wealth gap by preserving
communities?
Ms. Scott. Right. Well, as we know, housing is the primary
source of wealth building for generations. And for many of the
families who cannot afford a home, they don't have any other
opportunity, unless you own a business, in order to generate
wealth. So enabling first-time home buyers, first-generation
home buyers, many of whom are in Black and Latino communities--
the tax credit is really aimed at the census tracts that in
many cases are majority minority communities, and so it will
also attract, we believe, families from those census tracts who
would benefit from this credit and be able to buy a home.
Senator Cardin. I want to move to a second subject which
deals with the urgency of action by Congress. And I appreciate
so many of my colleagues who have legislation here. I can tell
you, the waiting lists in Maryland are long for affordable
housing. The options are not really bright today. So, anyone on
the panel, talk about the urgency of us dealing with these
issues. We missed an opportunity in the last Congress. How
urgent is it for Congress to strengthen the tools?
Ms. Geno. I'm happy to take that on, Senator. Again, coming
out of COVID, we really put a spotlight on the importance of
housing, for health and for all sorts of other outcomes. People
are still struggling now, and it takes a long time to put these
deals together. I worked on them for many years as a lawyer
myself. You have to start today in order to get housing built.
Frankly, if you enacted this bill today, it would take 3,
4, 5 years to truly see the housing on the ground to serve
residents. We know we're already falling behind, so if we don't
act very quickly to bring more resources to the table, we're
going to fall even further behind in the future. And the
population of our Nation is still growing. We are
anticipating--we're at 330 million Americans today. We're going
to be at 400 million Americans by the middle of this century.
They all need to live somewhere, so we really need to start
this now.
Senator Cardin. Thank you.
Thank you, Mr. Chairman.
The Chairman. Thank you.
Senator Tillis is next.
Senator Tillis. Thank you, Mr. Chairman, and thank you to
the witnesses for being here. I hope you're not as cold as I
am, but I suspect a couple of you are. Mark, it's good to see
you. I thank you for the work you did at FHFA, and I appreciate
you being here today.
I had the opportunity to really start getting my
understanding of what you need to do to build affordable
housing back in my time in the Statehouse, and we made some
progress. The progress we made there was always balanced
between tax incentives, but also a very healthy focus on
impediments to affordable housing. First among them are
regulations.
I remember vividly a town in my legislative district. I
spent 45 minutes of an hour-long meeting talking about
affordable housing and then they shifted to agenda item 2, and
it was to authorize their local government to mandate sprinkler
systems in all single-family dwellings. I said, ``Guys, we just
spent 45 minutes talking about affordable housing and you've
just proposed something that would increase the cost of an
affordable home by 10 to 15 percent. How does that work?'' So
that didn't happen.
But when we're talking about--and I think the chairman and
this committee had a lot of opportunities for proposals in the
last Congress to come together and really make headway here.
But I, for one, think if we want a good, strong bipartisan,
bicameral outcome, we have to get to the point of recognizing
that there are regulations that are either outdated or need to
be modernized. To what extent--Mr. Watson, I want you to opine
on this. Anyone can. To what extent do we think, Dr. Calabria,
we need to have that balanced approach for anything we do here?
If we do tax incentives, are we really doing something that's
going to provide a sustainable, long-term opportunity for
people in the affordable housing space?
Mr. Watson. Yes. I was just going to add that part of this
is, yes, there is a major risk that you're effectively pushing
on a string if you only rely on tax credits because, similar to
what was mentioned earlier, if you have regulations, if you
have zoning restrictions, if you have other barriers, there's a
higher risk that a lot of those credits will be----
Senator Tillis. I'll give you another example. I want you
all to continue to answer. I want to keep in my time. But I'll
give you another example. The more recent promulgation of WOTUS
is far better than where it started, but I talked to bipartisan
groups and county commissioners most recently over the last
month who say that it's going to be a real problem for
development. And if you think about the development of certain
properties, it may even be disproportionately so for ones that
would make projects work.
So, I think I hear agreement here. If we want something
where we're not coming back every Congress and having the same
discussion, we need to come up with a more rational,
sustainable framework, and I think then that requires a look at
regulations. Not to get rid of them. You want them to be safe.
You want them to be environmentally sound, but I think there's
a lot of work we can do there.
One question, and, Dr. Calabria, do you have something to
add?
Dr. Calabria. I was going to say part of the process is
just getting certainty. I mean, the worst example of this may
be the environmental review process in California, where you
can be fully entitled to the land. You can be zoned. You can
set up all of these things and then you have year after year of
it being litigated. And so again, we can debate what the right
zoning should be for a certain area. We can debate how to
protect the environment, but I think what developers need most
is knowing there's a light at the end of the tunnel.
Senator Tillis. Right. And I, for one, think that Federal
funding and Federal support should go to the jurisdictions that
have proven responsibility on regulatory execution. We're not
going to have enough money to address it nationally. So, if
certain States and local jurisdictions want to overregulate and
make the barriers to affordable housing high, then until we
have all the money that we need for everybody who requests it,
we should put a priority on jurisdictions that are getting it
right, managing all the right outcomes for safety, health, but
getting it right. And I already see with the CHIPS Act--I voted
for the CHIPS Act, $52 billion.
Now, we've got guidance put out by the Department of Labor
that's going to discount that $52 billion by a double-digit
percentage because of structural costs. Those are the things we
need to avoid when we get to a bipartisan outcome, and I think
we will.
Mr. Watson, if you could, just tell me a little bit about
LIHTC and how we can do a better job of balancing urban and
rural areas. I'm a 50/50 State. I've got the problems of big
cities and the problems of rural areas. What do we need to do
there? Thank you.
Mr. Watson. Yes, I would echo a lot of what Dr. Calabria
had said earlier about how we need to create incentives for
providing LIHTC for smaller unit sizes. There should be more
accommodating to rural areas. I think that would be helpful.
Going back to the data side of things, I think if we get
more information from HUD--or if they come in and be more of an
active participant in some of these things--that would also
help us understand where those disparities may lie across
different localities. I think it was a really great suggestion
made earlier to try to bring in State FHAs and others who may
have that data and information so that we can come to some
conclusions about what the right policy recommendations are to
help rural areas.
Senator Tillis. Thank you.
Thank you, Mr. Chair.
The Chairman. Senator Tillis, before you go, I'm very
interested in your ideas for cleaning out needless red tape and
just bureaucratic water torture to me. I mean, it just goes on
and on. The challenge, of course, is nobody wants Federal
zoning. In other words, nobody wants to say, ``Hey, let's write
a whole bunch of rules for America here.''
Senator Tillis. Nor do I.
The Chairman. Nobody wants to go there, so I look forward
to your ideas and suggestions. Thank you.
Okay; Senator Hassan is next.
Senator Hassan. Well, thank you, Mr. Chair. And to you and
Ranking Member Crapo, thank you for holding this hearing. And
thanks to all the witnesses for being here.
Ms. Geno, I want to start with a question for you. In New
Hampshire, I hear from families about the burden that rising
housing costs have had on their ability to live and work in our
State, and it also, obviously, hurts businesses. The story I'm
hearing repeatedly right now is, ``We've made an offer to a
really valuable recruit to come into the State and work for our
business, and they not only can't afford a place to live, they
can't find a place even if they could afford it.''
So, part of the reason that we're seeing rising housing
costs in New Hampshire and around the country is obviously a
lack of supply, and that's why additional Federal support for
programs to support housing construction, like the Low-Income
Housing Tax Credit, is critical. Can you discuss how States can
use programs like the Low-Income Housing Tax Credit to address
the shortage of workforce housing?
Ms. Geno. Sure. We talked earlier about the MIHTC proposal
that Chairman Wyden has introduced. And that really is an
important tool to capture that group that doesn't qualify for
the Low-
Income Housing Tax Credit and is trying to move up the economic
scale, but whose wages are not keeping pace with the increased
cost of housing.
Again, housing isn't the only sector of our economy that is
experiencing incredible cost increases. Particularly since
COVID, food, energy, and other sectors are seeing rising prices
as well. We've seen those more in real time because they're
implemented pretty quickly when those costs increase.
In the housing sector, however, it's much more of a lagging
indicator, particularly on the rental side and, in part,
because people sign 1-year leases. They get renewed at
different times. So, those costs from COVID are really just
hitting our sector right now, and we need as many tools in the
toolbox as we can have to develop and increase supply in
communities--suburban, urban, and rural.
Senator Hassan. Well, thank you.
And I want to turn to the issue of rural housing now. And,
Ms. Scott, I have a question for you, and I know Senator
Grassley and I just heard Senator Tillis talk a little bit
about it too.
Ms. Scott, in your testimony you note that investment in
quality housing not only supports families, but also
strengthens the economy and supports employment. I hear from
constituents all across my State, including those in rural
areas like our north country, that expanding housing options is
necessary to expand economic opportunity. How can we leverage
the tax code and expand existing Federal housing programs to
help make housing more affordable for rural families?
Ms. Scott. Thank you, Senator, for that question. For one,
we can provide a basis boost for the projects in rural
communities. This would go a long way to help deals pencil out
that currently do not. We can align the income limit
requirements. There's a difference between the income limit
requirements to rural communities between the Housing Credit
and Private Activity Bonds, and that difference leads also to a
gap in terms of how we can finance.
And then lastly, I would say that providing the basis boost
for projects serving Native communities would also help in
terms of--we should require States, I think, to provide a
selection preference that allows more projects to serve Native
communities. When you combine fixes like that, I think we begin
to get to addressing some of the gaps in providing housing in
both rural communities and Native communities and the like.
Senator Hassan. That's very helpful. Thank you.
An additional question for you, Ms. Scott. In addition to
increasing the supply of housing, it's essential that we
provide additional support for families working to achieve home
ownership. That's why last Congress I introduced bipartisan
legislation which was called the Middle-Class Mortgage
Insurance Premium Act to provide tax cuts for middle-class home
buyers who use mortgage insurance. Can you discuss how mortgage
insurance can make home ownership more accessible, and how else
can we continue to cut housing costs for families?
Ms. Scott. Sure. The issue there is that home buyers who
can't afford the 20-percent down payment are required to
purchase mortgage insurance, and that requirement prohibits a
lot of families from actually going forward with home
ownership. So, first-time home buyers, minority home buyers,
those are the ones that we really, really want to focus on. And
I think that, as noted earlier in the testimony, the gaps in
terms of the limits in income and the limits in savings--this
will help us to address that gap and make home ownership more
available to many more families.
This is also why we support increasing funding to other
housing programs that can provide down payment assistance as
well like, for example, CDBG and HOME, and the USDA Rural
Housing Service single-family programs. So, we say combine all
of those other resources to increase the availability of home
ownership down payment assistance.
Senator Hassan. Well, thank you very much. That's very
helpful.
And thank you, Mr. Chair.
The Chairman. I thank my colleague.
Here is where we are. I'm going to run and vote and then
free Senator Crapo up, and I do have a family commitment at
noon that I can't break. So we'll go with Senator Cantwell, and
then we'll go with Senator Young. With a little bit of luck,
others will come in after they vote, but it's going to be a
little bit of a juggling act. And Senator Crapo and I will call
some audibles.
Senator Cantwell?
Senator Cantwell. Did my colleague, Senator Young, want to
go?
Senator Young. I'm prepared to. Thank you. Thank you,
Senator Cantwell.
Senator Cantwell. I'm yielding to my colleague who is
working so diligently with me to get an increase in the tax
credit.
Senator Young. Thank you to the great Senator from the
State of Washington with Hoosier roots. I appreciate that.
I mean, this is a timely hearing, and I've enjoyed working
with Senator Cantwell and others, and I look forward to working
with the ranking member on housing affordability challenges. I
dare say we're in the midst of a national crisis right now. I
mean, we've experienced consumer inflation across a number of
areas in the economy in recent years, but this is one that
really, going back to when I entered the U.S. House of
Representatives in 2011--as I travel around the State of
Indiana, I've heard a lot about housing affordability.
I've tried to trace the roots and primary drivers of this
challenge, and they are manifold. It's labor challenges. Many
contractors who went out of business during the financial
crisis a number of years ago still haven't come back.
Oftentimes we have input challenges, on and on and on, but by
any stretch, this is a market failure. Yes, I used the term
deliberately, but I also use it carefully. After study, it's
pretty clear we have a market failure, some of which has been
the result of government failures or government excesses,
whether it was through the over-subsidization of mortgages, or
zoning or land use policies over the years, but in the end, the
market hasn't worked.
So we can do that, I think, in some instances by, at the
very least, shining a light on some of the government policies
that distort markets and make affordable housing out of reach
for some people. And I try to do that through my YIMBY Act,
which through a light touch approach, would require localities
to make clear when they are implementing land use and zoning
policies which historically exclude certain peoples and/or
drive up the cost of housing. So that's a priority.
But what I'm most excited about today--and I know all of
you want to hear about this--are some things that I am working
on with my good friend from the State of Maryland, Senator
Cardin. We have introduced legislation we are calling the
Neighborhood Homes Investment Act. Now, this is a
reintroduction; Senator Portman collaborated with Senator
Cardin on this legislation. But it would address the value gap
between the cost of renovating a house and the market price in
low-income census tracts.
So, if you go through any major city in the United States,
many small towns, you will see what is loosely called blight:
unsightly homes. I've traveled around these neighborhoods,
tried to figure out how we can make it economical to remove
these homes to allow others to put others in their place or to
renovate those structures. And Senators Portman and Cardin were
able to crack that nut, and I'm carrying the ball this
Congress.
The NHIA will not only increase access to affordable
housing, it will also increase jobs and provide economic
development around the country. The estimated impact of this
bill over 10 years in the State of Indiana alone is remarkable.
Approximately 9,500 homes will be built or substantially
rehabilitated, and about $2.5 billion of total development
activity will occur in the State of Indiana alone over 10
years.
Over 16,000 jobs in construction or construction-related
industries will be created; over $900 million in wages and
salaries will be generated; and nearly $250 million in Federal,
State, and local tax revenues and fees will eventuate if we can
get this done, as I think we will this Congress.
So, these are the sorts of things that I think we ought to
be working on during a time of what is called divided
government, but I see us coming together on important
priorities like this that don't have a red or blue hue to them.
And I thank all of you much for being here.
And with that, I will just look forward to following up
with our witnesses. I won't be asking any questions of you
today. So, with that, thank you, Mr. Ranking Member.
Senator Crapo. Senator Cantwell?
Senator Cantwell. Thank you, Senator Crapo. Thank you so
much.
I want to go back to this workforce housing issue that I
brought up, and I know some of my colleagues did. This
workforce housing--I'm hearing that hospitals are paying for
affordable housing, that insurance--I see nods--insurance is
paying for affordable housing, that people are finding it just
better to build affordable housing than incur the cost of
unhoused individuals.
I also wonder if I could get people to comment on the fact
that the LIHTC program is also so successful in rural areas
that, even while it may make sense in Seattle that health care
or insurance might pay for housing as a better way to deal with
the population, we're also seeing the need for affordable
housing in rural economies, and that's why this legislation on
increasing the tax credit is so important. And the fact that in
2018 we secured a bump that ran through 2021, but now is
expired--what impact that is having? So, Mr. Walker, do you
want to start and try to address those issues?
Mr. Walker. Sure. I'd be happy to. Starting with the second
one on the bump, that juiced the production at a very important
time. And, as we've seen over the last handful of years related
to the pandemic, we now have lost that 12-percent increase at a
time when costs have gone way, way up in a short amount of
time. So, we're playing catchup. We're trying to fill gaps in a
lot of financed deals that can't either get off the ground or
get completed without some additional funding. So, losing that
12-percent could not have happened at a worse time.
On your first question about rural areas, as has been
discussed, rents are lower in rural areas--and the cost of
materials is not much different--and so that creates a real
paradigm and a challenge for developing in those communities.
And the credit program, especially the 9-percent program that
has a much larger equity component to it, is so key to
addressing the affordable housing needs that are equally large
in our rural areas.
I might also add that what we are seeing converging and
colliding really is, we need to produce new units. And as the
credit program approaches 40 years old, we are also under a lot
of pressure to get back to those older deals and preserve and
do some rehabilitation and recapitalization work. So there are
two pressures on every dollar of credit that we have available
to us, both because of the success of the program and all the
units that we have built, as well as the housing crisis that we
are in right now--and needing to produce additional units, both
in rural areas as well as our urban areas.
Senator Cantwell. Does anybody else--Dr. Calabria, I see
you and others nodding your head. I still don't feel like we've
calibrated this issue so that everybody gets it. It is a supply
issue. We are not keeping pace with demand. And to your point,
Mr. Walker, we literally had supply come out of the system
because it went to
market-based rates on pressure, so what should we do? Yes, Dr.
Calabria or Mr. Walker?
Dr. Calabria. Thank you. I will maybe take a little bit of
a different--yes, the tax credit is used in rural and suburban
areas, but certainly, just looking at the distribution of the
stock, there is still a heavily urban bias to the program. And
again, as Mr. Walker alluded to, the economics of the program
are harder in rural areas. That's absolutely true, and that's
why I'm generally of the view that we probably should have a
rural set-aside in the program to nudge housing finance
agencies to do the projects that are harder there.
Senator Cantwell. Thank you.
Mr. Walker?
Mr. Walker. I don't think it's been acknowledged yet, and I
think it's important to acknowledge that we have under-built
for now 2-plus decades, and we are in a deep, deep hole at a
time when the wealth gap is widening. And so this is a
multifaceted challenge, and I would not say that the credit
program is perfect, but it is very good, and the Credit
Improvement Act, in particular when we think about rural areas,
has a component of a basis boost in rural areas that is going
to really help close the financing gap that presents itself in
many of our rural areas.
Senator Cantwell. How much have we under-built?
Mr. Walker. I don't know how to put a figure on that. I
feel like we're in such a deep hole that just seeing the break-
even point is really, really challenging. But I'd love to get
back to you on that, if you would like.
Senator Cantwell. We've asked this question of other
witnesses. I've heard 300,000 units. I've heard different
numbers. I think people have admitted that the downturn
basically just kind of put a halt to a lot of things. And those
were significant years where supply was not meeting the market
demand, and then we've had other issues. So anyway, I'd like to
get this number, because I think if we could show our
colleagues exactly how much supply has not been put in to the
system, then these other issues like you're saying--the
pandemic and supply chains--we all know how much that increased
cost of materials.
And then you take out the one bump we were able to get, so
yes, there's probably a huge swing in the amount of costs that
are now making it more expensive, again tacked onto to this
decade-plus where we didn't keep pace with supply. Then you can
see really why we're in this hole, and I think that will
motivate people.
I'm very interested in looking at the rural credit issues;
so, thank you.
Senator Crapo. Thank you.
Senator Warren?
Senator Warren. Thank you, Mr. Chairman.
So, I'm going to pick up actually where Senator Cantwell
left off, and that is, for decades the country has
underinvested in our housing supply, and the data I see
suggests we're now facing a shortage of as many 7 million
affordable homes. But the bottom line is that we need more
housing for everyone, for renters and first-time home buyers
and veterans and people living with disabilities and families
experiencing homelessness. You name it, we need more housing.
So, tax policies can be a way to address housing shortages.
The Low-Income Housing Tax Credit is not perfect, but it helps
drive the development of affordable rental homes. But some of
our tax policies may actually make the problem worse. Wall
Street money managers have fanned out across the country buying
and converting what little supply of affordable homes remain,
and they get tax breaks to do that.
Ms. Scott, you are an expert on community development, so
let me start by asking you about the impact of more Wall Street
investors moving into the housing market. Big corporate
landlords, often acting through investment vehicles known as
Real Estate Investment Trusts, or REITs, have bought up
hundreds of thousands of homes across our country over the past
decade.
Now, some of these folks argue that REITs and other
investors encourage investment in supply and neighborhood
quality. Is that what you've seen?
Ms. Scott. Thank you, Senator, for this focus in your
question. We're not opposed to REITs, per se, but we are very
concerned about the institutional investor in housing markets
in our communities. LISC did a research paper focusing in on
New York City that you may have seen. And in certain instances
when these investors acquire properties, they refinance them so
they're extracting money from the real estate and taking it out
of the community rather than reinvesting it in the housing that
they purchase.
Oftentimes, we find that in the housing that has been
purchased, the rents are increased and the existing tenants may
even lose their housing. They may be evicted. We see that the
quality of maintenance goes down, and overall there aren't the
capital improvements.
And on the single-family side, we see something similar
happening, where these investors are snapping up homes to rent
at much higher rates than the market has generally supported,
and so you see less opportunity for first-time home buyers.
This is the stock, and the community is being denied wealth.
Wealth is coming out of the community. The housing is
dilapidated, and oftentimes the institutional investors are not
easily identified, and so it's not clear who the players are,
where the money is coming from--and it's changing the face of
many of our communities.
Senator Warren. So that's a pretty grim picture about
what's going on, and it's particularly alarming because, in
2021, investors bought up one-quarter of all single-family
homes that were on the market. And no surprise, the places
where the biggest of these investors went--those that owned
thousands of properties--have been the places where home prices
have increased the most.
Now, these same biggest investors are collecting record
profits while they are subsidized by government financing and
tax breaks. So, I just want to take a quick look at these tax
breaks.
Mr. Watson, we're going to be limited on time, so let's see
if we can do these as true/false. You are an expert on Federal
tax policy at the Tax Foundation. Let's just talk about a few
of the tax breaks. Wall Street investors have exploited them to
hoover up homes, make the supply crisis worse, and drive up
costs for families. True or false?
Many REITs are billion-dollar companies, including some of
the biggest corporate landlords in the United States:
Invitation Homes, American Homes 4 Rent, and Mid-America
Apartments. But they generally do not pay corporate income tax
if they meet certain conditions; is that right? True or false?
Mr. Watson. If they deduct it from their income, they would
not.
Senator Warren. True. Okay.
So, let's do another. The 2017 Tax Cuts and Jobs Act allows
investors to deduct 20 percent of their pass-through business
income, such as dividends they might receive from REITs. True
or false?
Mr. Watson. True.
Senator Warren. True. All right.
Let's keep going here. I like the way you're doing this.
The CARES Act allowed all business losses to be carried back
for 5 years. True or false?
Mr. Watson. That's true.
Senator Warren. That's true. And that change resulted in
billions of dollars in tax benefits that went largely to the
wealthiest in the country, including Wall Street real estate
investors.
So let's do one more. Real estate investors can avoid
paying taxes on profits from the sale of a property if those
profits are used to buy another property, a process known as
like-kind exchanges. True or false?
Mr. Watson. That's true.
Senator Warren. Okay. This loophole is expected to provide
investors with $134 billion in tax breaks over the next 10
years. I just want to say our tax policies reward giant real
estate investors who raise fees, jack up rents, and evict
families. Americans are already suffering from severe lack of
affordable homes, and any taxpayer money spent on housing
should go toward fixing the problem, not making it worse.
Thank you, Mr. Chairman.
The Chairman. Senator Warren, because of her collegiality,
we will have Senator Brown, then we will have Senator Cortez
Masto. And then we're going to wrap up because I have to deal
with William Peter Wyden, age 15, in a couple minutes. Okay.
Senator Brown?
Senator Brown. Is he a relative of yours?
The Chairman. Yes; a son.
Senator Brown. I knew that.
Senator Cortez Masto, thank you for your graciousness.
Dr. Calabria, good to see you again. Glad you're here.
Thank you.
Ms. Scott, in this committee and the Banking and Housing
Committee, we've heard time after time how difficult it is for
first-time home buyers and families to find a place they can
afford. Yesterday I joined Senators Cardin and Young and Wyden
and Warner in reintroducing the Neighborhood Homes Investment
Act. I know Senator Cardin and Senator Young raised this with
you earlier.
Ms. Scott, how would the Neighborhood Homes Investment Act
help expand the supply of safe, affordable homes and open up
home-ownership opportunities for families in Ohio and across
the country?
Ms. Scott. Thank you, Senator, for this question.
Essentially, what the credit is going to do is to enable us to
build housing, because we'll be able to fill the gap between
what it costs to build and what the home is actually valued at.
In the communities that you're referring to, in Ohio for
example, the value of the home is less than the cost of the
construction. So once we close that gap, we get to a place
where we can build more homes. We expect that we can build
another 500,000 new homes under this program over the next 10
years. And the Neighborhood Homes credit is targeted to census
tracts that will assist many low-income families and minority
families, both in urban and rural communities.
Senator Brown. Thank you.
Mr. Walker, last Congress I introduced the bipartisan
Housing for Homeless Students Act with my colleague from Ohio,
Senator Portman, and Senator King of Maine. This bill ensures
that students and veterans who have experienced homelessness
are eligible to reside in Low-Income Housing Tax Credit, LIHTC,
funded affordable housing while pursuing an education full-
time.
Currently, these students are not eligible for LIHTC-
financed housing. This creates a Catch-22 for students forced
to make an untenable choice between a roof over their heads and
full-time status. What would it mean to students and veterans
experiencing homelessness to be eligible for affordable housing
through LIHTC while pursuing their education, and would
streamlining the student rule also make LIHTC easier to use?
Mr. Walker. Thank you for the question, and thank you for
your leadership on this issue. I think the student rule is a
concept of decades ago, and I think both the credit program--my
experience is that we can improve on that by opening up the
housing that we are creating for students, whether they are
homeless students or students of families that have experienced
homelessness, or whether they're working families that are
having to retool for industry changes.
We've learned as we've gone, and both your legislation and
the Credit Improvement Act include some modifications to really
reconcile the shortcomings of limiting access to the affordable
housing that we're creating for students.
Senator Brown. Thank you.
And back to you, Ms. Scott. I want to follow up a bit on
Senator Warren's questions and comments. We've seen what
institutional out-of-State investors are doing to communities
in Ohio and everywhere else. My office is inundated with
complaints from Ohio renters, from local officials who see
investors jacking up rents, filing eviction after eviction,
letting homes fall apart to the point where they're
uninhabitable. Your comment about the renovation costing more
than it's worth is particularly incisive, I think. How are
these investors affecting renters, aspiring homeowners, and
their communities? Talk a bit more about that, if you would.
Ms. Scott. So essentially what happens here is, especially
on the single-family home-ownership side, this housing is swept
off of the market as a resource for first-time home buyers,
first-generation home buyers. The prices, if they are on the
market for sale, are at a much higher rate than the market can
bear, than the families can pay, and so we're basically losing
inventory that is affordable in these markets. And then we're
also having the negative impact of the inventory that stays as
rental that is, as I said, dilapidated, oftentimes not kept up,
and so it's a problem that crosses multiple layers of housing
inventory.
Senator Brown. Thank you.
One of my favorite religious philosophers, Rumi, once said,
``In generosity in helping others, be like a river,'' and
that's what Senator Cortez Masto is. So thank you for yielding
for a moment.
The Chairman. And I thank my colleague, who also is going
back to the Banking Committee, but it is a committee that also
works very extensively on housing issues, so we're very glad to
be able to be partners.
Senator Cortez Masto?
Senator Cortez Masto. Thank you, Mr. Chair, and thanks to
everybody here. It is just appropriate we're having this
conversation right across the way from the Chair of the Federal
Reserve. This is a question I asked him--about housing and the
impact the Federal Reserve is having on access to housing.
Mr. Walker, let me start with you. And thank you for
including your support of my bill, the Affordable Housing Bond
Enhancement Act, in your opening statement. This legislation
that I've introduced will expand the supply of affordable homes
and improve access to home ownership for low- and moderate-
income home buyers and improve our mortgage revenue bonds and
Mortgage Credit Certificate program.
Among other things, it raises the home improvement limit
from $15,000 to $50,000, allows refinancing, and simplifies the
Mortgage Credit Certificate calculation. So my question to you,
Mr. Walker, is, how would this legislation help working
families buy and sustain home ownership?
Mr. Walker. Well, today's marketplace emphasizes the
importance of mortgage revenue bonds and Mortgage Credit
Certificates by being able to provide lower cost to borrowing
and helping folks who otherwise would not have the access to
the dream of home ownership. And so, both of these tools are
incredibly valuable, and I think your legislation helps to
enhance these tools.
Secondly, being able to improve homes, keeping people
housed--people who have the opportunity to own a home, but are
struggling to maintain that home--is an important component as
well. And so, whether it's an elderly couple that needs to do
some modifications to their existing home so that they can age
in place--again, a very important component of our housing
continuum.
Senator Cortez Masto. Thank you, and I so appreciate the
chairman and the ranking member having this hearing, because
there are a number of things that we have introduced that can
help not only the home-building side and the financing to
pencil out, but on the home ownership and helping those who
want access. And I'm hopeful after this--we do have this group
of bills that we're putting forward that really are going to
make a difference here. I hear it in Nevada so often, because
we have affordable housing issues on so many levels.
Dr. Calabria, it's good to see you again. Thank you.
Congratulations on your new book that has come out.
Dr. Calabria. Thank you.
Senator Cortez Masto. I look forward to reading it. Let me
ask you this--and thank you for serving as the FHFA Director.
In my research on the Federal Home Loan Banks, it has become
clear that the Federal Home Loan Banks have access to the type
of financing that affordable housing developers need:
acquisition, construction, long-term low fixed-interest rates
to finance multifamily housing developments; yet, this
trillion-dollar system invested less than $3 billion in these
types of investments, a fraction of the more than $300 billion
in advances.
And I think the FHL Bank advances could work very well with
the Low-Income Housing Tax Credit. I'm a supporter of the
legislation there in so many other ways. So my question to you
is, right now the FHFA is undertaking a review of these Federal
Home Loan Banks, and I'm curious, as a former Director, about
your thoughts on that. Is that appropriate? And then what
should Congress be doing once the review is finalized?
Dr. Calabria. Certainly, it is appropriate. I had actually
started my own internal review on some of the Bank Act
questions when I was there, and it's been almost 30 years since
Congress made any real changes to the Federal Home Loan Bank
system. So I think in a couple of months we'll see a report
from the agency to Congress. Some of that will include
congressional recommendations.
Senator Brown left, but maybe he's still listening, and we
can suggest that perhaps the Banking Committee should have some
hearings on the system and look into it, but it is absolutely
appropriate and timely.
Senator Cortez Masto. Thank you. And for this reason--I've
heard it from so many in my State around not just helping the
homeowners, but this idea of putting together this financing.
And I'm going to quote one of my State Senators: ``It's like
lasagna. You've got to pull all these different pieces together
to make it work, and each time it's going to come out maybe a
little bit differently.''
Our goal here is to give them enough tools to put that
lasagna together, the ingredients that they need for that
financing. There's so many different ways, and this is one of
them. The Federal Home Loan Bank is an important part of it.
I'm going to add one other thing that came up today, and I
think it was Dr. Calabria who said this. In the West, a
majority of the land is owned by the Federal Government. So,
our local governments do not have the opportunity to own land,
to say maybe we're going to provide this land at a cheaper rate
for affordable housing. We have to go through the Federal
Government to do so. There has to be a benefit for those of
us--and believe me, there's bipartisan support for this--to
identify Federal land in the West that can go for a cheaper
rate to help us develop this affordable housing so it pencils
out. So, I'm just going to put that word out there.
Thank you, Mr. Chair.
The Chairman. I thank my colleague. I'm going to have to
run, and Senator Menendez is going to wrap up, and I thank him
for doing so.
Senator Cortez Masto, as is usually the case, makes a good
point. The ingredients are there. And to me, we've had a lot of
good ideas here. I think there's a chance to build a really
unique coalition here to deal with this. The only thing that's
unacceptable to me is for this Congress to take a pass on
housing. This is too urgent. It's too important, for all the
reasons we've been talking about.
Senator Menendez, thank you for making it possible to wrap
up.
Senator Menendez [presiding]. Thank you, Mr. Chair, and
your closing statement there is exactly my sentiment, so thank
you very much.
Allowing property taxes to be fully deducted has been a
bedrock principle of our tax code. It rewards States that
provide services like education, public safety, and
transportation that improve the quality of life. The State and
local tax deduction has been critical to ensuring housing stays
affordable.
Ms. Geno, your members that are C corporations are able to
fully deduct State and local taxes at the entity level against
their corporate taxable income; is that correct?
Ms. Geno. Yes.
Senator Menendez. If SALT was capped for these
corporations, would that likely increase the cost for tenants?
Ms. Geno. It could. And again, there's so many things that
can be done on the State and local levels for support. But from
a tax policy perspective, we're seeing State and local taxes
increase dramatically in communities across the country, and
that is an increasing problem that impedes multifamily
development. Another thing that State and local governments can
do--and the Federal Government can help incentivize--is for
them to provide tax-
abatement opportunities for multifamily housing developments,
particularly those that include affordable units.
Again, Federal incentives for State and local governments
to make those changes on the local level would truly help.
We've seen that happen in certain communities across the
country. More of that would be beneficial.
Senator Menendez. I appreciate that. I mean, unfortunately
what you described as a possibility is the unfortunate reality
for middle-class homeowners in my State and many others. The
2017 Republican tax law gutted this essential deduction, not
for large corporations, but for families, forcing them to be
double taxed and punishing States with progressive tax codes
that choose to invest in their communities.
New Jersey has some of the best schools in the Nation. It
has a vast infrastructure system in terms of transportation.
These are all elements that make it a desirable State to live
in. Of course, you have to spend money on those investments,
and gutting the State and local property taxes has been a
consequence that attacks the very essence of making those
investments.
Even if you have an abatement, an abatement obviously
foregoes a certain revenue at the municipal level, so the
deduction would be able to help towards creating stability, and
it has been essential for encouraging and preserving home
ownership and wealth for Black and Hispanic homeowners.
Historians like Andrew Kahrl at the University of Virginia have
found Black and Hispanic households have been subject to higher
property tax assessments than their White counterparts.
The SALT deduction has been vital in providing relief from
unjust tax assessments, which is why the NAACP passed a
resolution in support of lifting the cap, so I'm going to
continue to revisit this issue until we get it right.
Now, one of the greatest challenges in the current housing
market--I know there's been a lot of talk about LIHTC, but I
just want to add my voice to it. There are simply not enough
affordable rental homes being built, and according to Secretary
Fudge, even before the pandemic, we had a shortfall of 7
million affordable homes for low-income renters.
So as a Nation, we have to find ways to build more
affordable homes, and part of that solution should come from
our new investments. But we also need to make maximum effective
use of existing tools, such as the bipartisan Low-Income
Housing Tax Credit, which subsidizes the creation of 100,000
units of affordable housing a year, but I think it has the
potential to do even more.
Ms. Geno, what would it mean for the development of new,
multifamily buildings if Congress increased the LIHTC value and
the total amount of credits as outlined in the Affordable
Housing Credit Improvement Act?
Ms. Geno. Current estimates are that it would increase the
value of the tax credit to create almost 2 million new homes,
but again, as we stated earlier, we have to start today. There
is a real urgency in moving this legislation forward. We are
already losing ground. And if this legislation were passed
today, it would take 3 years to see the benefit. So we need
those additional 2 million homes, but it's going to take a
minute to get there.
Senator Menendez. Now, tax credits like LIHTC are vital in
increasing the supply of affordable housing, but developers
first need to obtain funding, financing to start construction
and build homes. So institutions like Community Development
Financial Institutions that deliver capital to communities
where affordable housing is most needed, in my view, are a
critical element of the housing ecosystem.
Ms. Scott, can you talk about how CDFIs like yours support
the development of affordable housing in underserved
communities?
Ms. Scott. Yes, Senator; thank you for this focus. The most
important thing, I think, that the CDFIs are doing is really
providing capital at the early stage of development when it's
almost impossible to get pre-development funding to even start
a project and conceive of it. The CDFIs are lending--we're
taking some of the biggest risks in the continuum of building
housing, and it gets us to a place where developers can apply
for credits and secure them and then oftentimes are even coming
back for some financing from us in order to work alongside the
credit and other financing.
We're also sometimes filling gaps in terms of the timeline.
Sometimes to preserve the integrity of the credit, we'll enter
the tax credit deal before the credit flows, and that's another
opportunity that enables a deal to go forward. We're also
lending to borrowers, to developers that may not be able to
secure conventional lending, and so that's another source of
opportunity. So, I think the CDFI world is really providing a
resource that's really helping to spur--I don't know the exact
number or percentage of Low-Income Housing Tax Credit units
that have been built by CDFIs or helped to be built by CDFIs,
but that number is substantial. Without the CDFI community, I
don't think we would see as much affordable housing production
as we see now.
Senator Menendez. You have a proven track record of
delivering affordable housing development in underserved
communities, which is why I led the effort to establish the
CDFI Bond Guarantee Program, which enables CDFIs to execute
large-scale development projects.
My final question is, would you agree that expanded funding
for CDFIs would help expand the building of affordable housing
in places where it's needed the most?
Ms. Scott. Simply put, Senator, yes.
Senator Menendez. Okay. Sometimes ``yes'' is the strongest
word. So I urge my colleagues to join me in strongly supporting
funding for CDFIs as we deal with the 2024 appropriations.
With that, on behalf of the chairman and the ranking
member, thanks to all of you for your presence and information.
For information of members, questions for the record will be
due at 5 p.m. next Tuesday, March 14th.
And with that, this hearing is adjourned. Thank you.
[Whereupon, at 12:13 p.m., the hearing was concluded.]
A P P E N D I X
Additional Material Submitted for the Record
----------
Prepared Statement of Mark A. Calabria, Ph.D.,
Senior Advisor, Cato Institute
Chairman Wyden, Ranking Member Crapo, and distinguished members of
the committee, thank you for the invitation to appear at today's
important hearing.
It has been a great privilege to get to know and work with many
members of this committee during my own years of public service.
Senator Crapo's work on reforming our mortgage finance system has been
critical. Of course, Senator Brown's longstanding commitment to
affordable rental housing has driven his tenure as Chair of the
Committee on Banking, Housing and Urban Affairs. I would also like to
recognize Senator Scott's work on housing credit access and Senator
Cortez Masto's work on the Federal Home Loan Banks. And last, but not
least, my home State Senator Warner's work on mortgage finance reform
has been an important contribution. While I haven't always agreed on
the details, I have always been impressed with the sincere commitment
of these, and other members, to address the pressing housing needs of
our country.
While my affiliation today is with the Cato Institute, any views
expressed are solely my own. In addition, I have no financial
interests, other than as a taxpayer, homeowner and concerned citizen,
in the issues being discussed at today's hearing, and nor do I
represent any interests that do.
Let me also clearly state that neither the Cato Institute nor its
scholars either endorse or oppose specific pieces of legislation.
Accordingly, nothing in my prepared testimony or oral remarks should be
interpreted to either support or oppose any particular legislation.
The observations and statements made in my testimony are based not
only on my years of public service, but also on my read of the relevant
statistical series and academic research. Others may read the same
research and reach different conclusions. I've attempted to limit any
observations to those generally supported by multiple researchers and
data series.
Let me first state that too many working families face significant
housing costs burdens. While I have never been shy when it comes to
disagreeing with some of the more conventional approaches to housing
assistance, my disagreement has been based in a concern that too many
programs are inefficient, poorly targeted, and even occasionally
counterproductive. It is not a disagreement over the importance of
housing affordability. At the risk of overgeneralization, I believe
that too often, too much of our housing subsidies have been captured by
providers, and too little of the economic benefit not ultimately
received by the intended families. I also remain concerned that too
often subsidies are not focused on those most in need, this is
particularly the case with housing, where despite the positive tax law
changes in 2017, the bunk of the benefit of the mortgage interest
deduction, for instance, is captured by wealthier households.
Let me also emphasize that the best housing policy is a jobs
policy. There is simply no greater force for housing affordability than
broad-based economic growth. Efforts must be made to reduce the cost of
housing, especially by reducing construction costs, but it is also
critical we see strong inflation-adjusted income growth for working
families. Future tax reform should be foremost focused on increasing
wages.
We must also recognize that the rental housing programs created in
our tax code are often used by developers in conjunction with other
non-tax subsidies. Considerable expense is incurred coordinating and
combining these various subsidies. I would encourage any changes to the
Low-Income Housing Tax Credit (LIHTC) or related programs to be
coordinated with programs changes in other programs. There is far too
much complexity today in affordable housing development. We should work
to reduce that complexity, not add to it.
I would also urge the committee to consider where the multifamily
rental market may be headed. To quote a recent Freddie Mac report,\1\
``Multifamily is at an inflection point.'' The bulk of evidence
suggests that national rental market has been softening, with some risk
of actual oversupply in multifamily rental housing. While forecasting
is always somewhat difficult, most indicators suggest that rents will
decline over the next 12 to 18 months. The committee should be cautious
as to adding any additional stimulus to apartment construction when we
are likely already passing the peak of this cycle.
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\1\ https://mf.freddiemac.com/research/outlook/2023-multifamily-
outlook.
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america's housing market
America contains just under 144 million housing units. Of these, 85
million are owner-occupied and 44 million are renter-occupied. As of
year-end 2022, we also had 14.5 million vacant housing units.
Of those renter households, around 2.2 million receive a Federal
housing voucher, usually under section 8, another 840,000 live in
federally assisted public housing, and 1.4 million live in a federally
assisted, but privately owned, unit, often a project-based section 8.
Just under 1 million renters live in units covered by some sort of rent
control or stabilization.
Since January 2021, America has experienced a dramatic decline in
housing affordability. The Federal Reserve Bank of Atlanta's national
Home Ownership Affordability Monitor (HOAM) index,\2\ fell from 103.6
in January 2021 to 64.7 in October 2022. The index, where higher
numbers indicate more affordability, has modestly recovered to 69.6 for
year-end 2022. The most recent HOAM index numbers are at their lowest
level since before the 2008 crisis. The rate of decline for 2022 is
unparalleled.
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\2\ https://www.atlantafed.org/center-for-housing-and-policy/data-
and-tools/home-ownership-affordability-monitor.aspx.
While the dramatic increase in mortgage rates has been the primary
driver of the decline in housing affordability, high home prices
coupled with weak real income growth have also added to declines in
affordability. Similarly negative trends have occurred in the rental
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market.
Rental housing often conjures up visions of urban, high-density,
apartment living. That vision fails to capture much of the character of
renting. A third of rental housing is in the form of single-family
units. Another fourth of rental units are in properties of under 10
units. In fact, only about 12 percent of rental units are in the
higher-density, 50 or more units, one generally finds utilizing the
LIHTC. If we include single-family units, approximately half of all
rental units are in properties of under 5 units.
The percent of renters earning below the poverty line is only
modestly lower for renters living in single-family detached housing (20
percent) relative to renters overall, 22 percent of whom earn below the
poverty line.
Lack of affordable rental housing is sometimes viewed as an urban
problem, yet according to the U.S. Census Bureau's Housing Vacancy
Survey, suburban rental markets actually have tighter housing markets
than those of central cities, 5.3 percent vacant compared to 5.9
percent vacant for central cities.
As Harvard's Joint Center for Housing Studies has noted, in recent
years, new construction has predominately added to the stock of higher
unit rental properties, while the number of lower unit properties,
particularly those in the 2- to 4-unit range, have been on net leaving
the housing stock.
A pressing policy question should be how do we leverage the large
portion of small units that typically fall outside the footprint of the
LIHTC? This is a particularly pressing issue in rural and suburban
communities.
The ``good news'' is that after years of under-building, both
single-family and multifamily construction is strong. The ``bad news''
is that we are almost certainly overbuilding in the multifamily market
and are due for a sharp correction in the apartment market. Over the
past year, multifamily housing starts have been at levels not seen
since the early 1980s.
primary causes of rental affordability burdens
The primary drivers of housing costs nationally are land costs,
labor costs/
shortages, and materials costs. To a lesser extent, issues related to
construction finance are also adversely impacting housing
affordability.
Despite being a country rich in land, only around 2 percent is
currently used for urban purposes. We, especially State and local
governments, have made it increasingly difficult to use our vast land
resources for housing. According to the National Association of Home
Builders, regulation, mostly State and local, adds 40 percent to the
cost of multifamily development.\3\
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\3\ https://www.nahb.org/news-and-economics/press-releases/2022/06/
new-research-shows-regulations-account-for-40-point-6-percent-of-
apartment-development-costs.
There is perhaps little that Congress can really do to
substantially change local land use rules, but we must at least
recognize that local supply constraints can render useless many Federal
attempts at affordable housing, and in some instances actually make
them worse. When supply is relatively fixed or inelastic, do not apply
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demand subsidies, as such only drives up prices.
One area where Congress can make considerable progress, at least
for a few States, is to convert federally held land into land that can
be used to develop housing. The model used by Nevada, which is 80
percent Federal land, to convert Federal land to developable uses
should be a model for other States. If not for this mechanism, Las
Vegas would be considerably more expensive. While few States have the
degree of Federal ownership as Nevada, one of the least affordable
housing markets, California, does have a Federal ownership of 45
percent. Even a modest level of converting Federal lands in California
to housing would make a massive difference in housing affordability.
Colorado, Arizona, Idaho, Oregon, Utah, New Mexico, and Washington
State are prime examples of housing markets were much of the
affordability problem could be solved by a Federal land to housing
conversion. Of course, a large amount of that land would not be
suitable for housing, but enough of it would be.
In relation to materials costs, we can make a significant
contribution to reducing construction costs by resolving many of our
outstanding trade disputes. This is especially the case with Canadian
lumber and aluminum. While we have witnessed dramatic declines in
lumber prices relative to those of 2021 and 2022, lumber prices still
remain above their long-run averages. Similar, aluminum is down
significantly from its summer 2022 highs but still remain highly
elevated relative to its long-run average.
When thinking in terms of directing subsidies, I urge the committee
to think clearly about which constraints are the most binding. If
subsidies are not directed at those constraints, then one risks simply
driving up the cost of the input in short supply. For instance, in a
housing market with limited land availability, or as the economists
would say an ``inelastic'' supply of land, then subsidies not directed
at easing the supply of land will largely bid up the cost of land
without increasing total units (housing) produced. For this reason, the
typical use of demand side tax credits, such as the home buyer tax
credit enacted in 2008 as part of the Housing and Economic Recovery
Act, simply caused a short-term spurt in housing prices, that later
reverted. While it was popular, it was a subsidy that was largely
wasted.\4\ As economist Dean Baker noted, the 2008 buyer credit
``delayed the deflation of the bubble, but did not stop it.''\5\ We
should avoid similar gimmicks this time around.
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\4\ As a Brookings Institute paper concluded, ``we find evidence
that the HERA home buyer tax credit, which essentially amounted to an
interest-free loan, did little to stop the rapid deterioration of the
housing market conditions after the bursting of the home price
bubble,'' https://www.brookings.edu/wp-content/uploads/2016/06/
28_homebuyer_tax_credit_dynan_gayer.pdf.
\5\ https://cepr.net/documents/publications/housing-2012-04.pdf.
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excess complexity in affordable rental development
The most prominent rental housing program in our tax code is the
Low-Income Housing Tax Credit (LIHTC). According to the U.S. Census
Bureau's Rental Housing Finance Survey (RHFS), there are around 2.6
million rental units currently in the Low-Income Housing Tax Credit
program (about 5 percent of the total U.S. rental stock), representing
over a little less than 60,000 properties, with an average of 40 units
per property.
LIHTC properties often receive additional subsidies. For instance,
at least a third of LIHTC properties have at least five tenants
receiving a section 8 housing voucher. A full fifth of tax credit
properties have a third of their tenants on section 8 housing vouchers.
A considerable amount of the ``affordability'' of these properties is
mostly, if not exclusively, provided by the section 8 voucher program.
Other subsidies include: 22 percent of tax credit properties have
subsidized mortgage rates; a third of LITHC developments get either
HOME or CDBG; about half get State low-income housing tax credit, and
another third are getting some sort of local tax relief.
If we could better streamline subsidies, my read of the literature
is that we could reduce development costs somewhere between 2 and 10
percent, depending upon locality. So not a silver bullet, but worth
doing, as it would require no additional funding. Not surprising, legal
fees are a big cost, as often each subsidy stream performs a separate
legal review. There is little market discipline among these fees, often
cost-plus. Developer fees in LIHTC are usually around 10-15 percent.
This is much higher than for-profit, unsubsidized development. While
some higher development fees are to be expected, given the complexity,
I would urge the committee to either cap development fees or have
Treasury promulgate a rulemaking on ``reasonable'' development fees for
LIHTC developments.
Another cost of subsidy-layering is that different subsidy
application cycles can add time and delay. One approach would be to
limit the use of other Federal subsidies on LIHTC developments, else
the committee should explore avenues to better align or consolidate
subsidy application cycles.
Although complexity, and its additional costs, are one concern, I
am also concerned that the extent of ``double-dipping'' in LIHTC
development reduces the amount of subsidy available to non-LIHTC
developments. One avenue to minimize the current incentives for double-
dipping is the approach of section 306 of last Congress's Cantwell-
Young bill (S. 1136) prohibition on local contribution requirements.
In addition to the complexities of affordable housing development,
the committee should also consider the tendency of LIHTC properties to,
as author Richard Rothstein observed in his book Color of Law,
reinforce existing patterns of segregation.\6\ In part this effect is
driven by the urban bias in site location, which is, in part,
influenced by the more difficult economics of multifamily development
in rural and suburban areas, due to the typically lower project
density.
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\6\ Also see Kirk McClure, Anne R. Williamson, Hye-Sung Han, and
Brandon Weiss, ``The LIHTC Program, Racially/Ethnically Concentrated
Areas of Poverty, and High-Opportunity Neighborhoods,'' 6 Tex. A&M J.
Prop. L. 89 (2020), https://scholarship.law.tamu.edu/cgi/
viewcontent.cgi?article=1115&context=journal-of-property-law.
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housing tax credit reform
While I would mostly recommend caution at this point in the real
estate cycle, if the committee were to revisit the legislative
framework for the LIHTC, I would offer the following recommendations.
First, make the LIHTC look at lot more like HUD's HOME program. HOME
allows a wider range of uses, such as direct tenant-based assistance,
so that the particular local market circumstances can be taken into
consideration. Despite some convergence, housing conditions are still
largely locally determined. I would particularly urge the committee to
allow LIHTC funds to be converted into short-term tenant-based rental
assistance.\7\ There are many families who do not need permanent or
even long-term assistance, but rather only a short-term bridge during
periods of financial distress.
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\7\ See https://www.jchs.harvard.edu/research-areas/working-papers/
short-term-benefits-emergency-rental-assistance.
I commend those State housing finance agencies which add tighter
income targeting requirements to their awarding of tax credits. That
said, I believe the current Federal level income targeting requirements
are insufficient to result in the prioritization of those families most
in need. I am also concerned that recent efforts at ``income
averaging,'' while reducing administrative burdens, will result in
weaker targeting. For most areas, the median renter income is around 60
percent of the overall median income, implying that full income
averaging would result in almost no actual targeting. The committee
should consider the addition of a subgoal of a certain percent of units
going to households under 30 percent of area median income. The
committee may also want to consider capping the percent of units that
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can be occupied by households over 120 percent of area median income.
As one of the Banking Committee staff responsible for the drafting
and negotiation of the 2005 reauthorization of the Violence Against
Women Act (VAWA) and its housing title, I remain frustrated at the slow
movement on the part of Treasury in meeting their obligations under
VAWA, in respect to LIHTC properties.
One of the strongest, and most transparent, features of the LIHTC
is its per-
capita allocation formula. I would strongly encourage the committee to
resist any efforts to move to a different formula. We have repeatedly
seen the perverse outcome in programs like CDBG that the allocation
formula results in a disproportionate percent of funding going to the
richest areas of our country, often rewarding local areas for choosing
high housing cost policies.
Progress has been made to broaden the ultimate investors in the
LIHTC, but the program is still overly reliant on the banking industry.
I will remind the committee that during the 2008 financial crisis, the
market for tax credits largely disappeared when the banking industry as
a whole become unprofitable. If we see a continued softening of the
economy, it is highly likely that bank profitability will decline and
the demand for tax credits will again fall.
broader rental tax reform
As mentioned above, there are a large number of rental units in
lower-density properties that will likely never be attractive
candidates for the LIHTC, at least not under current rules. Also
mentioned was the over 14 million vacant housing units in the United
States. How do we better leverage the millions of lower-density units,
while also attracting vacant unit onto the rental market? I would
suggest the committee directly examine the tax treatment of rental
income. A modest proposal would be to make the first $500 in monthly
rental income tax-free. In many markets, that savings would be passed
along to renters. It would also encourage vacant units to enter the
rental stock. As I am concerned as to our long-term fiscal situation,
which I believe is unsustainable, this change could be paid for by
reducing the tax expensing of mortgage interest payments of rental
properties.
other committee issues
While somewhat tangential, I do want to take this opportunity to
alert the committee to significant vulnerabilities in the REIT sector
that were witnessed in March 2020. In particular, so-called mortgage
REITs were a major source of fragility in our financial markets in
March 2020, resulting in both assistance from FHFA and the Federal
Reserve. A small handful of REITs have moved beyond acting as passive
investment vehicles and have adopted active trading strategies, not in
substance different from those that contributed to the failure of Bear
Stearns. As I believe these activities represent a threat to financial
stability and run counter to congressional intent, I would encourage
the committee to investigate this issue. If interest, I would be happy
to provide the committee with additional detail.
conclusions
The housing market has been softening and will continue to do so
for at least another 18 months. Rents and prices have weakened and will
continue to do so. In fact, I believe we are closer to the beginning of
this housing correction than to the middle or end. Accordingly,
Congress should move slowly and cautiously when it comes to providing
any additional stimulus to the housing market. Such will only delay the
inevitable.
Legislating is, of course, an often slow process and should focus
primarily on longer-term issues. Despite the short-term outlook for an
oversupply in multifamily housing, we still have longer-run cost
pressures. We also have significant housing resources that are
underutilized.
As the most effective housing program is a jobs and incomes
program, I would encourage Congress to approach changes to our housing
tax provisions within the broader context of overall tax and housing
reform. I would also encourage the committee to favor simplicity over
complexity, and to expand the focus of the LIHTC beyond higher-density,
urban projects.
______
Questions Submitted for the Record to Mark A. Calabria, Ph.D.
Question Submitted by Hon. Mike Crapo
Question. Most of today's affordable housing is built using the
Low-Income Housing Tax Credit (LIHTC). However, we know that State and
local regulatory barriers can prevent developers who participate in a
LIHTC project from building at a desired pace.
What are some regulatory reforms at the State and local level that
should be enacted or encouraged as best practices to ensure quicker
development of LIHTC projects?
Answer. Streamlining the zoning process would be foremost,
especially moving to a ``build-by-right'' framework, where builders who
meet the local/State requirements are then entitled to build. While not
the case in most jurisdictions, the worst building environments are
those with multiple veto-points, where the builder lacks the certainty
of whether a project can even be completed.
I would also encourage jurisdictions to move from a single-limited
use zoning model to the hierarchical model, where certain land uses are
allowed in all zones. For instance, while a jurisdiction may not want
to allow industrial or heavy commercial uses in a residential zone, it
would allow residential, particularly multifamily development, to occur
areas zoned industrial or commercial. Zoning should have built in
flexibility that allows the property market to evolve without the need
for constant updating of zoning maps.
While I love my car as much, or even perhaps more, than the next
person, local jurisdictions should examine, if not reduce or eliminate,
unnecessary parking space requirements for new residential
construction.
In several jurisdictions, local and State prevailing wage
requirements also add considerable expense to the construction of
affordable housing. They may also extend development times as labor
negotiations may leverage the urgency of the development process in
order to extract concessions.
I would highly recommend the committee and local jurisdictions to
review the various options offered in Housing Reform in the States: A
Menu of Options for 2023, by Salim Furth and Emily Hamilton at GMU's
Mercatus Center. https://www.mercatus.org/research/policy-briefs/
housing-reform-states-menu-options-2023.
Some references for the committee to consider:
Dunn, Sarah, John M. Quigley, and Larry A. Rosenthal. ``The effects
of prevailing wage requirements on the cost of low-income housing.''
ILR Review 59, no. 1 (2005): 141-157.
Littlehale, Scott. ``Revisiting the Costs of Developing New
Subsidized Housing: The Relative Import of Construction Wage Standards
and Nonprofit Development.'' Berkeley Planning Journal 29, no. 1
(2017).
Furth, Salim, and Emily Hamilton. Housing Affordability Is
Attainable Through Regulatory Reform. No. 10350. 2020.
Reid, Carolina, Adrian Napolitano, and Stambuk-Torres. ``The Costs
of Affordable Housing Production: Insights From California's 9% Low-
Income Housing Tax Credit program.'' Terner Center for Housing
Innovation at UC Berkeley, http://ternercenter.berkeley.edu/
development-costs-LIHTC-9-percent-california (2020).
Kneebone, Elizabeth, and Carolina K. Reid. ``The Complexity of
Financing Low-Income Housing Tax Credit Housing in the United States.''
Terner Center, UC Berkeley. August 18 (2021): 2022.
______
Questions Submitted by Hon. Catherine Cortez Masto
Question. What changes do you recommend the Federal Housing Finance
Agency make to improve the ability of the Federal Home Loan Banks to
safely enable their member institutions to invest in housing and
community economic development?
Answer. In order to assure that System advances are being used to
support housing activity, I would suggest that FHFA examine the
possibility of a more frequent asset test for System members. FHFA
should also examine the FHLBanks' approach to managing concentration
risk, as we have seen instances where a small number of advance
borrowers constituted a large percent of advance activity at individual
FHLBanks. FHFA should also review the FHLBanks' approach to accounting
for interest rates risk in eligible collateral, such as mortgage-backed
securities.
FHFA should also examine any need for System consolidation. FHFA
can reduce the number of FHLBanks to eight without congressional
approval. FHFA can also rationalize the existing geographic footprint
of the System. If feasible, FHFA should consider reducing the System
from 11 to eight banks, and draw the boundaries in a more equitable
manner than is currently the case. Congress may want to consider
whether the System should be consolidated into less than eight banks.
Question. When you were leading the Federal Housing Finance Agency,
what efforts did you undertake to review the Federal Home Loan Bank
System?
Answer. I began an internal legal and program review of the System,
which was ongoing when I left the agency. I also conducted internal
resolution exercises on the System, so that in the event of the failure
of a FHLBank, FHFA would be able to resolve that entity without any
taxpayer assistance. Those exercises also allowed FHFA to clearly
identity which other financial institutions would be adversely impacted
by the failure of a FHLBank. The results were shared with FSOC and the
relevant primary regulators. I understood the orderly resolution of a
FHLBank would require the coordination of FHFA with other financial
regulators. Hence, we began an interagency dialogue on those issues. I
also began a process of visiting each of the System banks and speaking
with their full board of directors, as well as visiting individual AHP
developments. Unfortunately, COVID interrupted those visits.
Question. What recommendations do you recommend Congress consider
regarding the Federal Home Loan Banks?
Answer. One of the most concerning aspects of the Federal Home Loan
Bank Act is its allowance of FHLBs to hold Fannie Mae and Freddie Mac
mortgage-backed securities in unlimited amounts. Asset concentration
risk is financial regulation safety 101, yet Congress has tied FHFA's
hands in this regard. Such first creates a massive interconnectedness
in our financial system. The very picture of systemic risk. Secondly,
such allows the FHLBs to accumulate massive investment portfolios. Too
much of the system has come to resemble a version of Bear Stearns:
long-dated, interest-rate sensitive assets funded by short-term
borrowing. This is a recipe for disaster. Congress should prohibit the
system from holding any Fannie or Freddie debt, giving the system 5
years to dispose of its current holdings. Congress should also
explicitly limit the ability of the FHLBs to retain large investment
portfolios. While large investment portfolios were initially grown to
cover the system's REFCORP obligations, over time they have grown to
provide an income source for dividends to members. In order to
eliminate this incentive, Congress should either tightly cap or
outright eliminate the System's ability to pay dividends.
The advance activities of the FHLB system have come to be dominated
the largest commercial banks. These institutions already have ready
access to the capital markets, and hence, are not in need of access to
the FHLB system. To keep the system focused on community institutions,
Congress should limit System membership to depositories with under $10
billion in assets (can be indexed to inflation, if so desired). Of the
4,746 depositories currently insured by the FDIC, such a change would
only exclude the largest 158 institutions from system membership.
To further reduce confusion as to the nature of the System debt,
Congress should subject System debt to the registration requirements of
the Securities Act of 1933. This should not be disruptive, as most of
the System's current debt would qualify as either private placements or
for a shelf registration. Congress should also remove any other System
exemptions from the securities laws and as well as ending any
preferences for purchase by the Federal Reserve or Treasury.
Congress should resist any calls to expand membership. In fact,
Congress should tighten membership. First CDFI membership should be
limited to those CDFI's that are insured depositories and regulated by
the FDIC. Congress should also explicitly limit the loophole of
``captive'' membership, where a larger company, such as a REIT,
purchases an insurance company or CDFI, as an avenue for membership.
Congress may also want to limit insurance company membership to those
insurance companies that are subsidiaries of financial service holding
companies.
Lastly, rather than expanding the current Affordable Housing
Program (AHP), Congress should eliminate AHP and substitute a direct
fee on debt issuance. This fee would remit to the Treasury to be
allocated by Congress for public purposes. The current AHP framework
provides the appearance of meeting some vague public purpose without
the reality. Congress should also reject any calls to expand the
System's purposes. If interest groups would like to see an expansion of
public spending on housing and community development activities, we
have an entire Cabinet level department devoted to such, as well as
activities at other agencies, such as the Commerce Department. Any
additional funding should be provided via the congressional
appropriations process, as so clearly intended under the Constitution.
______
Prepared Statement of Hon. Mike Crapo,
a U.S. Senator From Idaho
Thank you, Mr. Chairman. You have well laid out the issue today. I
appreciated not only your focus on this issue and supply-side
solutions, but the fact that you recognized the bipartisan work we do
in this committee and identified this as one of the key areas where we
ought to be able to accomplish similar solutions.
When this committee held a hearing on housing last summer, we had
just learned that consumer price inflation had spiked to 9.1 percent,
the highest in more than 40 years. The shelter component of the
consumer price index was up 5.6 percent relative to a year earlier, and
rents were up by nearly 6 percent.
Unfortunately for renters and potential homeowners, the mislabeled
``Inflation Reduction Act'' did nothing to address inflation and rising
costs, but is in fact projected to exacerbate inflation in the near
term.
As the Federal Reserve attempts to control price growth with
interest rate hikes, mortgage rates have hit highs not seen since the
2008 financial crisis and are now hovering at 6.5 percent, slowing
investment in the housing market and pricing many buyers in Idaho and
all across the country out of the market. January's overall consumer
price inflation is still significantly above normal, hitting 6.4
percent annually. Shelter accounts for over half of the core increase,
up 7.9 percent over the last year. Inflation is also eating away at the
value of wages; real hourly earnings have declined 1.8 percent.
Across the country, Americans are faced with unaffordable housing.
Specifically, lower-income Americans are facing a shortage of about 7
million affordable homes, and the supply of affordable housing
continues to fall short of demand, with the gap increasing every year.
One tax tool used to address the supply shortage and incentivize
builders to create affordable homes is the Low-Income Housing Tax
Credit (LIHTC). It is responsible for generating a majority of all
affordable rental housing created in the U.S. today and generally
enjoys bipartisan support in Congress.
Several members of this committee have been working across the
aisle to find affordable housing solutions. Senator Wyden has well
described those efforts. Proposals include changes to LIHTC and new tax
incentives. Senators Young and Cantwell, as well as several other
members, are working to reintroduce the Affordable Housing Credit
Improvement Act, which would bolster LIHTC for developing and
preserving affordable housing. Senators Young and Cardin introduced the
Neighborhood Homes Investment Act, which would create a Federal tax
credit to finance home building and rehabilitation in urban and rural
neighborhoods. Other Finance Committee members have expressed interest
in addressing the affordable housing supply shortage, including one of
our newest members, Senator Blackburn. Additionally, Senator Wyden has
introduced the Decent, Affordable, Safe Housing for All--or DASH--Act.
Thank you all for your hard work.
Targeted tax policies such as LIHTC are an important part of
solving housing affordability and supply issues, but we must also
address the drivers that are raising the cost of housing generally.
When input and regulatory costs are high, LIHTC is less effective.
Zoning laws and regulatory barriers are often uncoordinated,
unnecessary, or overly cumbersome, and can ultimately work against the
goal of providing affordable housing by creating excessive development
costs. States and localities with the most restrictive zoning laws and
regulatory barriers often have the most severe shortages in affordable
housing as a result. Federal, State, and local leaders must work
together to reduce regulatory barriers, and they should look to success
stories around the country.
In Houston, local leaders reduced the minimum lot size from 5,000
to 1,400 square feet. After initial success, the reform was expanded to
cover the entire city. Due, in part, to the ability for small-lot
construction, Houston's median house price is below the national
median. Further, it is estimated the average Houston household
benefited from the reform by roughly $18,000. In order to make it
economically viable to build across price points in the market, these
supply-side factors need to be addressed. Overall tax costs,
regulations, supply chain bottlenecks, and financing expenses all enter
into investment decisions.
Overall, there is no better cure to housing affordability than a
healthy, thriving economy. The pro-growth policies in Republicans' 2017
tax reform led to one of the strongest economies in decades: low
unemployment, a low poverty rate, strong wage growth, high median
incomes, increased investment, and record Federal tax revenues. We
should preserve these policies and explore additional opportunities to
promote growth, increase investment, and encourage research and
development in the United States.
I look forward to discussing with today's witnesses ways to ensure
that affordable housing is accessible and that the American dream of
home ownership remains attainable.
______
Prepared Statement of Sharon Wilson Geno,
President, National Multifamily Housing Council
For more than 30 years, NMHC and the NAA have partnered to provide
a single voice for America's apartment industry. Our combined
memberships are engaged in all aspects of the apartment industry,
including ownership, development, management, and finance. NMHC
represents the principal officers of the apartment industry's largest
and most prominent firms. As a federation of 141 State and local
affiliates, NAA encompasses over 95,000 members of all sizes
representing more than 11.6 million apartment homes globally.
We appreciate the Senate Finance Committee's continued focus on
housing issues and, in particular, the rental housing sector and the
many challenges that face our industry and its residents. As the
committee conducts this hearing, we offer our perspective on efforts
needed to promote workable and sustainable policies to address our
Nation's housing challenges. Our ultimate goal is to be sure that
apartment providers can meet long-term housing needs of the 38.9
million Americans who live in apartment homes and continue to make
significant contributions to the growth of our economy, which currently
stands at $3.4 trillion annually.\1\, \2\
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\1\ 2021 American Community Survey, 1-Year Estimates, U.S. Census
Bureau, ``Total Population in Occupied Housing Units by Tenure by Units
in Structure.''
\2\ Hoyt Advisory Services, National Apartment Association and
National Multifamily Housing Council, ``The Contribution of Multifamily
Housing to the U.S. Economy,'' https://weareapartments.org/pdf/
Economic_Impact.pdf.
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the challenge: decades-long underbuilding has resulted
in unaffordability in many communities
There is no doubt that America is facing a housing affordability
crisis. Challenges are different from community to community and State
to State, but facts are facts. For decades, America has witnessed the
escalating challenge created by demographic shifts, short-sighted
public policy decisions, and economic changes culminating in the
inability of an increasing number of families, seniors, and people with
disabilities to rent, buy, or maintain affordable homes that meet their
needs.
Today, in more and more communities, hardworking Americans are
unable to rent homes due to increased costs driven by a lack of supply,
barriers to development, and regulatory burdens. The total share of
cost-burdened households (those paying more than 30 percent of their
income on housing) increased steadily from 28.0 percent in 1985 to 36.9
percent in 2021 and is growing, while others have been priced out of
communities altogether.\3\ This is not sustainable, particularly in a
period of high inflation. Wage stagnation in conjunction with barriers
to new supply--for instance, onerous regulatory hurdles, antiquated and
often discriminatory zoning and land use policies at the local level,
and NIMBYism (``the behavior of someone who does not want something to
be built or done near where they live, although it does need to be
built or done somewhere''\4\)--has led the Nation to this juncture. It
has taken many decades to get to this point, and it will take time to
reverse these trends, but it is critical that we start now to enact a
number of different policies that will incentivize new housing
production.
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\3\ NMHC tabulations of 1985 American Housing Survey microdata,
U.S. Census Bureau; 2021 American Housing Survey, U.S. Census Bureau.
\4\ https://dictionary.cambridge.org/us/dictionary/english/
nimbyism.
In addition, more recent economic instability poses a serious
threat to the ability of housing providers to leverage the private-
market capital necessary to generate needed housing. The Federal
Reserve's rate increases have contributed to a period of economic
volatility, which is driving up the cost of building new housing,
discouraging new investment and pushing some in our sector out of the
market altogether. According to NMHC's January 2023 Quarterly Survey of
Apartment Market Conditions:\5\
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\5\ https://www.nmhc.org/research-insight/quarterly-survey/2023/
nmhc-quarterly-survey-of-apartment-conditions-january-2023/.
More than three-quarters of respondents (82 percent)
reported declining sales volumes from 3 months prior;
Nearly two-thirds (63 percent) indicated equity financing
was less available; and,
Fully 60 percent said it was a worse time for mortgage
borrowing compared to 3 months earlier.
Further, we are still making up for lost housing not produced
during the 2008 financial crisis. Thus, we do not have enough housing
to keep up with demand. Research from NMHC and NAA estimates the U.S.
needs to build 4.3 million more apartments by 2035 to make up for
decades-long underbuilding, meet future demand, and avoid increasingly
expensive housing.\6\
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\6\ Hoyt Advisory Services, ``Estimating the Total U.S. Demand for
Rental Housing by 2035.'' (2022), https://weareapartments.org/pdf/NMHC-
NAA-US-Apartment-Demand-through-2035.
pdf.
While demand for apartments in recent months has softened as a
result of economic uncertainty fueled by high inflation, we caution
that this is only a short-term trend. We simply do not have enough
homes to meet this long-term demand--this housing shortage is immense,
widespread, and enduring. Some communities will see temporary softness
for higher-income households in new Class A buildings, but these units
will not filter down to the millions of lower- and middle-income
households, unless those households choose or are forced to become more
cost-burdened.
the solution: supply + subsidy
It is imperative we keep building new housing despite this
temporary demand lull if we want to avoid large rent increases in the
future and have sufficient housing that meets the need of our growing
population in the years to come. The apartment industry stands ready to
help meet the rising need for attainably priced rental housing, but we
cannot do it alone. It requires a strong partnership between the
private and public sectors. First and foremost, we must seek solutions
that support increased supply--at all price points. Without investment
in our Nation's housing, we will continue to face housing instability
and affordability challenges now and in the future. In addition to
increased supply, we must also deliver short-term solutions to renter
populations that need support. Increased subsidies and emergency
housing support for those of modest means are critical to keeping
struggling renters and their families afloat.
While there is no one silver bullet, a multifaceted approach can be
effective in easing current market constraints. As such, we believe the
following actions will help further our shared affordability goals.
These policy proposals are presented in two parts. The first considers
tax policy proposals that are within the jurisdiction of the Finance
Committee. The second provides analysis of actions that the broader
Congress should consider.
tax policy proposals to promote housing supply
While it will take a variety of tax and non-tax approaches to
increase supply, the rental housing industry believes tax policy can
play a critical role in this regard. To this end, we strongly urge
Congress to:
Expand and enhance the Low-Income Housing Tax Credit;
Enact the Middle-Income Housing Tax Credit to support
workforce housing;
Enhance Opportunity Zones to incentivize the rehabilitation
and preservation of multifamily buildings;
Encourage the adaptive reuse of underutilized commercial
properties into multifamily housing; and
Promote the rehabilitation of multifamily housing located
near transit.
Each of these proposals is briefly described in the pages that
follow, and we note that many have bipartisan support.
Expanding and Enhancing the Low-Income Housing Tax Credit
The Low-Income Housing Tax Credit (LIHTC) is a public/private
partnership that leverages Federal dollars with private investment to
produce affordable rental housing and stimulate new economic
development in many communities. Between its inception in 1986 and
2021, the LIHTC program has, according to the A Call To Invest in Our
Neighborhoods (ACTION) Campaign, developed or preserved 3.74 million
apartments, served 8.06 million low-income households, supported 6.08
million jobs for 1 year, generated $239 billion in tax revenue, and
produced $688.5 billion in wages and income.\7\ The LIHTC program
provides critical support to the Nation's affordable housing production
but could be made even more impactful.
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\7\ https://rentalhousingaction.org/wp-content/uploads/2022/12/
ACTION-NATIONAL-2022-NEW-LOGO_01.pdf.
NMHC and NAA strongly support the Affordable Housing Credit
Improvement Act of 2021 (AHCIA) (S. 1136/H.R. 2573). Introduced last
Congress by Senators Cantwell, Young, Wyden, and Portman (and
cosponsored by Finance Committee Senators Blackburn, Bennet, Brown,
Cardin, Carper, Casey, Cortez Masto, Hassan, Menendez, Stabenow, and
Whitehouse), this bipartisan bill would, among other provisions, make
permanent the now-expired 12.5-percent increase in LIHTC authority for
2018-2021 to enable the production of new units and further augment
credit authority by 50 percent. Additionally, the bill would lower the
private activity bond financing threshold to 25 percent from 50 percent
required to receive the full amount of 4-percent Low-Income Housing Tax
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Credits.
In December 2022, it was estimated that over the 2023-2032 period,
1.93 million additional affordable homes, housing 4.5 million low-
income people, could be financed across the United States and
territories by AHICA provisions expanding LIHTC authority and reducing
the Private Activity Bond financing threshold to 25 percent. Over that
period, this enhanced financing could also create nearly 3 million
jobs, more than $335 billion in wages and business income, and $116
billion in tax revenue.\8\
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\8\ https://www.novoco.com/notes-from-novogradac/novogradac-
estimates-193-million-additional-affordable-rental-homes-could-be-
financed-if-lihtc.
Finally, we would encourage the Finance Committee to consider
increasing the Private Activity Bond volume cap to enhance the
utilization of 4-percent Low-
Income Housing Tax Credits. According to March 2023 data by Tiber
Hudson and Novogradac, 18 States and Washington, DC, are
oversubscribed. Authorizing these States to issue additional Private
Activity Bonds would enable the financing of additional 4-percent LIHTC
projects.\9\
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\9\ Tiber Hudson and Novogradac, Volume Cap Scarcity, March 2,
2023.
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Enacting the Middle-Income Housing Tax Credit (MIHTC) to Support
Workforce Housing
Housing affordability is an issue threatening the financial well-
being of both
middle-income and low-income households across the Nation. According to
the U.S. Census Bureau's Survey of Market Absorption, the median asking
rent for apartment units completed in the third quarter of 2022 was
$1,805, a 27-percent increase from the same period in 2017.\10\
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\10\ U.S. Census Bureau, Survey of Market Absorption.
For a renter to afford one of those units at the 30 percent of
income standard, they would need to earn at least $72,200 annually.
Moreover, the share of apartment households making between $30,000 and
$74,999 with at least moderate housing cost burdens rose from 45
percent to 53 percent, while the share with severe burdens rose from 9
percent to 13 percent.\11\
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\11\ NMHC tabulations of American Community Survey microdata.
Furthermore, based on 2021 American Community Survey data, we
estimate that more than a quarter (26 percent) of middle-income renter
households (81-100 percent of HUD Area Median Income) were cost
burdened in 2021. This amounts to more than 1.2 million households.\12\
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\12\ IPUMS USA, University of Minnesota, ipums.org; 2021 HUD Median
Family Incomes for FMR areas, metro areas, and States.
Accordingly, this is an issue impacting those workers who comprise
the very fabric of strong communities nationwide, including teachers,
firefighters, nurses, and police officers whose wages are not keeping
pace with costs. Tax policies to spur the production of multifamily
housing targeted to middle-income Americans should be a part of any
legislation that seeks to address housing affordability on a
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comprehensive basis.
We urge Congress to enact the Middle-Income Housing Tax Credit
(MIHTC) that Senate Finance Committee Chair Wyden introduced last
Congress as part of the Decent, Affordable, Safe Housing for All (DASH)
Act (S. 2820) to address the shortage of workforce housing available to
American households. Estimates indicate the proposal could finance
344,000 affordable rental homes over 10 years while also creating
560,400 jobs and generating over $63.4 billion in wages and business
income.\13\
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\13\ https://www.novoco.com/notes-from-novogradac/dash-acts-middle-
income-housing-tax-credit-would-finance-344000-affordable-rental-homes-
households.
Designed to complement the successful LIHTC program, the MIHTC
program would enable State housing agencies to issue credit allocations
to developers that would subsequently be sold to investors. Investors
would receive a dollar-for-dollar reduction in their Federal tax
liability over a 15-year period, and developers would invest the equity
raised to build apartments. The equity raised would cover 50 percent of
the cost of constructing qualifying units. A development project
eligible for MIHTC would have to set aside 60 percent of units for
households earning 100 percent or less of Area Median Income and must
be kept affordable for up to 30 years.
Enhancing Opportunity Zones to Incentivize Rehabilitation of Housing
Units
Under the leadership of Senators Tim Scott and Booker and enacted
as part of tax reform legislation in 2017, Opportunity Zones are
designed to provide tax incentives for investments in distressed
communities. Opportunity Zones hold great promise for the development
of multifamily housing.
While we expect the Opportunity Zones program to be beneficial in
spurring the production of new multifamily housing, the program could
be improved with respect to incentives for the rehabilitation and
preservation of existing multifamily units. Current regulations work
against using this program to rehabilitate properties for affordable
housing since the developer must double their basis in the property
without consideration of the cost of land. In many cases, such
significant renovation is unnecessary to preserve buildings and units
that might otherwise be lost to obsolescence.
Congress should leverage the Opportunity Zones program to promote
the rehabilitation and preservation of multifamily units and, thereby,
positively address the shortage of apartment units. NMHC and NAA
recommend that Congress consider statutory modifications to reduce the
100-percent basis increase excluding land necessary to qualify a
multifamily rehabilitation project for Opportunity Zone purposes. It is
noteworthy that to qualify for an allocation under the LIHTC, owners
must commit to rehabilitations valued at the greater of: (1) 20 percent
of adjusted basis of a building; or (2) $6,000 ($7,900 in 2023 as
adjusted for inflation) per low-income unit.
Encouraging the Adaptive Reuse of Underutilized Commercial Properties
into Multifamily Housing
Given the Nation's shortage of affordable rental housing, many are
considering turning unused and underutilized commercial real estate
structures, including offices, hotels, and retail spaces into housing.
Not only would such repurposing help address the Nation's housing
supply challenge, but it would also create jobs and boost local
property tax revenues.
A segment of commercial real estate space could potentially be
available to be converted into housing. According to a February 2023
study by the Urban Land Institute's Center for Real Estate and
Economics and Capital Markets and sponsored by the NMHC Research
Foundation and the Urban Land Institute's Terwilliger Center for
Housing, Behind the Facade: The Feasibility of Converting Commercial
Real Estate to Multifamily, ``JLL Research found that between the onset
of the pandemic and the second quarter of 2022, buildings delivered in
2015 or later had 86.8 million square feet of net absorption, while
pre-2015 buildings had net negative absorption of 246.5 million square
feet. Almost 80 percent of the negative net absorption was in buildings
delivered in 1980 and earlier.''\14\
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\14\ Kramer, Anita. Behind the Facade: The Feasibility of
Converting Commercial Real Estate to Multifamily. Washington, DC: Urban
Land Institute, 2023, pg. 5, https://www.nmhc.org/globalassets/
research--insight/research-reports/conversion/behind-the-
facade_conversion-report.pdf.
Changing consumer preferences and online shopping are also changing
the real estate landscape. Estimates show between several hundred
million and 1 billion square feet of surplus and obsolete retail space.
Slower post-pandemic business travel is also challenging a portion of
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the Nation's hotel stock.
Unfortunately, converting commercial real estate into housing can
be extremely challenging and can be more complicated than typical
ground-up development. Costs associated with property acquisition and
conversion, including addressing structural building issues (e.g.,
beams, columns, ceiling heights, utilities, and floor layouts), can
quickly add up and make the difference between a viable or unfeasible
project. This is in addition to other barriers that may arise,
including permitting, zoning rules, and NIMBYism.
A Federal tax incentive to encourage property conversions would be
greatly beneficial in helping to overcome these obstacles and spurring
additional housing supply. In addition, it would help revitalize
distressed commercial property and stabilize the surrounding
communities. Notably, Senator Stabenow, joined by Senator Brown as a
cosponsor, last Congress introduced the Revitalizing Downtowns Act (S.
2511) that would provide a 20-percent tax credit to convert office
buildings into other uses, including residential use. This Congress,
Representative Gomez has introduced this legislation (H.R. 419) in the
House of Representatives.
The multifamily industry is interested in working with Congress on
this type of proposal but would like to see it modified to, among other
things, enable other types of commercial properties (e.g., shopping
centers and hotels) to qualify for the tax incentive; ensure REITs
could utilize the benefit; and clarify that the credit does not reduce
other tax benefits including the Low-Income Housing Tax Credit.
Additionally, the multifamily industry would encourage Congress to
explore whether tax-exempt Private Activity Bonds could be used as a
means of promoting adaptive reuse. Housing finance agencies could issue
such bonds to help facilitate adaptive reuse of underutilized
properties, particularly in areas that have a plan to track
discriminatory land use policies as envisioned by the Yes In My
Backyard Act (YIMBY) Act (S. 1614/H.R. 3198) introduced last Congress
by Senators Young and Schatz and Representatives Kilmer and
Hollingsworth and strongly supported by NMHC and NAA.
Promoting the Rehabilitation of Multifamily Housing Located Near
Transit
NMHC and NAA strongly support bipartisan legislation that would
provide a new tool aimed at encouraging greater community development
and inclusive neighborhood revitalization. Introduced last Congress by
House Ways and Means Committee member Blumenauer and cosponsored by
committee members Kelly, Kildee, and LaHood, the Revitalizing
Economies, Housing and Business Act (REHAB Act) (H.R. 1483) provides:
A 15-percent tax rehabilitation credit for buildings that
are more than 50 years old, not certified historic structures,
and are within one-half of a mile of a public transportation
station;
Expanded credit eligibility to include building expansion on
the same block; and
A bonus credit of 25 percent for expenses related to public
infrastructure upgrades and rent-restricted housing.
additional recommendations for congress to consider
While changes to tax laws are especially important to spurring
affordable housing, the multifamily industry also urges Congress to
consider additional proposals and issues relative to the production of
multifamily housing. Specifically, we urge Congress to consider
proposals that:
Lower regulatory hurdles;
Ease construction costs and delays;
Deploy the Housing Supply Action Plan (e.g., reward
jurisdictions that have reformed zoning and land-use policies
with higher scores in certain Federal grant processes and
deploy new financing mechanisms to build and preserve more
housing where financing gaps currently exist);
Reform and fully fund the section 8 Housing Choice Voucher
Program; and
Sustain funding for Federal housing support and
affordability programs.
Lower Regulatory Hurdles
Regulatory, administrative, and political obstacles at all levels
of government prevent us from delivering the housing our country so
desperately needs. Yet, even in communities that want new rental
housing development, there are numerous barriers that can drive up
costs or halt development altogether.
These costs and barriers can account for an average of 40.6 percent
of multifamily development costs further impacting affordability--
according to research released by NMHC and the National Association of
Home Builders (NAHB).\15\ This research illustrates how unnecessary and
duplicative regulation can negatively impact developing housing that is
affordable. Although smart regulations can play an important role in
ensuring the health and well-being of the American public, the NMHC-
NAHB research found that many regulations can go far beyond those
important goals and impose costly mandates on developers that drive
housing costs higher, including via NIMBYism.
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\15\ National Association of Home Builders and National Multifamily
Housing Council, Regulation: 40.6 Percent of the Cost of Multifamily
Development, https://www.nmhc.org/globalassets/research--insight/
research-reports/cost-of-regulations/2022-nahb-nmhc-cost-of-
regulations-report.pdf.
NIMBYism and antiquated, discriminatory land use policies coupled
with onerous local requirements (like building code provisions that
have nothing to do with health or safety, land or infrastructure
donation requirements, and ill-fitting transportation and parking
mandates) add to project costs and, ultimately, the rents American
families pay. Three quarters of respondents to the NMHC-NAHB research
reported they had encountered NIMBY opposition to a proposed
development. This added an average of 5.6 percent to the total
development cost and delayed the completion of those developments by an
average of 7.4 months.\16\
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\16\ Ibid.
Easing regulations could go a long way to address the housing
affordability challenges faced by communities across the Nation,
especially at a time of high inflation and other cost of living
challenges. It is important to keep in mind that rental housing
requires significant operating expenses to maintain quality. According
to research by NAA, only 9 cents of every dollar of rent goes back to
the owner as profit, including the many apartment owners who are
themselves small businesses and rely on this revenue to make ends
meet.\17\
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\17\ https://www.naahq.org/sites/default/files/naa-documents/
dollar_of_rent_2022.pdf.
We urge Congress to redouble its efforts to incentivize States and
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localities to:
Reduce barriers to housing production and rehabilitation;
Streamline and fast track the entitlement and approval
process;
Provide density bonuses and other incentives for developers
to include workforce units in their properties;
Enable ``by-right'' zoning and create more fully entitled
parcels;
Defer taxes and other fees for a set period of time;
Lower construction costs by contributing underutilized
buildings and raw land; and
Encourage higher-density development near jobs and
transportation.
NMHC and NAA strongly support the Yes In My Backyard Act (S. 1614/
H.R. 3198), introduced in the last Congress by Senators Young and
Schatz and Representatives Kilmer and Hollingsworth and due to be
reintroduced in the 118th Congress. This legislation requires
recipients of Community Development Block Grants to provide information
on how they are reducing local barriers to housing development. This
will focus attention on the critical issue of enabling greater
development of housing across the country.
Policymakers, at all levels of government, should also avoid the
lure of ``quick fix'' regulations such as rent control or similar rent
stabilization laws that do nothing to address the underlying supply
shortage. Such policies do not create a single additional home and
eventually harm the very people they purport to help by discouraging
new apartment housing construction and limiting the financial resources
owners have to maintain existing communities. Also, rent control
proposals are not targeted at those most in need of affordable housing,
thus incentivizing those who could otherwise afford an unrestricted
unit to remain in place. Past experiments with rent control have been
shown time and time again to result in unhealthy conditions and
deteriorating neighborhoods.\18\
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\18\ Diamond, McQuade, and Qian, The Effects of Rent Control
Expansion on Tenants, Landlords, and Inequality: Evidence from San
Francisco, American Economic Review 2019. https://pubs.aeaweb.org/doi/
pdfplus/10.1257/aer.20181289.
Notably, NAA conducted interviews with professionals who own,
manage, or develop rental housing properties in Santa Barbara/Santa
Ana, CA, Portland/Eugene, OR, and St. Paul, MN, and garnered findings
buttressing the conclusion that rent control policies negatively impact
investment in existing and future multifamily housing.\19\
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\19\ One of the key findings from that research was that owners and
operators reported that their plans to invest in or develop the market
dramatically shifted after rent control laws were put into effect: more
than two-thirds of housing providers have reduced or expect to reduce
development or investment plans as a result of rent-control policies;
and over half have considered selling off properties. This is clearly
seen when building permit applications dropped by 80 percent in St.
Paul when its rent-control initiative passed during a period where
building permits were increasing significantly elsewhere around the
country. Additionally, NAA's interviews reveal that the majority of
housing providers have had to or expect to defer maintenance and
improvement projects in jurisdictions where rent control is enacted.
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Ease Rising Construction Costs and Delays
As we look for solutions to the Nation's housing supply challenges,
we must also recognize the immense, practical pressures on apartment
development and construction that impact our ability to deliver new
housing units. Following extreme,
pandemic-fueled volatility in product costs, supply chain stability,
and staffing constraints, the apartment construction and renovation
pipeline has seen some moderation, yet continues to face difficult
conditions. Eighty-four percent of respondents reported construction
delays in NMHC's December 2022 Quarterly Survey of Apartment
Construction and Development Activity. Fifty-seven percent reported
experiencing repricing increases in projects at an average rate of 8
percent. The availability of construction financing, or lack thereof,
continues to be of primary concern, as 29 percent of respondents cited
this as a contributing factor to delayed starts. Additionally, 30
percent of respondents attributed delays to materials sourcing and
delivery challenges.\20\
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\20\ https://www.nmhc.org/research-insight/nmhc-construction-
survey/quarterly-survey-of-apartment-construction-development-activity-
december-2022/.
Apartment builders and developers also continue to see escalations
in materials costs and mixed labor conditions. The prices of a range of
critical building materials and equipment continue to rise, including
exterior finishes and roofing, electrical components, appliances, and
insulation. In addition, 36 percent of respondents reported that
construction labor costs increased more than expected during Q4 2022,
up from 21 percent in the previous quarter. Forty-six percent of
respondents said that costs increased as expected, while only 5 percent
said costs did not increase, down from 11 percent in September.
Deploy the Housing Supply Action Plan
We applaud the Biden administration for recognizing the Nation's
critical shortage of affordable housing and developing the Housing
Supply Action Plan, a comprehensive package of regulatory and
legislative measures to address the supply demand imbalance.
We urge Congress to work with the administration to implement
provisions in the Housing Supply Action Plan issued in May 2022 that
aim to address the myriad challenges to the development of new housing,
such as:
Reward jurisdictions that have reformed zoning and land-use
policies with higher scores in certain Federal grant processes,
for the first time at scale;
Deploy new financing mechanisms to build and preserve more
housing where financing gaps currently exist;
Expand and improve existing forms of Federal financing,
including for affordable multifamily development and
preservation; and
Work with the private sector to address supply chain
challenges and improve building techniques.
While we support the administration's Housing Supply Action Plan
and worked in good faith with the administration on its Resident-
Centered Housing Challenge (both NMHC and NAA made commitments as part
of the Challenge), we are concerned the recently released White House
``Blueprint for a Renter's Bill of Rights'' will create potentially
duplicative and confusing Federal regulations that interfere with State
and local laws meant to govern the housing provider and resident
relationship. These efforts will do nothing to address the Nation's
housing shortage or households that are struggling financially and
could, in fact, discourage much-
needed private-market investment in new housing construction.
Reform and Fully Fund the Section 8 Housing Choice Voucher Program
As the COVID-19 pandemic has taught us, the most valuable short-
term policy solution to the housing affordability crisis is rental
assistance. The section 8 Housing Choice Voucher (HCV) program has long
served as America's primary method for aiding 2.1 million low-income
households with rental assistance and has helped millions of Americans
find homes in communities near good schools, jobs, and transportation
services. Critical reforms to the program are urgently needed to expand
private industry participation and improve housing opportunity for
millions of American families.
The section 8 program has additional untapped potential to help
address our Nation's affordable housing needs. Unfortunately, the
program has also been plagued with a flawed and inconsistent funding
system that has undermined private-sector confidence in the program.
The program's potential success is also limited by too many inefficient
and duplicative requirements, which prevent private housing providers
from being able to accept vouchers.
Despite previous congressional and administrative attempts at
improving the program, it remains overly burdensome. Our groups, once
again, call on Congress to pass the Choice in Affordable Housing Act of
2023 (S. 32), introduced by Senators Coons and Cramer. The legislation
empowers public housing authorities (PHAs) to offer incentive payments
for housing providers that operate in areas of opportunity; creates
security deposit assistance to cover repairs and damages and to help
participants better manage their risk; enables PHAs to hire ``landlord
liaisons'' to improve communication and finally, would importantly
streamline the costly and time-
consuming property inspection process.
While more can certainly be done to reform the section 8 program,
the Choice in Affordable Housing Act is a critical step for Congress to
take to expand housing options to American families in need of housing
that is affordable.
Sustain Funding for Federal Housing Support and Affordability Programs
Alongside inadequate funding and bureaucratic barriers in the
section 8 HCV program, for too many years, Federal funding for one of
the primary housing programs serving low-income households has been
virtually flat or declining. This has translated into waiting lists for
support that can last years, pushes too many Americans into substandard
housing that only exacerbates housing and racial inequities, and harms
the economic potential of individuals and their overall communities.
For decades, we have advocated for increased funding for multiple
critical programs that focus on housing affordability, (in addition to
the section 8 HCV program), such as Project Based Rental Assistance
(PBRA), Rental Assistance Demonstration (RAD), Homelessness Programs,
HOME, and Community Development Block Grants (CDGB), the Housing Trust
Fund, FHA Multifamily Programs, Rural Housing Programs, and others.
Programs like section 8 and PBRA allow low-income families to rent
market-rate housing, taking advantage of the broad offering of
privately owned and operated properties in a given market. Programs
like HOME, CDBG, FHA Multifamily and Rural Housing programs allow
developers to address financing shortfalls often associated with
affordable housing properties and stimulate meaningful development and
preservation activity as a result. Homelessness Assistance Programs
provide funding to serve individuals and families across the Nation who
are affected by homelessness, while section 811 and 202 programs
provide assistance for elderly and persons with disabilities. These
programs, in totality, are some of the most effective and proven means
to increase housing supply across the Nation, assist our most
vulnerable families find stable housing and are worthy of bipartisan
Congressional support.
conclusion
On behalf of the multifamily industry and the millions of family,
single, senior, student, veteran, and disabled households we serve, we
applaud the committee's efforts to explore solutions to the Nation's
most significant housing challenges. The increased supply of
multifamily rental housing at all price points in all markets will play
a vital role in promoting economic growth, encouraging household
stability for all American households, and we look forward to working
together as legislation to further these efforts is considered.
ADDENDUM
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low-income housing tax credit (lihtc)
The Low-Income Housing Tax Credit (LIHTC) is a public/private
partnership that leverages Federal dollars with private investment to
produce affordable rental housing and stimulate new economic
development in many communities. Between its inception in 1986 and
2019, the LIHTC program has according to the ACTION Campaign financed
3.7 million apartments and served approximately 8 million households.
This development has supported 5.68 million jobs for 1 year while
generating $643 billion in wages and business income and $223 billion
in Federal, State, and local tax revenues.
Under the program, State housing agencies issue credit allocations
to developers who then sell the credits to investors. Investors receive
a dollar-for-dollar reduction in their Federal tax liability over a 10-
year period, and developers invest the equity raised to build or
acquire apartments. This equity allows apartment firms to operate the
properties at below-market rents for qualifying families. LIHTC-
financed properties must be kept affordable for at least 30 years.
The LIHTC has two components:
A 9-percent tax credit that subsidizes 70 percent of new
construction and cannot be combined with any additional Federal
subsidies.
A 4-percent tax credit that subsidizes 30 percent of the
unit costs in an acquisition of a project and can be paired
with additional Federal subsidies.
Given the Nation's severe shortage of affordable housing, Congress
in recent years has enacted significant improvements to the LIHTC
program. In December 2020, Congress established a minimum 4-percent
credit rate, akin to current law's minimum 9-percent credit rate--so
that investors may derive its full value. Under prior law, the 4-
percent credit rate floated and was worth considerably less due to low
interest rates. Additionally, in March 2018, rightly increased LIHTC
authority by 12.5 percent for 2018-2021. Congress also sensibly
authorized income averaging so that LIHTC could serve a wider array of
households.
Congress should continue to invest in the LIHTC's success by making
permanent the expired increase in program authority effective in 2018-
2021, as well as further augmenting credit authority by 50 percent.
Additionally, Congress should lower the bond financing threshold to 25
percent from 50 percent to receive the full amount of 4-percent Low-
Income Housing Tax Credits.
The LIHTC has enjoyed broad bipartisan support over the years, and
Congress sensibly preserved it in the 2017 tax reform bill. It should
now be strengthened to meet the continued need for affordable housing.
middle-income housing tax credit
The Middle-Income Housing Tax Credit (MIHTC) is a proposal to
establish a
public/private partnership that leverages Federal dollars with private
investment to produce rental housing affordable to our Nation's
workforce.
Designed to complement the successful Low-Income Housing Tax Credit
(LIHTC), the MIHTC program would enable State housing agencies to issue
credit allocations to developers that would subsequently be sold to
investors. Investors would receive a dollar-for-dollar reduction in
their Federal tax liability over a 15-year period, and developers would
invest the equity raised to build apartments. The equity raised would
cover 50 percent of the cost of constructing of qualifying units. A
development project eligible for MIHTC would have to set aside 60
percent of units for households earning 100 percent or less of Area
Median Income (AMI) and must be kept affordable for up to 30 years.
Housing affordability is a significant challenge facing many
American families. The U.S. needs to build 4.3 million more apartments
by 2035 to meet the demand for rental housing. This includes 600,000
units (total apartments) to fill the shortage from underbuilding after
the 2008 financial crisis. Underproduction of housing has translated to
higher housing costs--resulting in a decline of 4.7 million affordable
apartments (monthly rents less than $1,000) from 2015-2020.
Affordability challenges are not unique to households receiving
Federal subsidies. In fact, solidly middle-income households are facing
constraints. According to the U.S. Census Bureau's Survey of Market
Absorption, the median asking rent for apartment units completed in the
third quarter of 2022 was $1,805, a 27-percent increase from the same
period in 2017. NMHC calculates that for a renter to afford one of
those units at the 30 percent of income standard, they would need to
earn at least $72,200 annually. Thus, this issue impacts those
supporting the very fabric of communities nationwide, including
teachers, firefighters and nurses.
The Middle-Income Housing Tax Credit would help build housing that
is affordable to a wide range of income levels at a time such housing
is increasingly difficult to afford.
adaptive reuse
Given the Nation's shortage of affordable rental housing, many are
considering turning unused and underutilized commercial real estate
structures, including offices, hotels, and retail into housing. Not
only would such repurposing help address the Nation's housing supply
challenge, but it would also create jobs and boost local property tax
revenues.
A large portion of commercial real estate space could potentially
be available to be converted into housing.
According to a February 2023 study sponsored by NMHC and the Urban
Land Institute's Terwilliger Center for Housing, JLL Research shows
that between the advent of the COVID-19 pandemic and the second quarter
of 2022, office buildings delivered in 2015 or later absorbed 86.8
million square feet of space. In contrast, pre-2015 office buildings
had net negative absorption of 246.5 million square feet, 80 percent of
which was attributable to buildings delivered in 1980 and earlier.
Changing consumer preferences and online shopping are also changing
the real estate landscape. Estimates show between several hundred
million and 1 billion square feet of surplus and obsolete retail space.
Slower post-pandemic business travel is also challenging a portion of
the Nation's hotel stock.
Unfortunately, converting commercial real estate into housing can
be extremely challenging and more complicated than typical ground-up
development. Costs associated with property acquisition and conversion,
including addressing structural building issues (e.g., beams, columns,
ceiling heights, and floor layouts), can quickly add up and make the
difference between a viable or unfeasible project. This is in addition
to other barriers that may arise, including permitting and zoning
rules.
A Federal tax incentive to encourage property conversions would be
greatly beneficial in overcoming these obstacles and spurring
additional housing supply. In fact, research commissioned by NMHC/NAA
shows that the Nation will need to build 4.3 million new apartment
homes by 2035.
In addition to ensuring a Federal tax incentive is sufficiently
robust to account for barriers to property conversions, NMHC/NAA
encourage policymakers to structure a tax incentive to enable:
All types of commercial property (e.g., offices, retail, and
hotels) to qualify for conversion;
REITs, which own approximately 15 percent of U.S. commercial
real estate, to utilize the incentive;
Other tax incentives, such as the Low-Income Housing Tax
Credit and energy tax benefits, to be used in conjunction with
the incentive; and
Government buildings to qualify for conversion.
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permitting and starts
During the December 2022 Construction Quarterly Survey, 84 percent
of respondents reported experiencing construction delays over the last
3 months. Of those experiencing delays, 84 percent reported
experiencing permitting delays, and 79 percent reported delays in
starts. These numbers are fairly similar to those reported last
quarter, indicating that delays are still a common feature of the
current development environment.
Respondents experiencing delayed starts were mostly likely to blame
permitting, entitlement, and professional services as a cause (46
percent of respondents, down from 54 percent in the previous quarter).
Economic uncertainty was cited as the second most common cause for
delays with 39 percent of respondents reporting. Although this is down
from 41 percent in the previous quarter, it still indicates that
Federal monetary policy is influencing the industry at large.
Additionally, the availability of construction financing, or lack
thereof, continues to be of primary concern, as 29 percent of
respondents cited this as a contributing factor to delayed starts.
Finally, 30 percent of respondents attributed delays to materials
sourcing and delivery.
Over the past 3 months, how long, on average, have municipalities
reported it would take before you receive building permits?
------------------------------------------------------------------------
June 2022 September 2022 December 2022
------------------------------------------------------------------------
Up to 2 Months 13% 2% 12%
------------------------------------------------------------------------
3-4 Months 23% 29% 36%
------------------------------------------------------------------------
5-6 Months 37% 24% 22%
------------------------------------------------------------------------
7-8 Months 10% 7% 7%
------------------------------------------------------------------------
9+ Months 10% 22% 12%
------------------------------------------------------------------------
N/A 7% 15% 11%
------------------------------------------------------------------------
Thirty-eight percent of respondents reported jurisdictions imposing
additional project requirements unrelated to actual project
construction, down from 39 percent in the previous quarter. Most
notably, respondents mentioned affordability requirements with some
also citing public infrastructure improvements and open space
preservation.
materials and pricing
Overall, 76 percent of respondents reported experiencing deals
repricing over the last 3 months. Of those respondents, 57 percent
reported that they have experienced deals repricing up, down from 76
percent of respondents who said the same in September. Of those
experiencing repricing, either up or down, respondents reported an 8
percent average increase over the last 3 months, down from 9 percent in
the previous quarter.
Respondents reported an average drop in lumber prices for the third
straight quarter, down 5 percent over the last 3 months. Prices for
other essential products continued to see increases. Over the last 3
months, respondents reported a 9 percent average increase in the price
of exterior finishings and roofing, a 13-percent increase in electrical
components, a 9-percent increase in appliances, and a 9-percent
increase in insulation, all larger increases than reported during the
previous quarter.
A sizeable portion of respondents reported using alternative brands
or suppliers to mitigate price increases and supply shortages for
exterior finishes and roofing (46 percent) as well as for appliances
(30 percent). For the second straight quarter, respondents reported
utilizing escalation clauses at lower rates than in the previous
quarter for all materials. However, unlike the previous quarter,
respondents reported utilizing design changes much less frequently over
the last 3 months for all materials. Additionally, the share of
respondents who reported that this question did not apply to them
increased significantly for both insulation (an increase from 15
percent to 32 percent) and lumber (17 percent to 30 percent).
Which of these approaches have you adopted to mitigate the price increases/supply shortages for each material?
(multiple selection--totals will not equal 100%)
----------------------------------------------------------------------------------------------------------------
Exterior
Finishes Electrical Appliances Insulation Lumber
and Roofing components
----------------------------------------------------------------------------------------------------------------
Used alternative brands or suppliers 46% 27% 30% 13% 6%
----------------------------------------------------------------------------------------------------------------
Used alternative Pproduct/material types 34% 22% 12% 8% 6%
----------------------------------------------------------------------------------------------------------------
Made design changes 35% 19% 10% 7% 6%
----------------------------------------------------------------------------------------------------------------
Changed purchasing schedules including pre- 33% 38% 20% 13% 20%
purchasing and/or warehousing products/
materials
----------------------------------------------------------------------------------------------------------------
Given greater focus on escalation clauses and 23% 20% 10% 8% 10%
acceptance of higher escalations
----------------------------------------------------------------------------------------------------------------
N/A 10% 11% 20% 32% 30%
----------------------------------------------------------------------------------------------------------------
To gain further understanding of other materials of issue,
respondents were asked about a more extensive list of common products
and materials used in development, seen in the table below. As supply
chains recover, respondents reported using fewer alterations for all
products compared to last quarter except for copper and brass mill
shapes and exterior finishes.
For which materials have you made alterations or Pused alternative
products/materials?
(multiple selection--totals will not equal 100%)
------------------------------------------------------------------------
June 2022 September 2022 December 2022
------------------------------------------------------------------------
Lumber 20% 22% 8%
------------------------------------------------------------------------
Plywood 13% 15% 8%
------------------------------------------------------------------------
Interior wood trim 23% 17% 6%
------------------------------------------------------------------------
Copper and brass mill 10% 2% 3%
shapes
------------------------------------------------------------------------
Steel mill products 17% 12% 10%
------------------------------------------------------------------------
Hardware--locks, door/ 43% 32% 30%
window hardware, cabinet
hardware
------------------------------------------------------------------------
Lighting fixtures 43% 49% 34%
------------------------------------------------------------------------
Exterior finishes 43% 29% 32%
------------------------------------------------------------------------
Electrical components-- 33% 32% 31%
panels and items with
chips
------------------------------------------------------------------------
Roofing 13% 34% 19%
------------------------------------------------------------------------
Appliances 40% 32% 31%
------------------------------------------------------------------------
Insulation 10% 17% 10%
------------------------------------------------------------------------
Ready-mix concrete 3% 7% 6%
------------------------------------------------------------------------
Other 7% 5% 2%
------------------------------------------------------------------------
labor and logistics
Almost two-thirds of respondents (64 percent) reported construction
labor availability to be roughly the same as it was 3 months ago. Only
10 percent of respondents reported construction labor to be more
available compared to 3 months ago, down from 11 percent in September,
while 21 percent of respondents reported construction labor to be less
available, down from 32 percent. All of this might suggest that the
tight construction labor market is still gradually easing.
However, 36 percent of respondents reported that construction labor
costs increased more than expected during Q4 2022, up from 21 percent
in the previous quarter. Forty-six percent of respondents said that
costs increased as expected, while only 5 percent said costs did not
increase, down from 11 percent in September.
Given current challenges in the importation and transportation of goods,
what are you doing to mitigate the negative impacts of these conditions?
(multiple selection--totals will not equal 100%)
------------------------------------------------------------------------
June 2022 September 2022 December 2022
------------------------------------------------------------------------
Sourcing more products/ 33% 33% 30%
materials domestically
------------------------------------------------------------------------
Sourcing more products/ 4% 4% 0%
materials from Canada
------------------------------------------------------------------------
Sourcing more products/ 11% 22% 20%
materials locally or
from specific domestic
regions
------------------------------------------------------------------------
Using alternative 41% 37% 40%
products/materials
------------------------------------------------------------------------
Other 11% 4% 9%
------------------------------------------------------------------------
Overall, there was no indication that developers are shifting
greater attention to any one particular market in search of more
projects. 46 percent of respondents said that the question was not
applicable to them, up from 44 percent last quarter. However, 7 percent
of respondents did say they were seeking out more projects in the
Southeast (Atlanta, Charlotte, Orlando, etc.) and Southwest (Phoenix,
etc.). Respondents commonly mentioned cities such as Charlotte,
Raleigh, Tampa, Nashville, Phoenix, and Las Vegas as places of
increased interest.
When asked about regions where they are no longer seeking projects,
51 percent of respondents said that the question was not applicable to
them. A small portion of respondents (6 percent) said they were no
longer seeking out projects in the southwest coast (LA, San Diego,
etc.) and a select few (4 percent) said the same about the northwest
coast (San Francisco, Seattle, etc.).
section 8 housing choice voucher program
The section 8 housing choice voucher program has long served as
America's primary method of rental assistance. Funded by the U.S.
Department of Housing and Urban Development and administered by local
public housing authorities, the program provides subsidized rents for
qualifying low-income families in private rental housing, including
apartments.
This public-private partnership has the potential to be one of the
most effective means of addressing our Nation's affordable housing
needs and supporting mixed-income communities. However, the program's
potential success is limited by too many inefficient and duplicative
requirements, which discourage private providers from accepting
vouchers. These include a required three-way lease between the
provider, resident and the public housing authority; repetitive unit
inspections; resident eligibility certification; and other regulatory
paperwork. Collectively, these make it more expensive for a private
owner to rent to a section 8 voucher holder.
The program has also been plagued with a flawed and volatile
funding system that has undermined private sector confidence in the
program. With Congress focused on austerity measures, insufficient
funding is expected to be worse in the near-term budget cycles. Common-
sense reforms that could help control costs, improve the program for
both renters and property owners, and increase private housing
participation include: putting a reliable funding formula in place; and
further streamlining the property inspection process.
It is also imperative for lawmakers to reinforce the voluntary
nature of the program. Congress specifically made participation
voluntary because of the regulatory burdens associated with it.
However, State and Federal Government are enacting laws that make it
illegal for a private owner to refuse to rent to a section 8 voucher
holder. Recent examples include ``source of income discrimination''
provisions passed by a number of cities. While often well intentioned,
such mandates are self-defeating because they greatly diminish private-
market investment and reduce the supply of affordable housing.
______
Questions Submitted for the Record to Sharon Wilson Geno
Questions Submitted by Hon. Mike Crapo
Question. According to your organization, the National Multifamily
Housing Council, ``like-kind exchange rules play a crucial role in
supporting the multifamily sector.'' Since the hearing, the Biden
administration released its Fiscal Year 2024 budget, which includes a
proposal to restrict like-kind exchanges.
Can you describe the impact this proposal would have on the supply
of affordable housing?
Question. The Fiscal Year 2024 budget proposal would sharply
curtail like-kind exchanges by limiting deferral of gain to $500,000
for single taxpayers and $1 million for married taxpayers filing a
joint return. This proposal would be devastating on investment in
multifamily housing, especially affordable rental housing, at a time
when we need more resources to meet the need for housing. Enacting this
proposal at this time would be particularly damaging to the multifamily
capital markets, given the high interest rate environment that is
already making it challenging to finance new multifamily housing
building. The like-kind exchange provision's incentive to invest in
rental housing is particularly critical given research commissioned by
NMHC and NAA that shows the Nation will need 4.3 million new apartments
by 2035. Disrupting the capital markets with a significant change in
tax policy will interrupt new multifamily construction starts and put
us even further behind in meeting the need for new apartments.
Like-kind exchange rules play a crucial role in supporting much-
needed investment in the multifamily sector by encouraging investors to
remain invested in real estate while still allowing them to balance
their investments to shift resources to more productive properties,
change geographic location, or diversify or consolidate holdings.
Without like-kind exchanges, property owners are deterred for tax
reasons from selling assets that are in need of capital investment.
Exchange rules allow those owners to transfer the property to new
owners who can invest the necessary capital to revitalize the asset.
Thus, like-kind exchange rules facilitate job-creating property
upgrades and improvements while also ensuring units are preserved and
not lost from the affordable housing stock. Enacting the budget
proposal could also result in owners needing to raise rents
significantly in order to offset the tax consequences and otherwise
meet their obligations to their lenders and investors.
In addition, like-kind exchanges are an especially important tool
for preserving and generating new affordable housing where other
incentives do not assist. For example, tax incentives like the Low-
Income Housing Tax Credit do not apply to land acquisition costs.
However, section 1031 can enable investors to acquire land for the
development of new housing, thereby making building affordable units
more financially feasible.
Finally, it should be noted that like-kind exchanges benefit other
commercial real estate segments, including office buildings and
senior's housing, while generating substantial economic activity. In
fact, according to May 2022 EY research, Economic contribution of the
like-kind exchange rules to the US economy in 2021: An update, like-
kind exchanges are a significant contributor to U.S. economic activity.
In fact, businesses that use like-kind exchanges in 2021 supported
447,000 jobs while generating $19.4 billion in labor income. Moreover,
suppliers to entities using like-kind exchanges supported 529,000 jobs
and $29.1 billion in labor income. On a combined basis, like-kind
exchanges supported 976,000 jobs, $48.6 billion in labor income and
generated $97.4 billion in value added to the U.S. economy.
Question. The Net Investment Income Tax (NIIT) serves as a surtax
on small businesses. The Biden administration's Fiscal Year 2024 budget
also includes a proposal to subject active business income to the
surtax.
Can you explain how expanding the NIIT to include active investment
income would result in higher rents?
Answer. The Fiscal Year 2024 budget proposal to subject active
business income to the Net Investment Income Tax while also raising the
tax rate to 5 percent would be extremely detrimental to the multifamily
industry. Assuming the qualified business income deduction expires at
the end of 2025 and that the Fiscal Year 2024 budget proposal to
increase the top marginal income tax rate to 39.6 percent and this
proposal are enacted, the top marginal income tax rate on active
business income would rise from 29.6 percent to 44.6 percent. This
would be a staggering 50.7-percent tax increase. In addition, the top
capital gains rate would soar and more than double from 20 percent to
44.6 percent under the Biden administration's budget. Both of these
proposals would significantly reduce investment returns and, therefore,
incentives to invest in multifamily housing. The reduction in
investment returns would likely not be borne solely by owners and
investors. Instead, these tax increases would, in many cases, be passed
on to residents in the form of higher rents. Finally, it must be noted
that a tax increase of this magnitude would result in less after-tax
income available to maintain and upgrade multifamily properties. Tax
policy should be focused on promoting capital investment and housing
supply.
Question. In response to the shortage of affordable housing, some
States and cities have enacted rent control measures. These approaches
vary, but they limit a property owner's ability to respond to market-
based rents.
What effects do these policies have on the quantity and quality of
housing in tight rental markets?
Answer. Rent control policies have been proven repeatedly to
diminish both the supply and quality of multifamily housing. At a time
that research from NMHC and NAA shows the Nation will need 4.3 million
new apartments by 2035, rent control is particularly pernicious and
would actually exacerbate our Nation's housing affordability challenge.
Indeed, rent control does not create a single additional home and
eventually harms the very people it purports to help by discouraging
new apartment housing construction and limiting the financial resources
owners have to maintain existing communities. Also, rent control
proposals are not targeted at those most in need of affordable housing,
thus incentivizing those who could otherwise afford an unrestricted
unit to remain in place. Past experiments with rent control have been
shown time and time again to result in unhealthy conditions and
deteriorating neighborhoods. Research has also found that rent control
and stabilization efforts deflate property values for surrounding
homeowners and in turn, tax revenue to states and local communities
resulting in fewer resources to support schools and other community
infrastructure investments.
To provide additional details on these conclusions, I am attaching
a study completed by the NMHC Research Foundation, The Impacts of Rent
Control: A Research Review and Synthesis, which examines the research
literature underpinning these findings.
I would also add that Lee Seltzer of the Federal Reserve Bank of
New York in February 2023 issued a revised staff report, Financing
Constraints and Maintenance Investments: Evidence from Apartments, that
is instructive. The paper concludes, ``more financially constrained
buildings incur more code violations.'' Significantly, based on his
review of the impact of rent control and rent stabilization programs in
New York City, Seltzer finds ``code violations increase for affected
buildings relative to controls, and the effect is concentrated among
more financially constrained buildings.''
Finally, NAA conducted interviews with professionals who own,
manage, or develop rental housing properties in Santa Barbara/Santa
Ana, CA, Portland/Eugene, OR, and St. Paul, MN, and garnered findings
buttressing the conclusion that rent control policies negatively impact
investment in existing and future multifamily housing. One of the key
findings from that research was that owners and operators reported that
their plans to invest in or develop the market dramatically shifted
after rent control laws were put into effect: more than two-thirds of
housing providers have reduced or expect to reduce development or
investment plans as a result of rent control policies; and over half
have considered selling off properties. This is clearly seen when
building permit applications dropped by 80 percent in St. Paul when its
rent control initiative passed during a period where building permits
were increasing significantly elsewhere around the country.
Additionally, NAA's interviews reveal that the majority of housing
providers have had to or expect to defer maintenance and improvement
projects in jurisdictions where rent control is enacted.
The bottom line is that rent control both constrains housing supply
and reduces investment in rental housing, harming residents.
______
Questions Submitted by Hon. Sheldon Whitehouse
Question. Rhode Island college graduates of the class of 2020
graduated with an average of $36,791 in outstanding student loan debt.
At the same time, the National Association of Realtors reports that
housing affordability reached the worst level on record in the fourth
quarter of 2022. Last Congress, I introduced several bills to ease the
burden of student loan debt, including canceling student loans for
front-line health-care workers and teachers.
For those with tens of thousands--and in some cases hundreds of
thousands--of dollars of student loan debt, how does their debt affect
their ability to buy a home or afford rent?
Answer. I would like to answer your first two questions together as
they relate to one another. The costs of repaying student loans and
child care can undoubtedly impact the ability to afford rent or
purchase a home. While I am not an expert on either child care or
student loan policy, I can say that Congress should focus on policies
to boost the supply of multifamily housing. More multifamily housing
would translate into additional housing units that individuals and
families can rent at a price they can afford. This, in turn, would
leave individuals and families with added financial resources to
finance the costs of student loans, childcare, and other priorities.
Research from NMHC and NAA estimates the U.S. needs to build 4.3
million more apartments by 2035 to make up for decades-long
underbuilding, meet future demand, and avoid increasingly expensive
housing. It is imperative we build this housing, which would better
guard against large rent increases in the future, as we would have
sufficient housing that meets the needs of our growing population in
the years to come. The apartment industry stands ready to help meet the
rising need for attainably priced rental housing, but we cannot do it
alone. It requires a strong partnership between the private and public
sectors. First and foremost, we must seek solutions that support
increased supply--at all price points. Without investment in our
Nation's housing, we will continue to face housing instability and
affordability challenges now and in the future. In addition to
increased supply, we must also deliver short-term solutions to renter
populations that need support. Increased subsidies and emergency
housing support for those of modest means are critical to keeping
struggling renters and their families afloat.
Question. Over the past 2 decades, the growing cost of child care
has outpaced inflation. Child-care costs for Rhode Island families can
now reach more than $10,000 per year annually for each child, and many
families now are paying nearly 30 percent of their incomes on child
care. At the same time, the National Association of Realtors reports
that housing affordability reached the worst level on record in the
fourth quarter of 2022. Indeed, according to HousingWorksRI, there are
currently no communities in Rhode Island where families earning the
State's median income or less can afford to buy a home, and there's
only one community--Burrillville--where Rhode Islanders can affordably
rent.
How does the high and growing cost of child care affect families'
ability to buy a home or afford rent?
Answer. Please see response to question above.
Question. Rhode Island is the 2nd-densest State in our Union,
second only to New Jersey.
For States like mine, where people live in much closer proximity to
each other than elsewhere in the Nation but which still have a housing
shortfall, what are the best practices and reforms for encouraging
affordable housing development while still preserving livable
communities and local character?
Answer. The most effective way to address our Nation's housing
shortage of housing is to significantly increase housing supply.
Research from NMHC and NAA estimates the U.S. needs to build 4.3
million more apartments by 2035 to make up for decades-long
underbuilding, meet future demand, and avoid increasingly expensive
housing. While I certainly appreciate concerns about preserving the
local character of communities, without adequate housing supply,
communities simply cannot support job creation and economic growth.
Without such job creation and economic activity, communities will
simply not realize their full potential in our Nation's dynamic
economy. Thus, communities should adapt to current realities and do all
that is possible to provide safe and decent housing to all residents at
a price they can afford.
A number of States are currently considering or have enacted new
legislation designed to make the development of more housing units
easier, incentivize affordable housing development, and prevent the
implementation of rent control by local communities that will exclude
those that cannot access housing, including seniors, blue-
collar workers, and people of color. The States of Florida, Colorado,
and New York currently are contemplating various legislative proposals
designed to support public-private partnerships that would incentivize
increasing housing supply, while considering the different local
conditions that vary from community to community.
Question. The Low-Income Housing Tax Credit is one of the primary
Federal programs for creating and preserving affordable housing units.
In Rhode Island, nearly 70 percent of new affordable units are financed
using LIHTC. Last Congress, I cosponsored Senator Cantwell's Affordable
Housing Credit Improvement Act, which would make a number of changes to
LIHTC to further incentivize the building of affordable housing.
How would the bill bolster our affordable housing supply, and are
there improvements to the program that weren't included in the bill
that the Senate should consider?
Answer. The Affordable Housing Credit Improvement Act (AHCIA) would
boost affordable housing supply through two primary provisions. First,
it would make permanent the now-expired 12.5-percent increase in Low-
Income Housing Tax Credit (LIHTC) authority for 2018-2021 to enable the
production of new units and further augment credit authority by 50
percent. Second, the bill would lower the Private Activity Bond
financing threshold to 25 percent from 50 percent required to receive
the full amount of 4-percent Low-Income Housing Tax Credits.
These two provisions in AHCIA would have a significant impact on
the ability of the LIHTC program to deliver affordable housing. In
December 2022, Novogradac estimated that over the 2023-2032 period,
1.93 million additional affordable homes, housing 4.5 million low-
income people, could be financed across the United States and
territories. by AHICA provisions expanding LIHTC authority and reducing
the Private Activity Bond financing threshold to 25 percent. Over that
period, this enhanced financing could also create nearly 3 million
jobs, more than $335 billion in wages and business income, and $116
billion in tax revenue.
In terms of improvements to the LIHTC program, we would be happy to
discuss options in a number of areas, but most significantly, we would
support increasing the Private Activity Bond volume cap to enhance the
utilization of 4-percent Low-Income Housing Tax Credits. According to
March 2023 data by Tiber, Hudson, and Novogradac, 18 States and
Washington, DC, are oversubscribed. Authorizing these States to issue
additional Private Activity Bonds would enable the financing of
additional 4-percent LIHTC projects. Additionally, Congress could
consider exempting from the bond cap multifamily bonds used to
rehabilitate existing Low-Income Housing Tax Credit properties. This
would be beneficial in preserving existing affordable housing units
that are aging out of affordability restrictions.
Finally, I would add that Congress should look to other tax
incentives to boost the supply of multifamily housing. In particular, I
would urge Congress to:
(1) Enact the Middle-Income Housing Tax Credit to support workforce
housing that Senate Finance Committee Chair Wyden has introduced as
part of the Decent, Affordable, Safe Housing for All (DASH) Act (S.
680) to address the shortage of workforce housing available to American
households. Estimates indicate the proposal could finance 344,000
affordable rental homes over 10 years while also creating 560,400 jobs
and generating over $63.4 billion in wages and business income;
(2) Enhance Opportunity Zones to incentivize the rehabilitation and
preservation of multifamily buildings. In this regard, Congress should
consider statutory modifications to reduce the 100-percent basis
increase excluding land necessary to qualify a multifamily
rehabilitation project for Opportunity Zone purposes; and
(3) Encourage the adaptive reuse of underutilized commercial
properties into multifamily housing. Notably, Senator Stabenow, joined
by Senator Brown as a cosponsor, last Congress introduced the
Revitalizing Downtowns Act (S. 2511) that would provide a 20-percent
tax credit to convert office buildings into other uses, including
residential use. This Congress, Representative Gomez has introduced
this legislation (H.R. 419) in the House of Representatives. The
multifamily industry is interested in working with Congress on this
type of proposal but would like to see it modified to, among other
things, enable other types of commercial properties (e.g., shopping
centers and hotels) to qualify for the tax incentive; ensure REITs
could utilize the benefit; and clarify that the credit does not reduce
other tax benefits including the Low-Income Housing Tax Credit.
Additionally, the multifamily industry would encourage Congress to
explore whether tax-exempt Private Activity Bonds could be used as a
means of promoting adaptive reuse. Housing finance agencies could issue
such bonds to help facilitate adaptive reuse of underutilized
properties, particularly in areas that have a plan to track
discriminatory land use policies as envisioned by the Yes In My
Backyard (YIMBY) Act (S. 1614/H.R. 3198) introduced last Congress by
Senators Young and Schatz and Representatives Kilmer and Hollingsworth
and strongly supported by NMHC and NAA.
Questions Submitted by Hon. Todd Young
Question. Later this spring, Senator Cantwell and I will be
reintroducing our Affordable Housing Credit Improvement Act (AHCIA),
which includes key production provisions that will help affordable
housing production across the country. Additionally, the bill will
enact a rural basis boost of up to 30 percent, expanding the equity
available to finance important affordable housing developments in areas
where production has been difficult, including so many rural Hoosier
communities that many of my constituents are proud to call home.
Can you explain how this basis boost proposal, and other important
provisions of the AHCIA, can help address these challenges?
Answer. The rural basis boost proposal would help boost rural
housing production through the Low-Income Housing Tax Credit by
increasing the amount of tax credits and resulting equity financing
dollars that can flow to such projects. Put simply, the increase in
basis translates into eligibility for additional credits. These credits
then offset production costs and, thereby, enable the production of
additional affordable multifamily housing units. NMHC and NAA strongly
support this proposal and look forward to working with you to ensure
that the tax credit works in all areas across the Nation, including
rural areas where it can be more difficult to build housing, so that
all families can find safe and decent housing at a price they can
afford.
In terms of producing affordable housing more generally, the
Affordable Housing Credit Improvement Act (AHCIA) is absolutely
essential to enact, and the multifamily housing is grateful that you
and Senator Cantwell will be reintroducing it later this spring. We
strongly support this bill.
AHICA would boost affordable housing supply through two primary
provisions. First, it would make permanent the now-expired 12.5-percent
increase in Low-
Income Housing Tax Credit (LIHTC) authority for 2018-2021 to enable the
production of new units and further augment credit authority by 50
percent. Second, the bill would lower the Private Activity Bond
financing threshold to 25 percent from 50 percent required to receive
the full amount of 4-percent Low-Income Housing Tax Credits.
These two provisions in AHCIA would have a significant impact on
the ability of the LIHTC program to deliver affordable housing. In
December 2022, Novogradac estimated that over the 2023-2032 period,
1.93 million additional affordable homes, housing 4.5 million low-
income people, could be financed across the United States and
territories by AHICA provisions expanding LIHTC authority and reducing
the Private Activity Bond financing threshold to 25 percent. Over that
period, this enhanced financing could also create nearly 3 million
jobs, more than $335 billion in wages and business income, and $116
billion in tax revenue.
Question. I know you have experience working with veterans through
your work with Volunteers of America.
Can you please discuss the impact the Low-Income Housing Tax Credit
has on safely housing and providing needed services for veterans?
Answer. The Low-Income Housing Tax Credit (LIHTC) plays a
significant role in providing quality housing to our Nation's veterans.
In many cases, veterans can use Veterans Affairs Supportive Housing
(VASH) vouchers to secure residency at LIHTC properties. These vouchers
ensure veterans can find housing and receive critical case management
and clinical services provided by the Department of Veterans Affairs. I
would note that Congress's enactment of so-called income averaging that
enables the LIHTC program to serve individuals earning up to 80 percent
of area median income was a critical step in enabling veterans using
VASH vouchers to secure housing at LIHTC properties. Prior to that
change, many veterans did not qualify for LIHTC housing because their
incomes exceeded statutory limits.
Finally, I would note that the Affordable Housing Credit
Improvement Act includes a proposal that would provide a basis boost
for LIHTC projects serving extremely low-income households. Under this
proposal, LIHTC projects with at least 20 percent of units serving
households earning no more than 30 percent of area median gross income
or whose income does not exceed the Federal poverty line, would be
eligible for 150 percent of basis with respect to that portion of the
project. This proposal would be beneficial in ensuring that veterans
without VASH vouchers, among others, could secure housing at LIHTC
properties.
______
National Multifamily Housing Council (NMHC)
1775 Eye Street, NW, Suite 1100
Washington, DC 20006
202-974-2300
https://www.nmhc.org/
GUIDANCE
MAY 2018
The Impacts of Rent Control:
A Research Review and Synthesis
By: Lisa Sturtevant, Ph.D.
About NMHC
Based in Washington, DC, the National Multifamily Housing Council
(NMHC) is a national association representing the interests of the
larger and most prominent apartment firms in the U.S. NMHC's members
are the principal officers of firms engaged in all aspects of the
apartment industry, including ownership, development, management and
financing. NMHC advocates on behalf of rental housing, conducts
apartment related research, encourages the exchange of strategic
business information and promotes the desirability of apartment living.
Nearly one-third of Americans rent their housing, and almost 15 percent
live in an apartment (buildings with five or more units). For more
information, contact NMHC at (202) 974-2300, email the Council at
[email protected], or visit NMHC's website at www.nmhc.org.
About the NMHC Research Foundation
In 2016, NMHC formed a nonprofit (501(c)(3)) Research Foundation to
produce research that will further support the apartment industry's
business interests. The work supported by the NMHC Research Foundation
raises the industry's standard of performance and encourage worldwide
investment in the sector. The NMHC Research Foundation funds unique and
original research on a wide range of topics, including issues related
to development and redevelopment activity, affordable and workforce
housing, demographics, tax policy, regulatory environment and zoning
and land use, among others. For more information, visit www.nmhc.org/
Research-Foundation.
About the Author
Dr. Lisa Sturtevant has been involved in research and analysis on local
economic, demographic, and housing market conditions for more than 15
years. As president of Lisa Sturtevant and Associates, LLC, she leads
housing needs assessments and planning projects for local communities
throughout the country. In addition, she conducts special studies on
housing issues for local and national organizations.
Introduction
Rent control laws limit the amount of rent a landlord can charge,
either by setting a rent ceiling and/or by limiting rent increases. The
latter approach is sometimes referred to as a rent stabilization
policy. Most rent control or rent stabilization policies also set rules
for the conditions under which a landlord can evict a tenant.
Many policies allow landlords to petition for greater rent increases if
they make significant improvements to the property. New York City's
rent control and rent stabilization laws are well known, but rent
control has also been adopted in cities in California, New Jersey,
Massachusetts, Maryland, and in the District of Columbia. There are
initiatives underway presently to expand rent control in California
(where rent control was restricted in 1995 by the Costa-Hawkins Rental
Housing Act) as well as Illinois, Washington, and Oregon.
Renewed interest in rent control is a reaction to growing housing
affordability challenges across the country and in high-cost coastal
markets, in particular. As rents continue to rise, rent control is
being advocated by some as a mechanism to help mitigate the rental
affordability challenge and make it easier for lower-income individuals
and families to find housing they can afford in high-cost regions.
Imposing limits on rents would seem to be a logical way to keep housing
costs low for people who need affordable housing. However, there are
significant problems associated with rent-control programs. Economists
nearly universally agree that rent ceilings reduce the quantity and
quality of housing and that even more moderate forms of rent
stabilization have efficiency challenges and negative housing market
impacts.\1\
---------------------------------------------------------------------------
\1\ Jenkins, Blair. 2009. Rent Control: Do Economists Agree? Econ
Journal Watch 6(1): 73-112.
This report synthesizes the empirical research on the effects of rent
control and rent stabilization on individual renters and communities,
building on prior evaluations of the rent-control literature.\2\ This
report does not include a review of every rent control study. Rather,
the research included in this review includes only empirical studies of
rent control and rent stabilization programs in the U.S. Theoretical
studies were excluded, as were studies that simply provided a
descriptive analysis of a rent-control program. Non-U.S. studies were
excluded with the presumption that housing markets and housing policy
are substantially different in other countries that have implemented
rent control. The vast majority of the studies included in this
synthesis were published in peer-reviewed journals, though other
studies (e.g., consulting reports) were included if they met the other
criteria.
---------------------------------------------------------------------------
\2\ In addition to Blair (2009), see also Turner, Bengt and Stephen
Malpezzi. 2003. A Review of Empirical Evidence on the Costs and
Benefits of Rent Control. Swedish Economic Policy Review 10: 11-56.
The earliest study included in this synthesis was published in 1972 and
the latest was released in 2017. The reviewed research includes case
studies of programs in a single market--New York, Boston, Los Angeles,
San Francisco, Santa Monica, Washington, DC--as well as fewer studies
that take a cross-sectional approach across markets. Most of the
research employed various multivariate statistical techniques, while a
small handful of studies were able to take advantage of a policy change
---------------------------------------------------------------------------
that created a natural experiment (see Table 1).
Table 1. Empirical Studies of Rent Control and Rent Stabilization (By
Publication Date)
------------------------------------------------------------------------
Authors (Date) Geographical Areas
------------------------------------------------------------------------
Olsen (1972) NYC
------------------------------------------------------------------------
Rydell et al. (1981) Los Angeles
------------------------------------------------------------------------
Fallis and Smith (1984) Los Angeles
------------------------------------------------------------------------
Mengle (1985) Multiple
------------------------------------------------------------------------
Navarro (1985) Cambridge, MA
------------------------------------------------------------------------
Linneman (1987) NYC
------------------------------------------------------------------------
Peat Marwick (1988) NYC
------------------------------------------------------------------------
Gyourko and Linneman (1989) NYC
------------------------------------------------------------------------
Ault and Saba (1990) NYC
------------------------------------------------------------------------
Gyourko and Linneman (1990) NYC
------------------------------------------------------------------------
Levine, Grisby, and Heskin (1990) Santa Monica
------------------------------------------------------------------------
Turner (1990) Washington, DC
------------------------------------------------------------------------
Rappaport (1992) NYC
------------------------------------------------------------------------
Caudill (1993) NYC
------------------------------------------------------------------------
Honig and Filer (1993) NYC
------------------------------------------------------------------------
Moon and Stotsky (1993) NYC
------------------------------------------------------------------------
Ault, Jackson, and Saba (1994) NYC
------------------------------------------------------------------------
Nagy (1995) NYC
------------------------------------------------------------------------
Malpezzi (1996) Multiple
------------------------------------------------------------------------
Gissy (1997) Multiple
------------------------------------------------------------------------
Grimes and Chressanthis (1997) Multiple
------------------------------------------------------------------------
Nagy (1997) NYC
------------------------------------------------------------------------
Early and Phelps (1999) Multiple
------------------------------------------------------------------------
Early (2000) NYC
------------------------------------------------------------------------
Glaeser (2002) California, New Jersey
------------------------------------------------------------------------
Glaeser and Luttmer (2003) NYC
------------------------------------------------------------------------
Krol and Svorny (2005) New Jersey
------------------------------------------------------------------------
Sims (2007) Boston
------------------------------------------------------------------------
Sims (2011) Boston
------------------------------------------------------------------------
Diamond, McQuade, and Qian (2017) San Francisco
------------------------------------------------------------------------
What Is Rent Control?
Rent control often refers to laws that set caps on rents, while rent
stabilization generally refers to policies that regulate how often and
how fast rent levels can increase.\3\ Generally adopted at the
municipal level, rent control laws often are coupled with rules related
to tenant eviction and to exceptions to the rent levels or increases
under certain circumstances. New York City has the most established
rent-control laws, but there are currently rent-control policies in
place in communities in California, New Jersey, Maryland, and the
District of Columbia.
---------------------------------------------------------------------------
\3\ Policies are sometimes referred to as ``first-generation'' and
``second-generation'' rent control to distinguish between stricter
programs with rent caps and more moderate programs that regulate rent
increases and provide tenant protections. In this paper, the term
``rent control'' is generally used to refer to both types of programs
unless otherwise specified.
Local rent control or rent stabilization polices can vary on different
---------------------------------------------------------------------------
dimensions:
Regulation of rent level or rates of rent increases and how
these levels or rates are set;
Types of residential buildings or units subject to rent control,
based on the age or size of the building, and, consequently, what share
of the locality's rental stock is subject to rent control;
Rules on rent changes upon a tenant vacating a rent-controlled
unit (i.e., vacancy allowances/vacancy decontrol policies); and
Eviction rules that outline the circumstances under which
landlords of rent-
controlled buildings can turn out a tenant.
The variation in rent control and rent stabilization policies has
important implications for understanding findings from the research on
policy impacts and for generalizing specific findings to other existing
and potential rent control policies. Market conditions also matter when
measuring the effects of rent control or rent stabilization, as does
the length of time the law has been in place. Furthermore, rent control
is one of many different forms of regulation that can impact housing
supply and price, and sometimes it can be challenging to isolate rent
control's impact.
Key Findings
Even with these caveats, there are several clear and consistent
findings about how rent control laws impact residents, landlords and
local housing markets:
1. Rent-control and rent-stabilization policies do a poor job at
targeting benefits. While some low-income families do benefit from rent
control, so, too, do higher-income house-holds. There are more
efficient and effective ways to provide assistance to lower-income
individuals and families who have trouble finding housing they can
afford.
2. Residents of rent-controlled units move less often than do
residents of uncontrolled housing units, which can mean that rent
control causes renters to continue to live in units that are too small,
too large or not in the right locations to best meet their housing
needs.
3. Rent-controlled buildings potentially can suffer from
deterioration or lack of investment, but the risk is minimized when
there are effective local requirements and/or incentives for building
maintenance and improvements.
4. Rent-control and rent-stabilization laws lead to a reduction in
the available supply of rental housing in a community, particularly
through the conversion to ownership of controlled buildings.
5. Rent-control policies can hold rents of controlled units at
lower levels but not under all circumstances.
6. Rent-control policies generally lead to higher rents in the
uncontrolled market, with rents sometimes substantially higher than
would be expected without rent control.
7. There are significant fiscal costs associated with implementing
a rent-
control program.
Impacts of Rent Control
The research on rent control and rent stabilization programs has
examined the effects of those regulations in several different areas:
Targeting Housing Benefits: How well do rent-control policies
assist the individuals and families most in need of affordable housing?
Allocation of Existing Housing Units: Do rent-control policies
lengthen tenancy duration? Do they create a mismatch between units and
households?
Maintenance and Building Quality: Does rent control lead to a
decline in building maintenance and lower building quality?
Housing Availability: Does rent control reduce the overall
supply of rental housing?
Rent Levels: Are rents of controlled units lower than market-
rate rents? Does a shortage in housing supply caused by rent control
lead to higher rents in the uncontrolled market?
Fiscal Impacts: Do rent control policies lead to lower levels of
property tax revenue collected by the municipality? How substantial are
administrative costs associated with rent control laws?
Homelessness: Does rent control increase homelessness as a
result of reduced housing supply?
The following review assesses the research evidence on each of these
issues.
Targeting Housing Benefits
Hypothesis: Limiting rent levels or rent increases under a rent-control
law allows lower-income individuals and families to gain access to
housing they can afford in high-cost housing markets. Depending on how
it is implemented, a rent-control strategy can create and preserve
mixed-income neighborhoods and can help promote racial and economic
integration.
Alternative: Because rent control creates a limited pool of below-
market units, the law creates a system where landlords are incentivized
to exercise greater control over tenant selection. Landlords of rent-
controlled buildings could make units more readily available to
households with particular characteristics (e.g., higher-income
households, households without children) or prospective tenants who can
pay a fee to apply for rent-controlled units. As a result, rent control
may not meet the needs of individuals and families most in need of
affordable housing.
Overview of Findings: Rent-control and rent-stabilization policies do a
poor job at targeting benefits. While some low-income families do
benefit from rent control, those most in need of housing assistance are
not disproportionately the beneficiaries of rent control. Furthermore,
rent control generally does not lead to more economically and/or
racially integrated neighborhoods.
Implications: Rent control/rent stabilization is not an efficient
mechanism for helping lower-income households access affordable
housing. There are more effective ways to provide assistance to lower-
income individuals and families who have trouble finding housing they
can afford. For example, researchers point to increasing the number of
Federal housing vouchers and expanding the Low-Income Housing Tax
Credit (LIHTC) program as more promising ways to create more affordable
housing options.
Research Findings on Targeting Housing Benefits
Research demonstrates that New York City's rent-control and rent-
stabilization laws are administered indiscriminately and benefits from
the programs tend to be quite small and poorly targeted. Based on the
research reviewed, the inefficiency in targeting benefits in New York
has increased over time.
Using data from 1968,\4\ Gyourko and Linneman (1989) found some poorer
individuals were benefiting from New York City's rent-control program;
however, there was no evidence that the program successfully targeted
those most in need, so benefits of rent control were also enjoyed by
higher-income households. Using the same data, Olsen (1972) came to a
slightly different interpretation, demonstrating that renters who lived
in rent-controlled apartments had significantly lower average incomes
than those in uncontrolled units. However, Olsen (1972) concluded that
there was significant variation in the distribution of the benefits of
rent control and that New York City's program was ``a poorly focused
redistribution device.''
---------------------------------------------------------------------------
\4\ The New York Housing Vacancy Survey (NYHVS) was administered in
1968 and 1981 and provided detailed data on residents of rent-
controlled, rent-stabilized, and uncontrolled units. Therefore, a
number of studies of NYC's rent control programs use 1968 or 1981 data.
The NYHVS currently is administered by the U.S. Census Bureau every 3
years to comply with New York State and New York City rent regulation
laws.
Looking at data between 1965 and 1968, Ault and Saba (1990) found that
residents of rent-controlled apartments tended to be more likely
minority and elderly--two groups a rent control policy could want to
target. However, over time, they found that the benefit of the rent-
control subsidy in New York City was greater for higher-income
households than for lower-income or minority households. Furthermore,
renters with similar needs or characteristics were very unlikely to
receive similar levels of benefits under New York City's rent-control
law, indicating that the program did a poor job of targeting
---------------------------------------------------------------------------
assistance.
These early studies of New York generally provide evidence from the
city's rent-
control law, adopted in the 1940s, rather than the later-implemented
rent-stabilization law. Using 1981 data, Linneman (1987) also concluded
that both the city's rent-
control and rent-stabilization programs were targeted haphazardly,
benefiting some low-income households, particularly seniors, but
generally doing a poor job at directing housing benefits to those most
in need. Early (2000) used data from 1996 and confirmed not only that
rent control and rent stabilization in New York City were poorly
targeted, but also that the city's laws induced landlords to change the
way they recruited tenants, giving preference to older and smaller
households. This observation that older households (i.e., seniors) and
smaller households (i.e., households without children) were preferred
by landlords of rent-controlled properties was also made by Linneman
(1987), Gyourko and Linneman (1989), and Ault and Saba (1990).
While New York City's rent-control history is unique in many ways, the
lack of efficient targeting of the potential benefits of a rent-control
program is observed in other communities. In the Boston metropolitan
area, Sims (2007) found that in the late 1980s and early 1990s, lower-
income households were not well served by rent-control programs.
Specifically, he found that about a quarter (26 percent) of rent-
controlled units were occupied by tenants with incomes in the bottom
quartile while 30 percent of rent-controlled units were occupied by
tenants in the top half of the income distribution. Navarro (1985) had
come to a similar conclusion about rent-control programs in the Boston
area, examining data from the 1970s.
In her study of Washington, DC's rent-control policy, where about two-
thirds of the stock was under control during the 1980s, Turner (1990)
concluded that DC's rent-control policy did not benefit renters
efficiently or equitably. In particular, the policy benefited renters
who remained in their units a long time (including affluent renters)
and did not provide assistance to recent or frequent movers (including
poor individuals and families at risk of homelessness) who were unable
to pay the above-market rents landlords could charge upon a tenant's
departure.
A benefit of a rent-control policy could potentially be an increase in
economic and racial integration if lower-income households are able to
access housing in higher-income neighborhoods. However, there is scant
evidence of this benefit in the empirical research. Glaeser (2002)
examined whether rent control increased residential integration in
eight cities with rent control in California and in seven cities with
rent control in New Jersey. In rising cost regions, such as those in
California, rent control did increase lower-rent housing options;
however, the occupants of rent-
controlled units in California and the beneficiaries of living in
higher-opportunity neighborhoods tended to be seniors rather than
families with children. In New Jersey, where housing markets were on
the decline, rent control was actually associated with increased
economic segregation in municipalities.
Using earlier data from 1979 and 1987 to evaluate Santa Monica's rent-
control policy, Levine, Grigsby, and Heskin (1990) found the city's
rent-control program did provide benefits to low-income households in
the city, finding no evidence that the city's rent-control policy
provided a disproportionate benefit to middle- and higher-income
households. However, there was no impact on economic or racial
integration in the community as a result of rent control.
Sims (2011) examined whether rent control in Cambridge, MA increased
economic and racial segregation and found that rent control appeared to
increase the share of minority residents in the city, but it was
associated with a decrease in the proportion of very low-income
residents. Sims (2011) concluded that the modest impacts on racial
integration in Cambridge were overshadowed by the increases in economic
segregation in the community.
Allocation of Existing Housing Units
Hypothesis: Rent control acts as a price control, which limits the
overall supply of housing and does not allow units to be allocated to
the residents who would benefit most since price cannot be used to sort
renters into different units. Renters who gain access to rent-
controlled apartments stay in those units longer than they would in a
market-rate unit, even if the unit is no longer appropriate for their
household (e.g., too big or too small, based on changes in household
composition).
Overview of Findings: Residents of rent-controlled units are less
mobile than residents of uncontrolled housing units, and the benefit of
living in a rent-controlled unit causes tenants to remain in their
units longer than they would without rent control, leading to a
mismatch in unit type or size and the need of the household.
Implications: Reduced mobility caused by rent control may limit the
availability of so-called ``family-sized'' units (i.e., units with
three or more bedrooms) if tenants of rent-controlled units remain in
units after children have moved out on their own. There could also be
instances of housing overcrowding if residents of rent-controlled units
stay in homes that are too small as their family grows (e.g., after the
birth of a child or when a relative moves in). Reduced mobility
associated with rent control could have other impacts.
Tenants of rent-controlled units may be less likely to change jobs or
may be more likely to endure long commutes because they do not want to
move into a new unit. Rent control may induce people to put off home
ownership and to remain renters longer to take advantage of below-
market rents. Finally, when residents of rent-
controlled buildings stay in their units as their incomes increase,
rather than move into units with higher rents, the result is a
reduction in the supply of affordable housing available to those with
lower incomes.
Research Findings on Allocation of Existing Housing Units
Studies on rent control and rent stabilization in New York City
consistently demonstrate that these policies have been associated with
reduced residential mobility and a significant ``mismatch'' between
tenants' housing needs and the characteristics of the units. Gyourko
and Linneman (1989) used 1968 data to examine the distributional
consequences of rent control in New York City, demonstrating that New
York City's rent-control policy led to longer tenures and lower
likelihood of home ownership among tenants in rent-controlled units.
Ault, Jackson, and Saba (1994) also examined 1968 data and estimated
that the typical rent control tenant remained in his or her unit about
18 years longer than an otherwise identical tenant in an uncontrolled
unit.
Other research in New York City attempted to differentiate the
residential mobility impacts of rent control versus the more moderate
rental stabilization program by using later data. Using data from 1981,
Linneman (1987) compared length of tenancy among residents living in
uncontrolled units with tenancy among those living in units under the
city's rent-control law and units subject to the city's later-enacted
rent stabilization law.
Residents of strictly controlled rental units received significant
rental subsides relative to those of the stabilized and uncontrolled
sectors, and that subsidy led to these renters remaining in their units
significantly longer than they would otherwise be expected. But
Linneman noted that there was no significant difference in the tenancy
durations of residents of rent-stabilized units and uncontrolled units.
At the time of the data collection (in 1981), New York City's rent-
stabilization policy had only been fully implemented for 7 years (since
1974), which may partially explain why no difference between tenants of
uncontrolled and rent-stabilized units was found.
Nagy (1995) also compared residential mobility between renters living
in rent-
controlled units and rent-stabilized units using data from 1978 and
1987 (between 4 and 13 years after full adoption of rent stabilization
in New York City). He found that tenants of rent-controlled units were,
in fact, significantly less mobile than those living in rent-stabilized
units; however, the differences were not so clear after accounting for
the differences in the socioeconomic characteristics of the two types
of renters. For example, renters living in rent-controlled units were
more likely to be White and older compared to rent-stabilized renters,
and those characteristics themselves are associated with reduced
mobility.
Rappaport (1992) examined the effects rent control had on the
probability of rental vacancies and occupant turnovers in New York
City, which is a slightly different way of looking at residential
mobility and length of tenure. She found that compared to uncontrolled
units, a rent-controlled apartment was about 8 percent less likely to
turn over in a 3-year period.
Lower levels of residential mobility and longer tenures in current
units suggest that tenants of rent-controlled units would be more
likely to live in housing that is not optimal either in terms of size
or amenities. Using data from the 1990 Census and comparing the New
York City apartment market to comparable areas that had not adopted
rent control, Glaeser and Luttmer (2003) found that between 15 and 21
percent of New York City apartment renters lived in larger or smaller
units than they would if they were living in a city without rent
control or rent stabilization (with the range depending on whether unit
size was measured by rooms or bedrooms). The authors cautioned that in
New York City there also is a ``housing misallocation'' among both
renters in uncontrolled buildings and owners when compared to other
markets, suggesting that the New York City market may be generally
inducing misallocation of units.
In 1994, San Francisco adopted rent-control protections for small
multifamily housing (four units or less) built prior to 1980. Diamond,
McQuade, and Qian (2017) compared outcomes for tenants and landlords of
small pre-1980 buildings and post-1980 buildings to estimate the impact
of rent control on residential mobility. The authors found that
residents of rent-controlled buildings were between 10 and 20 percent
more likely to stay in their current unit over the study period, with
the effects significantly stronger among older households and among
households that already had a long tenure in their current unit, two
groups that have lower levels of residential mobility even absent
having access to a rent-controlled unit.
Washington DC's rent-control law was adopted in 1985 and applied limits
on rent increases to all units in buildings built before 1975. In an
evaluation of rent control in DC, Turner (1990) found that tenants of
rent-controlled units moved less frequently than tenants of other
units, concluding that the city's rent control program contributed to
the very low rates of residential mobility observed in the city. Turner
(1990) did not find evidence of reduced probabilities of home ownership
associated with rent control in Washington, DC.
Krol and Svorney (2005) examined the impacts on residential mobility of
rent-
control programs in New Jersey more implicitly by examining the links
between length of commute and presence of rent control. Using data from
the 1980, 1990, and 2000 censuses, the authors found a positive and
statistically significant relationship between the presence of rent
control in a city and commute times for workers who lived in those
cities. The municipalities with the most restrictive regulations were
associated with the longest average commute times. Krol and Svorney
(2005) suggested that in New Jersey, a lack of household mobility was
the driver of the longer commute times and concluded that the relative
immobility of the population was the factor underlying the relationship
they observed between rent control and commute times.
Maintenance and Building Quality
Hypothesis: Limiting rents through a rent-control or rent-stabilization
law reduces the return on investments in rental housing and will cause
landlords to choose to undermaintain their properties until the output
of housing services (as measured by housing quality and amenities)
declines to the level that is supported by the below-market rents.
Alternative: Even as rent control may limit landlords' desire to
maintain their properties, other local ordinances that require
landlords to maintain units to certain standards, to repay tenant
maintenance expenditures, and/or to permit rent increases for well-
maintained or upgraded units could counteract the potential negative
impacts on housing quality associated with rent control.
In addition, a rental subsidy in the form of rent control could
encourage tenants to contribute to maintenance and upkeep,
counteracting any possible deferred maintenance on the part of the
landlord.
Overview of Findings: There is no clear association documented in the
empirical research between rent control and building quality,
particularly if other ordinances, requirements, or incentives are
present to have landlords maintain buildings.
Implications: Rent-control laws in communities that have comprehensive
requirements related to building maintenance may mitigate any potential
negative impacts on housing quality. However, without appropriate
incentives or requirements, landlords of rent-controlled buildings will
be unlikely to make improvements to buildings. Furthermore, tenants of
rent-controlled buildings may feel obligated to take on more
maintenance responsibilities and costs, which ends up reducing the
benefits of the rent-control subsidy.
Research Findings on Maintenance and Building Quality
Earlier studies of rent control in New York City did find a negative
relationship between rent control and building quality, but researchers
noted that it is difficult to isolate the rent control impacts since
the law applied to older and often lower-
quality buildings. Using data from 1968, Gyourko and Linneman (1990)
found that New York City's rent-control law had a large and significant
negative impact on the quality of rental buildings, but the impact was
primarily for non-high-rise buildings and buildings that were already
in a state of disrepair when rent control was adopted. In the same
study, Gyourko and Linneman (1990) provided modest evidence that rent
control in New York City induced maintenance and upkeep on the part of
individual residents of controlled units.
The relationship between rent control/stabilization and building
quality in New York City is even less clear cut in later years. Moon
and Stotsky (1993) offered mixed evidence that rent control led to a
decline in housing quality in New York City over the 1978 to 1987
period. While there was a possibility of the quality of rent-controlled
units to decline over time, Moon and Stotsky (1993) found that
maintenance and improvements occurred in rent-controlled buildings when
other economic conditions were favorable to induce landlords to
renovate. For example, if landlords were able to offer a payout to
existing tenants and/or were able to capitalize on higher rents when
existing tenants moved out, they could be incentivized to maintain
their buildings. This research also found that longer-term tenants of
rent-controlled units in New York City were incentivized to provide
maintenance and upkeep of their property even if the landlord did not.
Rent control was ended in Massachusetts in 1995, and the termination of
rent-
control laws in cities in the Boston metropolitan area provided a type
of natural experiment to examine the impacts of rent control. While
Sims (2007) primarily focused on impacts of rent control on housing
supply, the findings from this research also suggested that in the late
1980s and early 1990s, rent control in Boston was associated with
modest deterioration in the quality of the rental housing stock without
a counteracting tenant-supplied maintenance and upkeep. Similarly,
while not the primary outcome analyzed in their evaluation of rent
control in Los Angeles, researchers at RAND (Rydell et al. 1981) found
evidence of deferred maintenance and upkeep in rent-controlled
buildings.
However, after 15 years of rent control in Washington DC, Turner
(1990), found no evidence of a decline in housing quality and, in fact,
documented that units exempt from rent control in DC had more
maintenance issues than rent-controlled buildings. She concluded that
other local policies helped to ensure building quality in the city.
Looking across the country at other communities with rent control,
Mengle (1985) attempted to examine the relationship between housing
quality and rent control across eight metropolitan areas in the mid-
1970s, with a dataset that included four metropolitan areas where rent
control was present and four where rent control was not present. While
Mengle (1985) found evidence of reduced residential building quality in
the metropolitan areas with rent control, it was noted that rent-
control laws varied considerably across municipalities in the study,
but the model did not explicitly attempt to account for those policy
differences or attempt to ascertain other regulations or ordinances
that could incentivize building maintenance.
Housing Availability
Hypothesis: Regulations that limit rents could reduce the availability
of rental housing in both the short and long term. Rent control could
induce landlords of properties covered by the law to convert their
buildings to condominium ownership, thereby taking rental units off the
market. The supply of affordable rental housing could also be
diminished if landlords redevelop their properties such that the new
units are not subject to rent-controlled laws. Longer-term, while rent-
control regulations almost always exclude new construction, if rent
control puts downward pressure on market rents or if developers fear
that in the future new units will be subject to controls, they may not
build new housing.
Overview of Findings: Rent-control and rent-stabilization laws
generally led to a reduction in the available supply of rental housing
because landlords were induced to convert their properties into
condominiums or to redevelop into housing not subject to rent-control
regulations. The impact of rent control on new construction is less
clear-cut in the empirical research.
Implications: Rent control incentivizes landlords to convert their
rental properties into condominiums, particularly when there is strong
demand for and a lack of home-ownership opportunities in a community.
New housing construction may be negatively impacted if developers are
uncertain about future applications of rent-control and rent-
stabilization policies.
Research Findings on Housing Availability
While there is a substantial body of theoretical work on the
relationship between rent controls and housing supply, there is
surprisingly little empirical research on the impacts.
In a study of San Francisco over the 1995 to 2012 period, Diamond,
McQuade, and Qian (2017) found that, overall, landlords with properties
covered by rent control were more likely than other property owners to
convert their units to condominiums or to redevelop their buildings,
which reduced the supply of available rental housing in the city.
Diamond, McQuade, and Qian (2017) estimated that the reduced supply of
rental housing--in just this one segment of the multifamily housing
stock; that is, properties with four or fewer units--led to a seven
percent increase in city-wide rents.
Sims (2007) came to a similar conclusion in Boston. While he found no
significant relationship between the presence of rent control and the
level of new housing construction in the Boston area, rent control was
associated with a shift from units offered as rentals to those offered
as ownership, with landlords of rent-controlled buildings converting
their units to condominium. In the Boston region, therefore, it was
estimated that rent control kept thousands of rental units off the
market.
In California and New Jersey, over the 1970 to 1990 period, Glaeser
(2002) found mixed results on the relationship between rent control and
housing supply. In California, the supply of housing in cities with
rent control increased more slowly than it did in cities without rent
control; however, the difference was not statistically significant
until Glaeser (2002) controlled by initial city size. In New Jersey,
there was a significant impact of rent control on the housing stock,
with the overall supply of housing actually declining in cities that
had adopted rent control. However, that effect disappeared when city
size was controlled for. Thus, these findings suggest no clear-cut
relationship between rent control and housing construction but also
suggest that rent control impacts housing availability differently in
different kinds of markets.
Rent Levels
Hypothesis: Rent control will keep rents of units in controlled
buildings lower than market rents, but if rent control results in a
decline in the rental housing supply, then rents for uncontrolled units
will be higher than what they would be without a rent-control program
in place.
Alternative: Depending on the vacancy decontrol policy, landlords of
rent-controlled buildings could set initial rents higher than market
rents to compensate for lower future rents allowed under rent control.
Furthermore, tenants would be willing to pay higher rents initially if
they knew that rent increases would be capped over time.
Overview of Findings: Units subject to rent control usually have rents
that are lower than market rents, which provide a benefit to tenants of
those units, often inducing them to stay longer than they would
otherwise. However, when a rent-
control policy includes a vacancy decontrol or vacancy allowance
condition, new residents of controlled units could actually pay more
than market rates initially.
Rent-control policies generally lead to higher rents in the
uncontrolled market, with rents sometimes substantially higher than
would be expected without rent control (i.e., between 10 to 25 percent
higher). Over time, if rent control does not apply to new construction,
there is some evidence that the impact on uncontrolled rents
diminishes.
Implications: Rent-control policies can hold rents of controlled units
at lower levels and benefit some tenants, particularly those who do not
move often. However, adopting a rent-control law will lead to rent
increases in the unregulated market, which reduces the well-being of
residents of uncontrolled units and can actually diminish the overall
welfare of all residents. Attempting to moderate a rent-control policy
by implementing a vacancy decontrol provision could actually increase
the rents of controlled units in the short-term.
Research Findings on Rent Levels
There is general consensus that rent control policies without vacancy
allowances do lead to lower rents for units in rent-controlled
buildings. Gyourko and Linneman (1989) found that rent control resulted
in significantly lower rents for controlled units. In fact, they
estimated that the reduced rents created a substantial subsidy for
beneficiaries of rent control, possibly as high as 27 percent of
renters' total annual income. In a study of Los Angeles rent control
over the 1969 to 1978 period, Fallis and Smith (1997) documented that
rent control was, indeed, responsible for keeping the rents of
controlled units low.
Newer rent-control and rent-stabilization policies typically have a
vacancy decontrol or vacancy allowance policy that makes it more
difficult to be certain that units in buildings subject to rent control
will have below-market rents. Under New York City's rent-stabilization
program, when a tenant vacates a unit, the landlord can reset the rent
level, increasing it by up to 20 percent. Rent increases as allowed
under the rent-stabilization policy then apply to this new, higher
rent.
This vacancy allowance feature could result in some tenants of rent-
stabilized apartments paying higher-than-market rents, at least
initially. Nagy (1997) found that in 1981, tenants of rent-stabilized
units paid higher rents than did tenants of similar, uncontrolled
apartments. However, tracking tenants over time, Nagy (1997) found that
rent-stabilized tenants had below-market rents 6 years later (assuming
they remained in the rent-stabilized unit.)
A bigger concern among policymakers has been whether adopting rent
control will lead to increases of rents in the unregulated market,
typically through a reduction in the supply of rental housing. Caudill
(1993) analyzed the New York City rental market in 1968 and concluded
that rents of uncontrolled units in the city were between 22 and 25
percent higher than they would have been had rent control not been in
place.
Early (2000) used New York City data from 1996 to demonstrate that rent
control drove up rents of uncontrolled units in the city and that the
increase in rents in the overall rental market actually made tenants of
rent-controlled units worse off than they would have been if rent
control had not been in place. Lower rents in the broader uncontrolled
market would have given rent-control tenants more opportunities to live
in a unit that was a better fit for their needs, and their overall
utility would have been increased.
Fallis and Smith (1997) found that 2 years after the adoption of rent
control in Los Angeles, uncontrolled rents increased more than three
times faster than rent-
controlled units, and the researchers concluded that it was the rent-
control policy itself--and not other characteristics of the
uncontrolled units or market--that led to the significantly greater
rent increases.
In Boston, Sims (2007) documented a more complicated relationship among
rent control, building quality, and rent levels to find that rent
levels of unregulated units declined in buildings near rent-controlled
buildings that were of lower quality.
There have been attempts to examine the link between rent control and
market rents in cross-sectional studies. While there are unanswered
issues related to the endogeneity between rising rents/rent levels and
adoption of rent control, Malpezzi (1996) used data for 54 metro areas
to demonstrate a positive, significant relationship between the
presence of a rent-control policy and median rent in the metropolitan
area. Early and Phelps (1999) examined the impact of rent control on
uncontrolled rents in 49 metropolitan areas over the 1984 to 1996
period.
Results from this analysis suggested a positive and statistically
significant relationship between the presence of rent control and
uncontrolled rents--specifically, the introduction of rent control
increased median uncontrolled rent levels by more than 13 percent.
However, if rent control did not apply to new construction, the effect
diminished over time, and between 2 and 3 decades after adoption of
rent control, there is no significant relationship between the presence
of rent control and rent levels in the uncontrolled market. (Like other
cross-sectional studies, there was no attempt in either of these two
studies to account for the variability in rent-control programs and the
fact that policies are often only in place in select municipalities
within a region.)
Fiscal Impacts
Hypothesis: Because rent control limits investment return, and
potentially building quality, it can also reduce the value of the
property and, as a result, lower the amount of property tax revenue
collected from the property owner. In addition, rent control increases
public expenditures through administrative procedures to implement and
oversee the rent-control program.
Overview of Findings: While there is very little empirical research on
the topics, rent-control laws can reduce the amount of property tax
revenue collected on rental properties and can be associated with
fairly high administrative costs.
Implications: There can be significant costs to the municipality (and
potentially to the State) of implementing rent control.
Research Findings on Fiscal Impacts
There is very little empirical research on the relationship between
rent control and local property tax revenue. In his analysis of rent
control in Cambridge, MA, Navarro (1985) concluded that the city lost
out on between $5 and $10 million per year in property tax revenue as a
result of lower property values induced by rent control. In New York
City, a study conducted by the accounting firm Peat Marwick (1988)
estimated that there was a loss in taxable assessed property values
attributable to rent control at approximately $4 billion in the late
1980s, which meant that the city lost out on an estimated $370 million
annually in property tax revenue.
Rent-control regulations create administrative processes that would not
be required without the law. As a result, there is a cost to the
municipality (and potentially to a State) to implement, administer, and
enforce a rent-control program. In Cambridge, Navarro (1985) estimated
that the public costs to administer the city's rent-control program
totaled about $40 per unit. Linneman (1987) concluded that the
administrative costs associated with New York City's rent stabilization
policy were ``substantial and inefficient.''
Homelessness
Hypothesis: Rent control reduces the availability of housing and,
therefore, can increase homelessness in a community.
Overview of Findings: There is no consistent relationship observed
between rent control and the prevalence of homelessness.
Implications: Given the complex causes of homelessness, a rent-control
policy has an unknown effect on a community's homeless population, but
if it reduces the availability of affordable housing in that community,
the homeless population will be better served by programs that are more
specifically targeted.
Research Findings on Homelessness
In a review of the relationship between homelessness and rent control
in metro areas across the country, Honig, and Filer (1993) found no
significant association either between the presence of a rent-control
policy and homelessness or between rent control and incidences of
overcrowding. Early and Olsen (1998) found that rent control was
associated with decreased rental vacancy and increased rents, which
could increase homelessness; however, they found that those potential
effects were more than offset by other effects that decreased
homelessness. Using 1990 data, Grimes and Chressanthis (1997) found a
significant though very small impact of rent control on the level of
homelessness, though as Gissy (1997) also concluded, it is possible
that underlying factors related to both the likelihood of adopting rent
control and level of homelessness could be an intervening factor
explaining the relationship.
Reviewed Research
Ault, Richard W., John D. Jackson, and Richard P. Saba. 1994. The
Effect of Long-Term Rent Control on Tenant Mobility. Journal of Urban
Economics 35(2): 140-158.
Ault, Richard, and Richard Saba. 1990. The Economic Effects of Long-
Term Rent Control: The Case of New York. Journal of Real Estate Finance
and Economics 3(1): 25-41.
Caudill, Steven B. 1993. Estimating the Costs of Partial-Coverage Rent
Controls: A Stochastic Frontier Approach. Review of Economics and
Statistics 75(4): 727-731.
Diamond, Rebecca, Tim McQuade, and Franklin Qian. 2017. The Effects of
Rent Control Expansion on Tenants, Landlords, and Inequality: Evidence
from San Francisco. NBER Working Paper No. 24181.
Early, Dirk W., and Jon T. Phelps. 1999. Rent Regulations' Pricing
Effect in the Uncontrolled Sector: An Empirical Investigation. Journal
of Housing Research 10(2): 267-285.
Early, Dirk. 2000. Rent Control, Rental Housing Supply, and the
Distribution of Tenant Benefits. Journal of Urban Economics 48(2): 185-
204.
Fallis, George, and Lawrence B. Smith. 1984. Uncontrolled Prices in a
Controlled Market: The Case of Rent Controls. The American Economic
Review 74(1): 193-200.
Gissy, William G. Rent Controls and Homeless Rates. International
Advances in Economic Research 3(1): 113-121.
Glaeser, Edward L. 2002. Does Rent Control Reduce Segregation? Harvard
Institute of Economic Research Discussion Paper No. 1985. Cambridge,
MA: Harvard University.
Glaeser, Edward L., and Erzo F.P. Luttmer. 2003. The Misallocation of
Housing Under Rent Control. American Economic Review 93(4): 1027-1046.
Grimes, Paul W., and George A. Chressanthis. 1997. Assessing the Effect
of Rent Control on Homelessness. Journal of Urban Economics 41(1): 23-
37.
Gyourko, Joseph, and Peter Linneman. 1989. Equity and Efficiency
Aspects of Rent Control: An Empirical Study of New York City. Journal
of Urban Economics 26(1): 54-74.
Gyourko, Joseph, and Peter Linneman. 1990. Rent Controls and Rental
Housing Quality: A Note on the Effects of New York City's Old Controls.
Journal of Urban Economics 27(3): 398-409.
Honig, Marjorie, and Randall K. Filer. 1993. Causes of intercity
variation in homeless. The American Economic Review 83(1): 248-255.
Krol, Robert, and Shirley Svorny. 2005. The Effect of Rent Control on
Commute Times. Journal of Urban Economics 58(3): 421-36.
Levine, Ned, Gene Grigsby, and Allan Heskin. 1990. Who benefits from
rent control? Effects on tenants in Santa Monica, California. Journal
of the American Planning Association 56(2): 140-52.
Linneman, Peter. 1987. The Effect of Rent Control on the Distribution
of Income among New York City Renters. Journal of Urban Economics
22(1): 14-34.
Malpezzi, Stephen. 1996. Housing prices, externalities, and regulation
in U.S. metropolitan areas. Journal of Housing Research 7: 209-241.
Mengle, David L. 1985. The Effect of Second Generation Rent Controls on
the Quality of Rental Housing. Federal Reserve Bank of Richmond,
Working Paper No. 85-5. Richmond: Federal Reserve Bank.
Moon, Choon-Geol, and Janet G. Stotsky. 1993. The Effect of Rent
Control on Housing Quality Change: A Longitudinal Analysis. The Journal
of Political Economy 101(6): 1114-1148.
Nagy, John. 1995. Increased Duration and Sample Attrition in New York
City's Rent-controlled Sector. Journal of Urban Economics 38(2): 127-
137.
Nagy, John. 1997. Do Vacancy Decontrol Provisions Undo Rent Control?
Journal of Urban Economics 42(1): 64-78.
Navarro, Peter. 1985. Rent Control in Cambridge, Massachusetts. Public
Interest 78(4): 83-100.
Olsen, Edgar O. 1972. An Econometric Analysis of Rent Control. Journal
of Political Economy 80(6): 1081-1100.
Peat Marwick. 1988. A Financial Analysis of Rent Regulation in New York
City: Costs and Opportunities: Final Report to the Rent Stabilization
Association of New York City, Inc.
Rappaport, Carol. 1992. Externalities, Government Intervention, and
Individual Responses: Rent Regulation and Housing-Market Dynamic.
American Economic Review 82(2): 446-451.
Rydell, Peter C., Lance C. Barnett, Carol E. Hillestad, Michael Murray,
Kevin Neels, and Robert H. Sims. 1981. A RAND Note: The Impact of Rent
Control on the Los Angeles Housing Market. The RAND Publication Series
Document Number: N-1747-LA. Santa Monica: RAND Corporation.
Sims, David P. 2007. Out of Control: What Can We Learn from the End of
Massachusetts Rent Control? Journal of Urban Economics 61(1): 129-51.
Sims, David P. 2011. Rent Control Rationing and Community Composition:
Evidence from Massachusetts. The B.E. Journal of Economic Analysis and
Policy 11(1): 1-30.
Turner, Margery A. Housing Market Impacts of Rent Control: The
Washington, DC Experience. Urban Institute Report 90-1. Washington, DC:
The Urban Institute Press.
______
Prepared Statement of Denise Scott, President,
Local Initiatives Support Corporation (LISC)
Chairman Wyden, Ranking Member Crapo, and members of the committee,
I thank you very much for the opportunity to speak with you today, at a
time when the Nation's affordable housing crisis continues to deepen,
to discuss the critical role that Federal tax policy plays in
supporting the development and preservation of affordable rental and
home-ownership housing throughout the country. I recognize that the
committee has a broad jurisdiction and will be addressing many
important issues this Congress, and I applaud you for your focus on
affordable housing so early in this legislative session.
My name is Denise Scott, and I am the president of the Local
Initiatives Support Corporation (LISC). LISC is a nonprofit housing and
community development organization and certified Community Development
Financial Institution (CDFI) with offices in 38 cities throughout the
country, and a rural network encompassing 146 partners serving 49
different States, the U.S. Virgin Islands and Puerto Rico. LISC's work
supports a wide range of activities, including affordable housing,
economic development, building family wealth and incomes, education,
community safety, and community health. LISC and its affiliates raise
and deploy well over $2 billion annually in grants, loans and equity
capital into distressed urban and rural communities. In 2022, this
included over $1.2 billion of equity capital deployed by our
affiliates, the National Equity Fund (NEF) and the New Markets Support
Company (NMSC), utilizing Federal Low Income Housing Tax Credits
(Housing Credits) and New Markets Tax Credits (NMTCs), respectively.
LISC believes that a safe, affordable home is one of the basic
requisites of life--a key to individual health, well-being and
financial security. We also believe that investments in quality,
affordable housing have benefits that extend beyond the walls of a home
and the experience of the people who live there to the community at
large. It can stimulate spending and employment in the local economy,
revitalize and bring revenue to the community, and build community
wealth.
In this testimony, I will discuss: (i) LISC's role in supporting
affordable housing; (ii) the current state of the housing market; (iii)
the unique and essential role of Housing Credits in increasing the
supply of affordable rental housing, and steps Congress can take to
strengthen the program; (iv) the need for Congress to enact the
Neighborhood Homes Investment Act; and (v) other actions Congress can
take to spur responsible investments in affordable housing through the
tax code.
i. lisc's role in supporting affordable housing
LISC provides support relating to all components of the affordable
housing financing ecosystem. We raise capital and manage the assets of
Housing Credit investment funds; provide training and technical
assistance grants to nonprofit housing developers; provide debt capital
for multifamily housing projects; administer off-
balance-sheet funds on behalf of municipalities, private-sector
organizations and foundations; support single-family housing
development and rehabilitation; and support rural housing initiatives,
both single-family and multifamily.
Housing Credit Investments
The National Equity Fund (NEF) is the largest nonprofit syndicator
of Housing Credits in the country. NEF serves as the bridge between
developers and Housing Credit investors--helping to place equity
capital at tax credit properties throughout the country, managing
investor funds, providing compliance monitoring services, and
facilitating the transfers of properties to new ownership at the
conclusion of the 15-year tax credit compliance period. Since its
founding in 1987, NEF has invested more than $22.7 billion, which
represents 231,500 new affordable homes for individuals, families, and
communities in need across the country. In 2022, NEF deployed $2.1
billion in affordable housing investments, including $1.2 billion in
Housing Credit investments. NEF has also raised over $130 million in
committed Opportunity Zone investments to support multifamily
affordable housing.
NEF is also an industry leader in creating targeted funds focusing
on high-needs populations. Its ``Bring Them Homes'' initiative provides
veterans of the U.S. military with high-quality affordable housing.
Over the past decade, NEF has invested $800 million in 80 projects that
provide a veteran's preference, alongside over $9 million of grant
funding to help provide on-site supportive services. These combined
efforts created and/or rehabbed nearly 13,000 units of affordable
housing, including 7,500 units targeting veterans and veteran families.
And in 2021, NEF raised more than $112 million to support its new
Emerging Minority Developer Fund to empower the next generation of
developers of color to overcome high barriers of access to Housing
Credits.
Multifamily Housing
LISC provides a range of grants, loans, and equity for nearly every
aspect of development, from planning and acquisition to construction
and renovation, to both nonprofit and for-profit developers. We offer
technical assistance, data, and mapping tools to community-based
organizations working to improve the supply and condition of affordable
housing in their neighborhoods, helping to equip developers and small
businesses with the resources they need to grow and thrive. We are
intentional in our efforts to bring these resources to communities and
businesses overlooked by conventional financing channels.
Lending is an essential instrument in LISC's community development
toolkit. As one of the largest CDFIs in the Nation, we work in
partnership with local grassroots groups, for-profit developers and
government agencies to finance programs and projects that will have a
positive, long-term impact. LISC offers a wide range of loans, from
pre-development to permanent financing, and we finance a variety of
asset classes, from large affordable housing to community facilities to
small business loans. In 2022, LISC closed over $360 million in total
loan commitments, providing $131 million to 62 affordable rental
housing projects and 14 affordable home-
ownership projects, supporting a total of 5,200 affordable homes.
In addition, LISC's Loan Fund Management (LFM) group is charged
with designing, launching, and managing successful place-based impact
funds and innovative capital vehicles across the country. Created in
2018 and operating under LISC's Strategic Investments arm, LFM is
currently managing 10 funds with $865 million of assets under
management and has closed close to 3,000 loans through the end of 2022.
LFM is currently managing $620 million of investments in four place-
based affordable housing funds in the Bay Area, Charlotte, Dallas, and
Detroit, which have collectively supported over 6,000 affordable
housing units. LFM also invests in affordable housing projects through
its national and regional funds, like the Black Economic Development
Fund, which has supported over 1,000 units of affordable housing.
Single-Family Housing
In addition to providing loans to support developers of single-
family homes in our communities, LISC has more recently developed a new
product to support owner-
occupied home rehabs. Pioneered in 2015 by our Detroit LISC office, we
are offering 10-year, interest-free loans ranging from $5,000 to
$25,000 to complete home repairs, fix structural defects, and resolve
health and safety issues such as lead, mold, and asbestos
contamination. The Detroit program has provided $13.6 million in
financing to 688 homeowners, 95 percent of whom are Black, and 71
percent of whom are low-income households. The loan fund structure
draws upon three sources of financing--CDBG funds, private loan capital
and grant funding--and we are in the process of building out similar
programs in Memphis and other cities across the country.
Rural Housing
LISC has a strong commitment to improving rural communities and in
1995, launched Rural LISC, a national program created to expand our
reach beyond urban areas. Today, Rural LISC partners with 146 rural
community-based organizations, including five financial intermediaries,
helping each organization identify challenges and opportunities, and
delivering the most appropriate support to meet those local needs. Over
half of our partners provide housing assistance to the small towns they
serve. LISC has renewed our commitment to rural communities through our
Rural LISC Promise, our pledge to catalyze at least 20 percent of the
community development impact that LISC makes, in any year, in rural
communities.
Our experience supporting local nonprofit housing organizations
working in rural communities has shown us the importance of Federal
affordable housing programs, including the Housing Credit. A recent
survey of our Rural LISC partners indicated that Housing Credits are
being utilized to finance 106 development projects in their pipelines,
totaling more than 7,000 units.
Many of our partners utilize Housing Credits to preserve and
recapitalize U.S. Department of Agriculture's section 515 multifamily
housing properties and for USDA section 514 and 516 farm labor housing.
These resources are essential for preserving what is often some of the
only affordable rental housing in small towns.
ii. challenges in the affordable housing markets
In the past few years, our Nation has experienced large swings in
the housing market due to the economic impacts of the pandemic and
consistent underproduction of housing supply. These impacts have been
disproportionately felt by lower-income families and households of
color, which experienced housing constraints before COVID. LISC has
seen throughout our national footprint that the greatest housing
challenges are primarily related to affordability, in both the
multifamily and single-family markets.
Multifamily Housing
The multifamily rental market has experienced historic rent growth,
triggered by strong overall demand and low vacancy rates. Rents
increased a record 11.6 percent at the end of 2021 and remained at an
elevated pace during the first quarter of 2022.\1\ This was the largest
year-over-year increase in 2 decades and more than three times the 3.2-
percent average annual rise in the 5 years preceding the pandemic.\2\
For the first time, the median asking rent in the 50 most populous
metropolitan areas is more than $2,000.\3\ Rent growth has recently
declined in response to the Federal Reserve's efforts to slow inflation
by raising interest rates. By the end of 2022, rents were up three
percent although it would take far more declines to counteract the
overall historic gains.\4\
---------------------------------------------------------------------------
\1\ Harvard University. State of the Nation's Housing, https://
www.jchs.harvard.edu/state-nations-housing-2022.
\2\ Ibid.
\3\ National Low Income Housing Coalition. Out of Reach, https://
nlihc.org/sites/default/files/oor/2022/OOR_2022_Mini-Book.pdf.
\4\ Dr. Christopher Herbert. Senate Banking Committee Testimony,
https://www.banking.
senate.gov/download/herbert-testimony-2-9-23.
These historic increases in rental housing costs have also occurred
during years of higher multifamily construction costs, challenging
affordable rental housing providers. The sector has experienced
increased costs for construction materials, labor, insurance, and
recently mortgage interest rates.\5\ The price of inputs to new
residential construction (excluding capital, labor, and imports) was up
20 percent year over year in February 2022.\6\ LISC finances affordable
rental housing projects across the country, and in markets of all
types, and has seen firsthand the additional financing gaps created by
these inflationary pressures. These can threaten the likelihood of a
project going to completion if additional sources of scarce affordable
housing funding can't be secured.
---------------------------------------------------------------------------
\5\ Fannie Mae. COVID-19 and Multifamily Construction Costs,
https://multifamily.fanniemae.
com/news-insights/multifamily-market-commentary/covid-19-and-
multifamily-construction-costs.
\6\ Harvard University, State of the Nation's Housing, https://
www.jchs.harvard.edu/state-nations-housing-2022.
High rent burdens contribute to housing instability for underserved
families. In no State, metropolitan area, or county in the U.S. can a
worker earning the Federal or prevailing State or local minimum wage
afford a modest two-bedroom rental home at fair market rent by working
a standard 40-hour work week.\7\ In addition, nearly half of all
renters are now considered cost-burdened since they spend at least 30
percent of their income on housing.\8\ The unaffordability of the
rental market also disproportionately harms Black and Latino households
because they earn disproportionately less income than White renters and
are more likely to be renters. Thirty percent of White households are
renters, compared with 58 percent of Black households and 46 percent of
Latino households.\9\
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\7\ National Low Income Housing Coalition. Out of Reach, https://
nlihc.org/sites/default/files/oor/2022/OOR_2022_Mini-Book.pdf.
\8\ Joint Center on Housing Studies Blog, https://
www.jchs.harvard.edu/blog/number-renters-burdened-housing-costs-
reached-record-high-2021.
\9\ National Low Income Housing Coalition, Out of Reach, https://
nlihc.org/sites/default/files/oor/2022/OOR_2022_Mini-Book.pdf.
While the most severe affordability challenges continue to be at
the lowest end of the income spectrum, there have been growing
challenges felt by middle-income households, particularly in high-cost
markets. Our Nation's underproduction of housing is increasing housing
affordability challenges for teachers, firefighters, nurses, and
others. City leaders from across the country have shared with LISC
their struggles with housing their municipal workforce, and related
challenges in attracting talent to both public- and private-sector jobs
due to inadequate supply of quality affordable housing. Renter cost
burdens increased across all income levels in 2021, although they were
the largest among middle-income groups.\10\ It is estimated that our
Nation has underproduced on almost 3.8 million units of housing, which
drives up housing costs and contributes to inflationary pressures for
low- and moderate-income families.\11\
---------------------------------------------------------------------------
\10\ Christopher Herbert. Senate Banking Committee Testimony,
https://www.banking.senate.
gov/download/herbert-testimony-2-9-23.
\11\ https://upforgrowth.org/apply-the-vision/housing-
underproduction/.
Relatedly, LISC is supportive of local efforts to reduce land use
and regulatory barriers which restrict housing supply for low- and
middle-income families and has seen these efforts in some of our local
office markets, including Charlotte, Twin Cities, our offices in
---------------------------------------------------------------------------
California, and others.
Lastly, we've also seen firsthand how increases in natural
disasters fueled by climate change are impacting affordable housing
properties and creating housing instability for low-income families.
Research has shown that our Nation's affordable housing stock is at
higher risks from disasters compared to other housing types.\12\ These
disasters are also reducing our Nation's affordable housing supply and
displacing residents from their communities.\13\ It can be difficult
for owners to rebuild due to inadequate insurance and reserves, while
low-income tenants have fewer financial resources to cope with the loss
of their homes.\14\
---------------------------------------------------------------------------
\12\ https://preservationdatabase.org/wp-content/uploads/2021/06/
Taking-Stock.pdf.
\13\ https://www.bisnow.com/national/news/affordable-housing/
disasters-like-ian-punish-affordable-housing-stock-especially-hard-
115855.
\14\ https://shelterforce.org/2023/02/17/how-the-inflation-
reduction-act-can-protect-low-income-renters-from-climate-change/.
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Single-Family Homes
Similar to the rental housing market, single-family homes have
experienced historic price increases since the pandemic. Home price
appreciation nationwide hit 20.6 percent in March 2022--topping the
previous high of 20.0 percent in August 2021 and marking the largest
jump in 3 decades.\15\ Home price increases have cooled since the
Federal Reserve began raising interest rates, although prices generally
remain high, and elevated interest rates make it more difficult for
first time home buyers to purchase a home. Just 42.2 percent of new and
existing homes sold between the beginning of July and end of September
2022 were affordable to families earning the U.S. median income of
$90,000.\16\ This was the second consecutive quarterly record low for
housing affordability since the Great Recession.
---------------------------------------------------------------------------
\15\ Harvard University, State of the Nation's Housing, https://
www.jchs.harvard.edu/state-nations-housing-2022.
\16\ https://www.nahb.org/news-and-economics/press-releases/2022/
11/housing-affordability-falls-to-more-than-10-year-low-as-rising-
interest-rates-take-a-toll.
Home-ownership disparities between racial and ethnic groups
stubbornly persist. In the second quarter of 2022, the home-ownership
rate for White households was 75 percent compared to 45 percent for
Black households, 48 percent for Hispanic households, and 57 percent
for non-Hispanic households of any other race.\17\ These gaps in home-
ownership rates have changed little over the last 3 decades. In fact,
the Black-White gap in home-ownership rates was the same in 2020 as it
was in 1970, just 2 years after the passage of the Fair Housing Act of
1968, which sought to end racial discrimination in the housing
market.\18\ These disparities limit the ability of families of color to
achieve their home-ownership goals and limits asset building
opportunities, contributing to our Nation's racial wealth gap.
---------------------------------------------------------------------------
\17\ https://home.treasury.gov/news/featured-stories/racial-
differences-in-economic-security-
housing#::text=housing%20equity%20wealth.-
,Homeownership,households%20of%20any%20
other%20race.
\18\ Ibid.
Many communities have also been significantly impacted by real
estate investors purchasing single-family housing properties for rental
housing. Increases in
investor-owned properties are associated with rising rental prices,
particularly in the most affordable segment of the housing market.
These investor purchases reached a record high in 2021,\19\ are
geographically concentrated in the South and Southwest sections of the
Nation and are primarily in low-cost neighborhoods with a majority of
households of color.\20\ Between 2010 and 2021, the share of homes
purchased by investors in majority Black ZIP codes has increased from
13 percent to 30 percent; compared to increases from 7 percent to 12
percent in other ZIP codes.\21\ LISC has seen the impacts of these
practices in several of our local office markets, including Atlanta,
Charlotte, Jacksonville, Phoenix, Detroit, and others. Increased
investor activity has been linked with troubling property management
practices and, as critically, it limits the ability of first time and
minority families to purchase homes and build wealth.\22\
---------------------------------------------------------------------------
\19\ Schaul, Kevin and O'Connell, Jonathan, ``Investors bought a
record share of homes in 2021. See where,'' Washington Post. February
16, 2022.
\20\ Dr. Desiree Fields, Senate Banking Hearing: How Private Equity
Landlords Are Changing the Housing Market, https://
www.banking.senate.gov/download/fields-testimony-10-21-21.
\21\ Schaul and O'Conell.
\22\ Frankel T. and Keating D. (2018), Eviction filings and code
complaints: What happened when a private equity firm became one city's
biggest homeowner, The Washington Post, https://www.washingtonpost.com/
business/economy/eviction-filings-and-code-complaints-what-happened-
when-a-private-equity-firm-became-one-citys-biggest-homeowner/2018/12/
25/995678d4-02f3-11e9-b6a9-0aa5c2fcc9e4_story.html.
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iii. affordable housing tax credits
Overview
The Housing Credit is the Nation's most successful tool for the
production and preservation of affordable rental housing, responsible
for nearly all of the affordable housing built and preserved since the
program's creation in the Tax Reform Act of 1986. There are two types
of housing credits: those allocated by State agencies from their annual
Housing Credit volume cap (the ``9-percent'' credit); and those that
are utilized by States to accompany projects funded by multifamily
Housing Bonds (the ``4-percent'' credit).
The power of the program is that it is a private sector affordable
housing development program, subsidized with Federal tax credits and
administered by State housing finance agencies. Through each State's
credit allocation process, developers are awarded Federal tax credits
based on their ability to satisfy the affordable housing priorities
identified by the State in its Qualified Allocation Plan. The public
policy benefit of this approach is that it enables States to address
their affordable housing needs by setting up a competition for the
award of credits, ensuring that only the most capable developers (both
for-profit and nonprofit) are selected.
The results are impressive. The Housing Credit has produced just
under 4 million affordable homes, serving more than 8 million
households, supporting approximately 6 million jobs annually, and
generating approximately $250 billion in taxes and $700 billion in
wages and business income. The Housing Credit has been critical in
helping approach the end of veterans homelessness, it has enabled the
redevelopment of distressed public housing, has been a critical source
of funding for elderly housing, and provided critically needed housing
for the disabled. What's more, properties financed with the Housing
Credit must remain affordable for a period of at least 30 years, and
longer in certain States.
The success of the Housing Credit program can be measured not only
by the number of units of affordable housing it has produced, but also
by the financial strength of the properties developed. According to
periodic analysis by the national accounting firm CohnReznick, the
cumulative rate of foreclosure on Housing Credit properties is lower
than any other real estate asset class, well below 1 percent. This is a
tribute to the quality of underwriting at the original financing as
well as the multiple eyes on the development by the State housing
finance agency, local governments, lenders, equity providers and
developers.
While development deals are complex, the essence of the Housing
Credit is actually quite simple. Federal tax credits enable developers
to raise equity capital from investors. Because the investor's return
is generated primarily through the tax credits and associated losses,
as opposed to income generated from the property, the developer can
take on significantly less debt and thereby offer much lower rents. The
Federal statute requires all subsidized Housing Credit units to be
rented to tenants with incomes at or below 60 percent of area median
income (AMI), with limited reach to tenants up to 80 percent of area
median income (provided the overall average of the development is still
at or below 60 percent of AMI), and the rents charged may not exceed 30
percent of the applicable median family income.
In practice, however, a significant percentage of Housing Credit
units are rented and affordable to tenants with considerably lower
incomes. According to recent HUD data on Housing Credit resident
demographics, 53 percent of all households living in Housing Credit
apartments are extremely low-income, meaning they earn 30 percent of
AMI or less; and another 31 percent of households are classified as
very low-income (earning less than 50 percent of AMI). This deep
targeting is in large part due to the requirements in Federal law that
creates a preference for developments that commit to deeper income
targeting. The Housing Credit is best able to reach the poorest
households when rental assistance is available, as the rents these
families can afford to pay often cannot support basic operating costs,
let alone debt service. LISC is supportive of efforts to increase
rental assistance since only one out of four eligible households
receive it, and since these resources are so critical for housing
extremely low-income families.\23\
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\23\ https://www.cbpp.org/research/housing/families-wait-years-for-
housing-vouchers-due-to-inadequate-funding.
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Current Challenges to Tax Credit Development
In spite of its tremendous successes over a period approaching 4
decades, the Housing Credit program faces serious challenges as the
affordable housing community seeks to respond to the overwhelming
shortage of affordable housing. In almost all areas of the Nation, we
face a substantial supply-demand imbalance. As noted earlier, there is
simply not enough affordable housing to serve families in need.
This supply imbalance has been exacerbated by sharp increases in
development costs throughout the United States. In a report issued last
fall, the National Council of State Housing Agencies examined a number
of their member housing finance agencies (HFAs) and found average
construction cost increases of approximately 30 percent since the
pandemic. This problem has been compounded by higher debt costs, which
further exacerbate financing gaps. Because cost increases have been so
rapid and unexpected across the board, a significant number of
affordable housing deals had to be put on pause last year after
developers received their credit allocations.
Recommendations for the Committee
1. Restore the 12.5-percent increase to the formula for the 9-
percent credit allocation. In 2018, to help address the growing
affordable housing shortage, Congress enacted on a bipartisan basis a
12.5-percent increase in the State allocation formula for the 9-percent
credit. This provision expired at the end of 2021, meaning that at a
time when rents are skyrocketing and supply is limited, we are actually
experiencing a cut to affordable housing production. At least 55,000
shovel ready affordable homes are expected to remain unbuilt unless
this provision is restored.
2. Enact the Affordable Housing Credit Improvement Act (AHCIA).
This legislation was sponsored by Senators Cantwell and Young in the
last Congress (S. 1136), and we anticipate will be reintroduced
shortly. The legislation garnered 43 Senate cosponsors in the last
Congress, including 15 from the Finance Committee. We strongly support
all two dozen of the provisions in that legislation, including:
Increasing the 9-percent formula allocation by an additional
50 percent over the 2021 baseline figure, adjusted for
inflation. This additional allocation would increase affordable
rental housing production and preservation by about 300,000
more homes over a 10-year period.
Lowering the threshold for the minimum amount of multifamily
Private Activity Bonds that must be used to finance a property
to be eligible for the 4-
percent housing tax credit. The legislation would reduce the
minimum threshold from 50 percent of development costs to 25
percent. This would both facilitate property development and
have the indirect effect of expanding the private activity cap
by requiring less of it to be used for each Housing Credit
development. According to a 2021 estimate, lowering the bond
financing threshold from 50 percent to 25 percent could produce
or preserve about 1.5 million additional affordable rental
homes over a 10-year period.
Creating additional basis boost. We support provisions
adding additional eligibility for more credits for units in
projects targeting extremely low-income families, for rural
projects, for projects serving Native American communities, and
also for certain 4-percent projects.
Reducing regulatory and cost burdens on affordable housing
development by taking away the ability of local and other
elected officials to effectively veto affordable housing
development. There is bipartisan concern across the country
that local and State governments impose a variety of regulatory
burdens that impede housing development and add unnecessary
costs that price people out of rental markets.
Simplifying and clarifying rules relating to resyndication
of LIHTC properties. In order to preserve older Housing Credit
properties, HFAs will sometimes provide a new allocation of tax
credits (called resyndication) so that the property can undergo
substantial rehabilitation and be put into a new 30-year
affordability restriction. The statute needs to be amended so
that investors that may have participated in the original
syndication of the credits will not be precluded from providing
new tax credit investments at the time of resyndication.
3. Adopt policies to prevent the loss of existing affordable
housing properties and resources. There are two issues with the Housing
Credit program that we believe are critical for Congress to address,
although they were not included in the AHCIA in the last Congress.
These issues have been before Congress for several years, but enactment
has been elusive in spite of the efforts of Chairman Wyden, most
recently in the Decent, Affordable, Safe Housing for all Act, the DASH
Act. The first issue is the Right of First Refusal in section 42(i)(7)
of the code. The second issue is the Qualified Contract provision in
section 42(h)(6)(E)(i)(II).
Right of First Refusal. Current law permits Housing Credit limited
partnership agreements to include a right of first refusal (ROFR) in
the name of a qualified nonprofit organization, typically the sponsor
of the property development. Because of ambiguities in the law, further
reflected in imprecise language in partnership agreements, numerous
legal disputes have arisen across the country, several resulting in
drawn out litigation. This situation has been driven not by initial
Housing Credit investors, but rather by outside capital that has come
into the industry by buying up control of syndication funds and
individual investor partnerships. The business purpose of these
entities is to generate revenues by insisting on back-end cash payments
from nonprofits as a condition to leaving the partnership. These legal
disputes over the meaning of right of first refusal language have
resulted in the unintended transfer of hundreds of millions of dollars
from affordable housing properties, nonprofit affordable housing
sponsors, and residents (subject in some cases to higher rents).
We strongly urge the committee to pass legislation to address this
issue, by permitting nonprofits to have a simple purchase option
covering all of the assets of the partnership.
Qualified Contracts. Under the Qualified Contract provision in
section 42, owners are permitted to approach the HFA after year 14 and
give the agency 12 months to find a buyer for the property at a price
established in the statute. Since the statutory price is so high and
bears no relationship to the fair market value of the property with the
rent restrictions, HFAs are rarely able to secure a buyer--which then
permits the owners to convert their Housing Credit properties to market
rents after as little as 15 years of affordability. This loophole
burdens low-income renters and frustrates congressional intent. While
most HFAs require developers to waive their right to utilize a
Qualified Contract at the time credits are awarded, too many do not
require such waivers, especially in the 4-percent credit program.
According to the National Council of State Housing Finance
Agencies, more than 100,000 affordable housing units have been lost as
a result of this. Closing the Qualified Contract loophole would not
only protect lower-income residents, but it would also save the Federal
Government money. According to the Joint Committee on Taxation, the
provision in the Build Back Better bill would raise $468 million over
10 years. We urge Congress to repeal the Qualified Contract provision
as soon as possible.
4. Exempt from a State's Private Activity Bond cap any bond
authority used for the recapitalization and resyndication of Housing
Credit developments. Each year, States receive a finite amount of tax-
exempt Private Activity Bond (PAB) authority to be used for certain
eligible activities, including multifamily housing, lower rate
mortgages for low- and moderate-income home buyers, industrial
development, student loans, and other uses. In most States due to the
significant need for affordable rental housing, a large majority of PAB
authority is dedicated to multifamily housing bonds.
Recently, more and more States have become bond cap-constrained,
meaning that they have far more need for bond authority than what they
have available to them under the PAB cap. Nearly half of States report
being bond cap constrained, and others report that if trends continue
as they have in recent years, they too soon will be bond cap
constrained.
With bond resources inadequate to meet the need, States are forced
to make difficult decisions. One such decision is how much bond
authority to commit to resyndication of older Housing Credit
properties, as the more authority that is used for resyndication, the
less that is available for new construction, for preservation of other
aging affordable housing projects originally funded with legacy HUD
programs, and for conversion of distressed public housing projects into
privately managed housing under HUD's Rental Assistance Demonstration
(RAD) program.
Given the need to rehabilitate older Housing Credit properties, and
the public benefits associated with resetting the long-term
affordability requirements of properties aging out of affordability
restrictions, an exemption from the private activity bond cap should be
enacted for multifamily bonds used to rehab existing Housing Credit
properties.
Notably, there is precedent for excluding certain activities from
the PAB cap. Under current law, private activity bonds not subject to
cap include bonds issued by 501(c)(3) institutions; as well as bonds
used to finance airports, docks and wharves, government-owned solid
waste disposal facilities, highway or surface freight transfers
facilities, among other priority investments. Rehabilitation of
affordable housing should also be a priority investment that is exempt
from the Private Activity Bond cap.
iv. neighborhood homes investment act
LISC, along with over two dozen other national organizations and
trade associations focused on housing and community revitalization, is
calling for the enactment of the Neighborhood Homes Investment Act
(``Neighborhood Homes''), to be introduced in the 118th Congress by
Senators Ben Cardin and Todd Young. This legislation has wide
bipartisan support. Similar legislation introduced in the Senate last
year was cosponsored by 24 Senators, including seven members of the
Finance Committee. The companion bill in the House was cosponsored by
109 Representatives in the 117th Congress.
Neighborhood Homes addresses the need for revitalization and
repopulation in rural and urban communities suffering from home
foreclosures and vacant properties. Vacant properties inflict heavy
costs on American communities: blight, crime, lowered home values, and
decreased property tax revenue. There are mounting costs and
difficulties associated with vacant and abandoned properties,
especially when concentrated within neighborhoods. These neighborhoods
are trapped in a cycle where low property values prevent the
construction of new homes and the renovation of existing homes, and
where the absence of these investments keeps property values
unsustainably low.
Similarly, rural communities that don't have a decent stock of
single family homes have difficulty attracting employers to their
region, creating additional headwinds for economic development and
leading to further decline in population and home values.
Neighborhood Homes is designed to attract private capital to
support investments in single family homes in these communities--where
the costs of developing and rehabilitating homes exceed the value of
the home. Neighborhood Homes would provide the developer or investor
with a tax credit to cover this ``value gap.'' The tax credit would
work as follows:
State allocating agencies (most likely the same State HFAs
that administer the Housing Credit) would be provided with a
per capital formula allocation Neighborhood Homes Tax Credits,
with smaller States receiving a minimum allocation.
The credits would be awarded by the State agencies to
eligible entities through an annual competition. The eligible
entity would identify a strategy for developing or
rehabilitating properties in eligible communities, either for
new homes, existing owner-occupied homes, or for homes that are
vacant and will be brought to market.
States would allocate only the tax credits reasonably needed
for financial feasibility, determined both at the time of
application and again when homes are sold or owner-occupied
rehabilitations are completed.
The maximum value of the credit would be 35 percent of
construction, substantial rehabilitation, and building
acquisition and demolition costs in the case of for sale homes;
and 50 percent of eligible project costs in the case of owner-
occupied rehabs.
The maximum home sales price could not exceed four times the
area's median family income.
The eligible entities would have 5 years to complete the
homes, and investors cannot claim the credits on a home until
the construction is completed and the home is occupied by an
eligible homeowner.
Neighborhoods characterized by some combination of high poverty,
low median family income and low home values would be eligible for
investments. Neighborhood Homes Credit agencies would also have
additional flexibility to serve rural communities, as well as
communities impacted by natural disasters, that may not otherwise have
qualified based on the initial Neighborhood Homes requirements.
As noted above, Neighborhood Homes would fill the gap between the
cost of construction and the value of the property, with the private
market bearing construction and marketing risks--much as is done with
the Housing Credit. However, the Housing Credit, which was designed to
create affordable rental housing for low- and very-low-income families,
cannot readily be utilized to support home-ownership housing. And while
tax-exempt Private Activity Bonds and mortgage credit certificates
(MCCs) do support home buyers by reducing mortgage interest costs,
these incentives do not address supply-side development cost gaps.
Neighborhood Homes would therefore fill a missing void in our
affordable housing tax financing ecosystem, providing an effective and
necessary tool for revitalizing communities and providing affordable
home-ownership opportunities for first time and minority home buyers.
Over the next 10 years, it is projected that Neighborhood Homes will
result in:
500,000 homes built or substantially rehabilitated.
$125 billion of total development activity.
861,000 jobs in construction and construction-related
industries.
$56 billion in wages and salaries.
$26 billion in Federal tax revenue.
$12 billion in State and local government revenue.
We therefore strongly urge Congress to pass the Neighborhood Homes
Investment Act and thank Senators Cardin and Young for their leadership
on this very important legislation.
v. other related tax items the committee should consider
In addition to the recommendations above pertaining to the Housing
Credit and to Neighborhood Homes, LISC recommends that the committee
consider other actions that can be taken to ensure portions of the tax
code are better aligned to support affordable housing, including:
1. Making the New Markets Tax Credit (NMTC) program permanent.
NMTCs are predominantly used to support commercial revitalization,
businesses and community facilities in lower income communities, and
are one of the most effective of all Federal economic and redevelopment
programs--spurring over $120 billion of investments in distressed
communities and creating over 1 million jobs to date. LISC has deployed
over $1 billion in NMTC financing since the program's inception, and we
have seen firsthand how our investments in businesses, commercial real
estate, and community facilities have complemented our housing work and
improved the lives of residents in our communities.
Though NMTCs cannot be used to support residential rental
properties, some NMTC investments have nonetheless supported housing
activities--principally through investments in mixed-use commercial
redevelopment projects that include on site housing, and to a lesser
extent, home-ownership activities. According to the Treasury
Department, NMTCs have helped to finance over 18,000 affordable homes.
The NMTC program is set to expire in 2025. Congress needs to enact
the New Markets Tax Credit Extension Act of 2023 (S. 234), which was
introduced by Senators Cardin and Daines last month and already has 10
other co-sponsors, including six others from the Finance Committee.
This legislation would make the NMTC program permanent at $5 billion
per year with annual inflation adjustments, and also allow it to be
used to offset the Alternative Minimum Tax.
2. Including restrictions to Opportunity Zone funding so that it
doesn't support luxury housing or displacement of community residents.
LISC supports the bipartisan Opportunity Zones Transparency,
Extension, and Improvement Act (S. 4065) introduced by Senators Corey
Booker and Tim Scott in the 117th Congress. We particularly appreciated
the sunsetting of certain higher income census tracts, the requirement
that Qualified Opportunity Funds report richer data to the Treasury
Department, and the establishment of the State and Community Dynamism
Fund. We welcome all of these improvements.
However, we believe any future version of this legislation should
also include guard rails to prevent Qualified Opportunity Funds from
supporting luxury housing. High-end housing doesn't need Federal
subsidies and may in some instances lead to the displacement of long-
time community residents who deserve to be able to stay in the
community to enjoy the benefits of redevelopment. We would therefore
encourage Congress to include affordability restrictions on multifamily
housing properties financed by Opportunity Funds (for example, by
requiring that at least 50 percent of the units must be affordable to
low-income families, and that the remaining units must be affordable to
families making less than 120 percent of AMI); and to incentivize
localities to develop anti-displacement strategies in their Opportunity
Zones, including through the submission of requests for funding under
the State and Community Dynamism Fund.
conclusion
There can be little doubt we are currently in an affordable housing
crisis. Rents have been rapidly climbing, supply has been tightening,
costs of construction have been increasing, and we have underproduced
roughly 3.8 million homes. On the
single-family side, home prices have cooled of late but still remain
historically high, and elevated interest rates make it even more
difficult for first-time home buyers to purchase a home. And sadly,
home-ownership disparities between racial and ethnic groups stubbornly
persist, with little gains made over the past 3 decades.
The good news is that solutions are out there, and they have wide
bipartisan support in Congress. Restoring the lapsed 12.5-percent
increase to the formula allocation for the 9-percent Housing Credits
and passing the Affordable Housing Credit Improvement Act will create 2
million additional affordable rental homes over the next decade than
would otherwise be built, while also supporting nearly 3 million jobs
and bringing in $120 billion in additional tax revenue. Enacting the
Neighborhood Homes Investment Act will create 500,000 new starter
homes, providing home-
ownership opportunities for first-time and minority home buyers while
simultaneously repopulating and revitalizing under-resourced rural and
urban communities.
I thank you again for this opportunity to testify. I hope that the
conversations we have today will bring us closer to enacting these
critical housing bills and put us on a path to ensuring that all
families in this country will be able to enjoy the health, well-being
and financial security that an affordable home provides.
______
Questions Submitted for the Record to Denise Scott
Questions Submitted by Hon. Sheldon Whitehouse
Question. Rhode Island college graduates of the class of 2020
graduated with an average of $36,791 in outstanding student loan debt.
At the same time, the National Association of Realtors reports that
housing affordability reached the worst level on record in the fourth
quarter of 2022. Last Congress, I introduced several bills to ease the
burden of student loan debt, including canceling student loan debt for
front-line health-care workers and teachers.
For those with tens of thousands--and in some cases hundreds of
thousands--of dollars of student loan debt, how does their debt affect
their ability to buy a home or afford rent?
Answer. The rise in student loan debt impacts access to affordable
rental housing and home-ownership opportunities. Research has shown \1\
that a $1,000 increase in student loan debt lowers the home-ownership
rate by about 1.8 percentage points for public 4-year college-goers
during their mid-20s, equivalent to an average delay of about 4 months
in attaining home ownership. The same research also indicates that
higher student loan balances have an impact on credit scores, due to
increased probability of student loan delinquencies, which makes
obtaining a mortgage more difficult. According to the Urban
Institute,\2\ as student loan debt has increased, the home-ownership
rate has decreased for people ages 24 to 32, falling by 9 percentage
points--nearly double the drop as that for the overall population. This
has an impact on our Nation's racial home-ownership gap since Black
students take on greater debt, hindering their access to home-ownership
opportunities.
---------------------------------------------------------------------------
\1\ https://www.journals.uchicago.edu/doi/full/10.1086/704609.
\2\ https://housingmatters.urban.org/articles/how-student-loan-
debt-affects-racial-homeownership-gap.
Higher amounts of student debt often cause these borrowers to rent
for longer periods of time due to credit score challenges and
insufficient resources to enter the housing market, including a lack of
down payment and closing costs. As rental housing demand has risen, and
outpaced supply, prices have increased. Census bureau data \3\ has
shown that renters are more likely than homeowners to be cost burdened.
---------------------------------------------------------------------------
\3\ https://www.census.gov/library/stories/2022/12/housing-costs-
burden.html.
Question. Over the past 2 decades, the growing cost of child care
has outpaced inflation. Child-care costs for Rhode Island families can
now reach more than $10,000 per year annually for each child, and many
families now are paying nearly 30 percent of their incomes on child
care. At the same time, the National Association of Realtors reports
that housing affordability reached the worst level on record in the
fourth quarter of 2022. Indeed, according to HousingWorksRI, there are
currently no communities in Rhode Island where families earning the
State's median income or less can afford to buy a home, and there's
only one community--Burrillville--where Rhode Islanders can affordably
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rent.
How does the high and growing cost of child care affect families'
ability to buy a home or afford rent?
Answer. The high cost of child care--which adjusted for inflation,
has increased by 49 percent \4\ over the last 25 years--leaves families
with less money to buy or rent a home and makes it very difficult to
save money for home ownership or rent larger homes for their growing
households. Research by the Department of Labor \5\ has documented that
the cost of child care consumes a significant percentage of median
family income across all care types, age groups, and county population
sizes, making it challenging for families to accrue savings and more
difficult for many working parents to reenter or remain in the
workforce. The impact of the cost of care is felt most profoundly by
women, and by low-income families whose child-care costs represent a
greater proportion of their household income. Families that pay for
care for multiple children have even greater expenses and effectively
face even greater barriers to home ownership and rental affordability.
These problems are compounded by insufficient Federal assistance for
child care and affordable housing needs.
---------------------------------------------------------------------------
\4\ https://freddiemac.gcs-web.com/news-releases/news-release-
details/freddie-mac-insight-shows-impact-child-care-costs-housing.
\5\ https://www.dol.gov/sites/dolgov/files/WB/NDCP/WB_IssueBrief-
NDCP-final.pdf.
Fortunately, there are ways that the Federal Government can begin
to address the important linkages between child care and housing in
order to improve the overall economic and social circumstances of
families struggling to find affordable care. The development of
affordable housing in high-need communities can be leveraged to
increase access to quality care for children and families, most notably
by constructing affordable housing that incentivizes center and home-
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based providers to ``co-locate'' on site.
Additionally, we need dedicated, stand-alone Federal funding to
support the acquisition, construction, and renovation of child-care
facilities to help alleviate some of the cost burden shouldered by
child-care providers seeking to serve additional families. Rhode Island
has a model that could be replicated in other places to address
facilities needs. LISC Rhode Island operates the Rhode Island Child
Care and Early Learning Facilities Fund (RICCELFF)\6\--a public-private
partnership designed to help child-care and early learning programs
develop safe, high-quality learning environments--indoors and outdoors.
As part of the Fund, LISC offers various opportunities for funding for
planning, improvement and expansion of child care spaces.
---------------------------------------------------------------------------
\6\ https://www.lisc.org/rhode-island/our-work/child-care-and-
early-learning-facilities/.
Question. Rhode Island is the second-densest State in our union,
---------------------------------------------------------------------------
second only to New Jersey.
For States like mine, where people live in much closer proximity to
each other than elsewhere in the Nation but which still have a housing
shortfall, what are the best practices and reforms for encouraging
affordable housing development while still preserving livable
communities and local character?
Answer. Communities of all types desperately need additional
affordable housing. There are numerous strategies for increasing
affordable housing supply, including in older, higher-density
communities. For instance, many localities provide modest density
bonuses, which allow developers to build more units than normally
allowed in exchange for committing a certain percentage as affordable.
Other strategies include taking actions at the local level which reduce
construction costs for affordable housing production, including
expedited permitting, less parking requirements for developments near
transit, tax abatements, and reduced fees. In addition, many
municipalities are making it easier for homeowners to build accessory
dwelling units (ADUs) or to subdivide lots to create more housing
opportunities. These strategies work best through robust community
engagement efforts.
Something to watch at the Federal level is a new pilot program at
HUD, called the ``Yes In My Backyard''\7\ initiative, that will provide
$85 million in competitive grants to municipalities to encourage them
to pursue innovative land use and zoning policies to promote the
development of more affordable housing.
---------------------------------------------------------------------------
\7\ https://www.planetizen.com/news/2022/12/120612-congressional-
spending-bill-includes-first-ever-federal-yimby-grant-program.
Question. What programs are most effective for creative reuse of
---------------------------------------------------------------------------
existing structures?
Answer. Adaptive reuse of vacant and abandoned buildings is
essential for revitalizing and repopulating communities, attracting
commercial businesses, and increasing the municipal tax base for
further investments in schools and public services. However, these
types of projects tend to be more expensive than new construction
projects, given that the buildings in many instances are older, need to
be repurposed, and often have environmental remediation issues than
need to be addressed. The Federal housing and community development tax
credits have been essential tools in financing adaptive reuse housing
properties. The Low-Income Housing Tax Credit, often used in
conjunction with Historic Tax Credits, has proven to be a very
effective source of financing for converting former industrial
facilities, schools, hotels, and office space into affordable housing
for low-income families. Similarly, New Markets Tax Credits, which can
also be utilized in conjunction with Historic Tax Credits, have
frequently been used to convert abandoned buildings into mixed use
properties with housing built atop retail stores or community
facilities.
The National Equity Fund (NEF), LISC's tax credit syndication arm,
is in the process of closing on a mixed use project that will support
70 units of housing, including 55 units of LIHTC housing, across three
adjacent properties in the Island Place Historic District along the
Blackstone River in Woonsocket. All three buildings are former
industrial buildings which were originally constructed in the late
1800s and are now being converted to properties with affordable housing
placed atop commercial facilities. The properties are very proximate to
public transportation and other neighborhood amenities, and residents
will be provided extensive supportive services including credit
counseling, after-school programming, health referral services, and
access to free or inexpensive high-speed Internet.
Though not technically adaptive reuse, older apartment buildings
can fall into such disrepair that the only way to restore the
properties to productive use is through extensive and substantial
rehabilitation. In these instances, Low-Income Housing Tax Credits are
often paired with resources from the U.S. Department of Housing and
Urban Development's HOME Investment Partnership Program, Federal Home
Loan Bank Affordable Housing Program, city and State tax credit and
loan programs, and private debt to renovate existing buildings.
Developers will often build additional affordable multifamily housing
units at these properties while they are undergoing renovation and
rehabilitation, if financially feasible and allowed by local zoning.
In Providence, LISC/NEF is helping to finance 36 units of LIHTC
housing as part of 79 units of housing developed as part of the Joseph
Caffey apartments and Jordan Caffey townhomes. This project is on the
former site of Barbara Jordan Homes, a property that consisted of 26
vacant and dilapidated homes that had gone into foreclosure in 2015 and
had sat vacant since then. The 79 units will be spread among 11
different buildings. Residents will be able to enjoy a community center
and will have access to a computer lab.
Question. The Low-Income Housing Tax Credit is one of the primary
Federal programs for creating and preserving affordable housing units.
In Rhode Island, nearly 70 percent of new affordable units are financed
using LIHTC. Last Congress, I cosponsored Senator Cantwell's Affordable
Housing Credit Improvement Act, which would make a number of changes to
LIHTC to further incentivize the building of affordable housing.
How would the bill bolster our affordable housing supply?
Answer. The AHCIA includes close to two dozen provisions that would
enhance and improve the Low-Income Housing Tax Credit. According to
estimates provided by Novogradac and Associates,\8\ there are two
provisions in particular that would create close to 2 million
additional units of affordable housing over the next 10 years, helping
to house close to 4.5 million people:
---------------------------------------------------------------------------
\8\ https://www.novoco.com/notes-from-novogradac/novogradac-
estimates-193-million-additional-affordable-rental-homes-could-be-
financed-if-lihtc.
1. Lowering the bond financing threshold for 4-percent Housing
Credits from 50 percent of project costs to 25-percent of project costs
(section 313). State housing finance agencies (HFAs) can issue ``4-
percent credits,'' which typically cover about 25-30 percent of total
financing costs, to help fill equity gaps in projects that are financed
by Private Activity Bonds. However, by statue, HFAs can only issue 4-
percent Housing Credits to projects in which at least 50 percent of the
costs are financed by Private Activity Bonds. In many instances,
developers will seek bond financing even though it may be more
expensive than other sources of debt solely because it will trigger the
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equity from the tax credits.
A growing number of States have become ``bond cap-constrained'' in
recent years, meaning they have more demand for affordable housing than
they are able to finance with their existing PAB volume cap authority.
Because of the high bond financing threshold, States are forced to put
more of a scarce and needed resource into each individual property than
what that property actually needs, just to unlock the full amount of 4-
percent credits. In effect, the 50-percent threshold limits States'
ability to build and preserve affordable housing.
By lowering the bond financing threshold from 50 percent to 25
percent, States that are bond-constrained will now be able to use these
scarce resources to finance additional housing properties and, as
critically, supplement this financing with additional allocations of 4-
percent credits to those properties. It is estimated that this would
result in an additional 1.48 million homes being produced over the next
10 years.
2. Increasing the formula for the 9-percent credit (section 101).
States are allocated 9-percent credits based upon a per capita formula,
with a minimum formula amount provided to States with smaller
populations. This formula allocation was increased by 12.5 percent for
each year from 2018-2021, but this increase has now expired. The AHCIA
would permanently extend this increase, and also provide an additional
increase to the formula of 50 percent, phased in over 2 years. It is
estimated that this provision would result in an additional 450,000
homes being developed over the next 10 years.
Question. Are there improvements to the program that weren't
included in the bill that the Senate should consider?
Answer. Yes. As noted in our long form testimony, we believe that
Congress can do more to help prevent the loss of existing affordable
housing properties and resources. There are two issues in particular
with the Housing Credit program that we believe are critical for
Congress to address that were not included in the AHCIA in the last
Congress. These issues have been before Congress for several years, but
enactment has been elusive in spite of the efforts of Chairman Wyden,
most recently in the Decent, Affordable, Safe Housing for all Act, the
DASH Act. The first issue is the Right of First Refusal in section
42(i)(7) of the code. The second issue is the Qualified Contract
provision in section 42(h)(6)(E)(i)(II).
Right of First Refusal. Current law permits Housing Credit limited
partnership agreements to include a right of first refusal (ROFR) in
the name of a qualified nonprofit organization, typically the sponsor
of the property development. Because of ambiguities in the law, further
reflected in imprecise language in partnership agreements, numerous
legal disputes have arisen across the country, several resulting in
drawn out litigation. This situation has been driven not by initial
Housing Credit investors, but rather by outside capital that has come
into the industry by buying up control of syndication funds and
individual investor partnerships. The business purpose of these
entities is to generate revenues by insisting on back-end cash payments
from nonprofits as a condition to leaving the partnership. These legal
disputes over the meaning of right of first refusal language have
resulted in the unintended transfer of hundreds of millions of dollars
from affordable housing properties, nonprofit affordable housing
sponsors, and residents (subject in some cases to higher rents).
We strongly urge the committees to pass legislation to address this
issue, by permitting nonprofits to have a simple purchase option
covering all of the assets of the partnership.
Qualified Contracts: Under the Qualified Contract provision in
section 42, owners are permitted to approach the HFA after year 14 and
give the agency 12 months to find a buyer for the property at a price
established in the statute. Since the statutory price is so high and
bears no relationship to the fair market value of the property with the
rent restrictions, HFAs are rarely able to secure a buyer--which then
permits the owners to convert their Housing Credit properties to market
rents after as little as 15 years of affordability. This loophole
burdens low-income renters and frustrates congressional intent. While
most HFAs require developers to waive their right to utilize a
Qualified Contract at the time credits are awarded, too many do not
require such waivers, especially in the 4-percent credit program.
According to the National Council of State Housing Finance
Agencies, more than 100,000 affordable housing units have been lost as
a result of this. Closing the Qualified Contract loophole would not
only protect lower-income residents, but it would also save the Federal
Government money. According to the Joint Committee on Taxation, the
provision in the Build Back Better bill would raise $468 million over
10 years. We urge Congress to repeal the Qualified Contract provision
as soon as possible.
Question. President Biden has proposed a $15,000 Federal,
refundable first-time homebuyers tax credit to assist low- and middle-
income families in purchasing their first homes. This tax credit would
be advanceable, meaning that homebuyers would receive the tax credit
when they make the purchase instead of waiting to receive the
assistance when they file taxes the following year.
Would you support such a program, and how would such a program
ameliorate the difficulties families today are facing when buying a
home?
Answer. LISC supports more resources, including incentives in the
tax code, that can support home-ownership opportunities for first-time
and minority homebuyers. One of the biggest barriers to affordable and
sustainable home ownership for low-income and BIPOC families is an
inability to save enough for a down payment and closing costs. Small
investments in down payment assistance support affordable home-
ownership opportunities for families that can afford a home mortgage
but lack the wealth to get their foot in the door. The Federal
Government's primary tool for supporting first-time homebuyers and
those with lower incomes is through the Federal Housing Administration
(FHA). The FHA insures private home mortgages and, importantly,
requires a down payment of only 3.5 percent and allows for lower credit
scores. Even with a low down payment requirement, many families
struggle to pay these costs. And while HUD's Community Development
Block Grant and HOME Investment Partnership programs can be used for
down-payment assistance, these block grant programs are insufficiently
funded and also utilized for many other pressing needs locally.
LISC supports targeted down payment assistance programs so that
more resources can be made available to support affordable home
ownership for all creditworthy families. An advanceable credit as
proposed by the Biden administration would be strengthened by targeted
outreach and technical assistance to ensure that families are aware of
this opportunity.
______
Questions Submitted by Hon. Todd Young
Question. As you know, the Low-Income Housing Tax Credit (LIHTC)
program is one of the most successful Federal housing programs. Since
its creation, the LIHTC program has served over 8 million low-income
households, supported 6 million jobs, and generated $239 billion in
local, State, and Federal tax revenue. One of the facets of the LIHTC
program that makes it so successful is the public-private partnership
aspect.
Can you please discuss the importance of this partnership in making
the LIHTC program as successful as it is?
Answer. We believe that first and foremost, the public-private
partnership allows for more efficient and robust program oversight.
Investors, with their own capital at risk, impose underwriting and
asset management oversight. The investor due diligence leads to a more
robust and efficient compliance monitoring system, and results in
projects that are financially strong. This is likely the primary reason
that Housing Credit properties far outperform other real estate
classes,\9\ with occupancy rates topping 96 percent nationwide and a
cumulative foreclosure rate of just 0.66 percent over the program's
history.
---------------------------------------------------------------------------
\9\ https://financialequity.net/publications/low-income-housing-
tax-credit-year-30-recent-investment-performance-2013-2014/.
In addition, investors and developers--not taxpayers--assume the
financial risks of these projects. If projects are not in compliance
with statutory requirements, tax credits are forfeited back to the
Treasury. In the case of the Housing Credit, investors cannot even
begin claiming credits until the apartments are occupied by low-income
families at affordable rents. This is in stark contrast to most Federal
grant-making programs, in which grants are advanced and an agency must
seek a return of funds (often after they are already spent) in the case
---------------------------------------------------------------------------
of program noncompliance.
Question. My colleague Senator Cantwell and I are planning to
reintroduce our Affordable Housing Credit Improvement Act later this
spring. Can you please describe the impact the AHCIA would have on the
communities you serve?
Answer. The AHCIA would have an incredible impact on the families,
as well as the communities, that LISC serves.
As noted in Harvard University's State of the Nation's Housing
Report,\10\ data indicates that our Nation is in the midst of an
affordable housing crisis. Rents increased a record 11.6 percent at the
end of 2021 and remained at an elevated pace during the first quarter
of 2022. This was the largest year-over-year increase in 2 decades and
more than three times the 3.2 percent average annual rise in the 5
years preceding the pandemic. At the same time, rising interest rates,
post-COVID supply chain disruptions, and labor force shortages are
significantly increasing the costs of housing production, and creating
gaps in financing that threaten the ability to move forward with
properties, including some properties that have already been awarded
housing credits.
---------------------------------------------------------------------------
\10\ https://www.jchs.harvard.edu/state-nations-housing-2022.
The AHCIA would address issues related to increased rent and lack
---------------------------------------------------------------------------
of production in three fundamental ways:
1. It would increase the formula for the 9-percent credit by 50
percent, phased in over 2 years. Novogradac and Associates has
estimated \11\ that this will lead to an additional 450,000 homes being
developed over the next 10 years. As importantly, enacting this
provision would immediately provide Housing Finance Agencies (HFAs)
with additional credits that, at their discretion, could be allocated
to already approved projects in their pipeline that are experiencing
unforeseen financing gaps or rising debt costs that could threaten
project feasibility.
---------------------------------------------------------------------------
\11\ https://www.novoco.com/notes-from-novogradac/novogradac-
estimates-193-million-additional-affordable-rental-homes-could-be-
financed-if-lihtc.
2. It would lower the bond financing threshold for use of 4-percent
Housing Credits from 50 percent of project costs to 25 percent of
project costs. By lowering the bond financing threshold, States that
are bond constrained will now be able to use these scarce resources to
finance additional housing properties and, as critically, supplement
this financing with additional allocations of 4-percent credits to
those properties. Novogradac estimates \12\ that this would result in
an additional 1.48 million homes being produced over the next 10 years.
---------------------------------------------------------------------------
\12\ https://www.novoco.com/notes-from-novogradac/novogradac-
estimates-193-million-additional-affordable-rental-homes-could-be-
financed-if-lihtc.
3. It would provide ``basis boosts'' to certain properties,
including projects targeting extremely low-income families, rural
projects, projects serving Native American communities, and also for
certain 4-percent projects. This will enable HFAs to finance those
properties that may not otherwise be financially feasible, given the
---------------------------------------------------------------------------
rising costs of production.
Beyond providing opportunities for stable and affordable housing
for low- and
extremely-low-income families, the Housing Credit has also proven to be
a very effective tool for community revitalization. This is due in
large part to a statutory preference for projects that contribute to a
concerted community revitalization plan. As a result, many projects are
now being evaluated by HFAs to determine whether they will contribute
towards holistic community development, including, for example, through
the adaptive reuse of vacant properties, co-location with community
facilities, and location near transit hubs.
For example, the National Equity Fund, LISC's tax credit
syndication arm, helped finance Englewood Lofts, the adaptive reuse of
an historic church originally built in 1895 in Indianapolis's Old
Northside neighborhood. The building sat vacant for the last several
years until the sponsor, Englewood Development Company, acquired it in
2013. The property is part of the city's Old Northside Historic Area
Preservation Plan, an effort to restore the community, which spans
approximately 55 city blocks. The original elements of the building's
facade were preserved while the interior was completely gutted and
transformed into 15 one-bedroom residences configured in a combination
of flats and lofts in addition to nine two-bedroom flats. Rents are
affordable to families' earning 30-60 percent of Area Median Income,
with 10 percent set aside for people with special needs. Huser
SpecialCare, a family-owned provider of services for children and
adults with developmental disabilities, provides referrals and a range
of services tailored to the disabled residents including shopping and
housekeeping assistance, in-home health care, fitness instruction and
nutrition counseling.
Question. I appreciate LISC's support of the Neighborhood Homes
Investment Act (NHIA), which Senator Cardin and I recently introduced.
Can you please describe the impact the NHIA would have on the
communities you serve? Why is it important that we not only support
affordable rental housing, but also affordable home ownership?
Answer. Neighborhood Homes addresses the need for revitalization
and repopulation in rural and urban communities suffering from home
foreclosures and vacant properties. Vacant properties inflict heavy
costs on American communities: blight, crime, lowered home values, and
decreased property tax revenue. There are mounting costs and
difficulties associated with vacant and abandoned properties,
especially when concentrated within neighborhoods. These neighborhoods
are trapped in a cycle where low property values prevent the
construction of new homes and the renovation of existing homes, and
where the absence of these investments keeps property values
unsustainably low.
Similarly, rural communities that don't have a decent stock of
single-family homes have difficulty attracting employers to their
region, creating additional headwinds for economic development and
leading to further decline in population and home values.
Neighborhood Homes is designed to attract private capital to
support investments in single family homes in these communities--where
the costs of developing and rehabilitating homes exceed the value of
the home. Neighborhood Homes would provide the developer or investor
with a tax credit to cover this ``value gap.'' We believe an incentive
like Neighborhood Homes is critically needed now, to spur construction
of starter homes in lower-income communities.
LISC believes that it is critical to support home-ownership
housing, as this is the primary path to wealth building in this
country. It's noteworthy that close to two-thirds of NHIA eligible
communities are majority-minority communities, creating an opportunity
to significantly cut into the home-ownership gap. According to the
Treasury Department,\13\ in the second quarter of 2022, the home-
ownership rate for White households was 75 percent compared to 45
percent for Black households, 48 percent for Hispanic households, and
57 percent for non-Hispanic households of any other race. These gaps in
home-ownership rates have changed little over the last three decades.
In fact, the same Treasury report noted that the Black-White gap in
home-ownership rates was the same in 2020 as it was in 1970, just 2
years after the passage of the Fair Housing Act of 1968, which sought
to end racial discrimination in the housing market. These disparities
limit the ability of families of color to achieve their home-ownership
goals and limits asset building opportunities, contributing to our
Nation's racial wealth gap.
---------------------------------------------------------------------------
\13\ https://home.treasury.gov/news/featured-stories/racial-
differences-in-economic-security-
housing#::text=housing%20equity%20wealth.-
,Homeownership,households%20of%20any%20
other%20race.
______
Prepared Statement of Steve Walker, Executive Director,
Washington State Housing Finance Commission
Mr. Chairman, Ranking Member Crapo, and members of the committee,
thank you for this opportunity to testify on the vital role tax
policy--specifically the Low-Income Housing Tax Credit (Housing Credit)
and tax-exempt private-activity Housing Bonds--play in combating the
housing crisis that low-income working households face. These programs
are by far the most important tools we have to increase the supply of
affordable housing--both through new production and preservation--and
help low- and moderate-income families become home buyers.
I am Steve Walker, executive director of the Washington State
Housing Finance Commission (WSHFC), which is the State of Washington's
Housing Finance Agency (HFA). HFAs are State-chartered, mission-driven
agencies that address the full spectrum of affordable housing need,
from homelessness to home ownership. For more than 50 years, HFAs have
played a central role in the Nation's affordable housing system,
delivering more than $700 billion in financing to make possible the
purchase, development, and rehabilitation of more than 8.1 million
affordable homes.\1\
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\1\ State HFA Factbook: 2021 NCSHA Annual Survey Results, The
National Council of State Housing Agencies, 2022.
On behalf of the HFAs' national trade association, the National
Council of State Housing Agencies, I want to begin by thanking you, Mr.
Chairman, for being a steadfast champion of the Housing Credit and
Housing Bonds for many years. We particularly appreciate your vision
for solving the affordable housing crisis, as outlined in the Decent,
Safe, Affordable Housing for All (DASH) Act. I also want to thank you,
Senator Crapo, for always being a supporter of State HFAs, and in
particular for your support of tax-exempt Housing Bonds. Lastly, I want
to acknowledge Senators Maria Cantwell (D-WA) and Todd Young (R-IN) for
their leadership as the sponsors of the Affordable Housing Credit
Improvement Act, passage of which is the most important thing Congress
could do to address the imbalance between supply and demand for
affordable rental housing.
insufficient supply is our nation's most significant
affordable housing challenge
While the housing crisis is multifaceted, I am pleased this hearing
focuses squarely on the biggest driver of that crisis: the inadequate
supply of affordable rental and for-sale homes. This is certainly the
case in Washington State where every part of our State--especially, but
not only, the Seattle area--is experiencing unprecedented housing
instability driven by a growing gap between incomes and housing costs.
According to the National Low Income Housing Coalition, our State would
need to build almost 160,000 apartments just to fulfill today's
immediate need for housing for the lowest-income families--to say
nothing of those with higher incomes who are struggling to find
appropriate housing.
America has been in the midst of a housing crisis for a long time,
but never has the need been more acute than it is today. In particular,
and especially since the Great Recession when many developers left the
industry, our Nation has drastically under-produced both rental and
for-sale housing. We are currently seeing the repercussions of the
extreme mismatch between supply and demand.
Meanwhile, in the 2-year period from early 2020 to early 2022, the
number of renter households grew by 1.1 million to 44.2 million.\2\
With rising interest rates and escalating home prices, would-be
homeowners are stuck renting at the same time millennials, many of whom
put off household formation, are now entering the rental market.
---------------------------------------------------------------------------
\2\ The State of the Nation's Housing 2022, Joint Center for
Housing Studies of Harvard University, June 2022.
The sheer number of new renters, without corresponding housing
production, has driven historically low vacancy rates and skyrocketing
rents, with rents in most major markets spiking by double digits
between 2021 and 2022.\3\
---------------------------------------------------------------------------
\3\ Ibid.
Demand-side programs, such as Housing Choice Vouchers, and supply-
side programs, like the Housing Credit, play different and
complementary roles in meeting affordable housing needs. Rental
assistance works most effectively in markets with an adequate supply of
quality housing and landlords willing to rent to voucher holders. Those
well-supplied markets are certainly not to be found in Washington
---------------------------------------------------------------------------
State, or in many areas of the country.
In fact, lack of supply has become a significant problem everywhere
in urban, suburban, and rural areas. In Seattle, housing construction
has lagged so far behind the growing population that rents have
skyrocketed out of reach of all but the
highest-paid workers. Families, especially families of color, have been
pushed farther and farther out of the metro area in search of
affordable rents. Suburban areas in turn are rapidly becoming less
affordable, and rural areas also feel the pinch. Every part of
Washington is experiencing similar dynamics. Unfortunately, a rental
voucher is only helpful if a unit can be found.
Instead, in these areas with tight housing supplies, programs like
the Housing Credit are essential. They not only generally expand supply
in tight markets, they also produce housing for households with special
needs, build properties in areas experiencing job growth, recapitalize
and preserve aging properties, and revitalize communities victimized by
systemic racism.
Ideally, both supply- and demand-side resources would be available
as needed in communities across the Nation: supply-side programs to
ensure we can build and preserve the housing we need, and demand-side
programs so that the most vulnerable among us will not be rent-
burdened.
the critical role of the housing credit and multifamily housing bonds
There is a fundamental market failure when it comes to affordable
housing supply. It simply costs too much to build housing to rent it at
rates low-income people can afford absent a financial incentive such as
the Housing Credit. Developers will tell you it is economically
infeasible for them to build rental housing without the equity derived
from the Credit unless they charge rents that are well out of the reach
of low-income families.
The Housing Credit and Housing Bonds are by far the state HFAs'
most essential production tools. The Credit is a highly successful
public-private partnership that draws on state HFAs' sophisticated
underwriting, asset management, and oversight capacity, as well as
private-sector experience and investment. It is the most efficient
means of increasing rental housing supply, while transferring risk to
private-sector investors rather than taxpayers. Since the Credit's
establishment in the Tax Reform Act of 1986, it has financed more than
3.7 million affordable rental homes for low-income families, seniors,
veterans, and those with special needs.\4\
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\4\ State HFA Factbook: 2021 NCSHA Annual Survey Results, National
Council of State Housing Agencies, 2022.
In recent years, more than half of Housing Credit homes have been
financed with the help of multifamily Housing Bonds, which trigger the
4-percent Housing Credit. In Washington State, multifamily Housing
Bonds play an even more outsized role as we have maximized this
critical resource, partnering closely with both nonprofit and for-
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profit developers.
Together, Housing Credits and Housing Bonds are helping low-income
working families, seniors, people with disabilities, and those who have
experienced homelessness. While the Housing Credit program generally
serves low-income households earning 60 percent of area median income
(AMI) or less, with congressional direction to serve the lowest income
households possible, in practice the program reaches families with
incomes much lower than its top-most statutory limits. In fact, 53
percent of households living in Housing Credit apartments are
extremely-low-income, meaning they earn 30 percent or less of AMI, and
another 31 percent are very-low-income, earning between 30 and 50
percent of AMI.\5\
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\5\ Tenants in LIHTC Units as of December 31, 2019, U.S. Department
of Housing and Urban Development, Office of Policy Development and
Research.
A study by Freddie Mac found that the average Housing Credit rent
payment was 38 percent lower than the market-rate rent for a comparable
apartment in an analysis of nine metropolitan areas across the Nation.
This is certainly indicative of what we see in Washington. In December,
we approved financing for several apartment buildings where the
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proposed rents were up to 60 percent lower than market rents.
Moreover, the benefits of the Housing Credit go beyond the savings
it provides to low-income households. Rigorous academic research has
quantified many of these indirect benefits.
Stanford researchers assessed the impact of the Housing
Credit and found ``an affordable housing development in a low-
income area improves welfare by $23,000 per local homeowner and
$6,500 per local renter, with aggregate welfare benefits to
society of $115 million.\6\
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\6\ Who Wants Affordable Housing in Their Backyard? An Equilibrium
Analysis of Low Income Property Development, Diamond and McQuade, July
2015.
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Cornell analysts studied the Credit and found ``low-income
housing development in the poorest neighborhoods brings with it
significant reductions in violent crime.''\7\
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\7\ Low-Income Housing Development and Crime, Journal of Urban
Economics, Freedman and Owens, 2011.
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Research from the University of Michigan quantifying the
spatial improvement effects of Housing Credit development found
``Black high-poverty neighborhoods receiving the [Housing
Credit] investment have experienced the most positive
change.''\8\
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\8\ Low-Income Housing Tax Credit Developments and Neighborhood
Change: A Case Study of Miami-Dade County, Deng, 2011.
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Analysis from a Georgetown University and Joint Committee on
Taxation researcher showed ``growing up in [Housing Credit]
housing has a large positive effect on both education and
earnings.''\9\
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\9\ Does Growing Up in Tax-Subsidized Housing Lead to Higher
Earnings and Educational Attainment?, Derby, 2021.
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A review of 16 studies of Housing Credit-financed
development found, in part, that the program generally resulted
in lower crime and higher property values in distressed
neighborhoods.\10\
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\10\ The What, Where, and When of Place-Based Housing Policy's
Neighborhood Effects, Dillman, Horn, and Verrilli, 2017.
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Research by the Federal Reserve Bank of Boston found that,
at the county level, Housing Credit projects significantly
reduce homelessness.\11\
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\11\ Do Increases in Subsidized Housing Reduce the Incidence of
Homelessness? Evidence from the Low-Income Housing Tax Credit, Jackson
and Kawano, 2015.
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the impact of rising costs on development of affordable rental housing
Unfortunately, the economic fallout of the COVID-19 pandemic has
made it even harder to produce rental housing. The costs of many
commodities necessary for construction have gone up drastically, while
supply chain disruptions create development delays that further
increase costs, and developers struggle to find skilled workers and
subcontractors.
According to the National Association of Home Builders, since
Spring 2020, prices have gone up for frame lumber by 25 percent, copper
by 187 percent, aluminum by 72 percent, steel mill products by 79
percent, plastic construction products by 55 percent, brick by 25
percent, interior paint by 47 percent, and exterior paint by 62
percent.\12\
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\12\ Data provided by the National Association of Home Builders to
the National Council of State Housing Agencies.
Some have criticized the Housing Credit by claiming that up-front
costs for the program are higher than those for market-rate housing.
However, a 2018 report by Abt Associates found that Housing Credit new
construction between 2011 and 2016 averaged $190,804 per unit.\13\ Data
from Dodge Data and Analytics on the multifamily market as a whole over
the same time period suggests that the average per-unit cost for new
construction was approximately $188,710.\14\
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\13\ Variation in Development Costs for LIHTC Projects, Abt
Associates, 2018.
\14\ Historical Starts Information: Multifamily Starts--U.S.
Summary, Annual Totals, Dodge Data and Analytics, August 2018.
Furthermore, affordable housing produced with the Housing Credit
and other governmental programs has certain up-front development costs
that market-rate housing does not have. Unlike market-rate developers,
Housing Credit developers do not make a profit by charging high rents
or by selling a property once it has appreciated in value. Instead,
they are compensated for their work by receiving a developer fee, which
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is factored into the total development cost on the front end.
Affordable housing developments that have certain HUD financing may
also be subject to prevailing wage requirements. Housing Credit
investors also require reserves capitalized on the front end so that
owners would be able to respond to maintenance and future operational
needs over the affordability period. Sadly, neighborhood opposition to
affordable housing in some locations can result in delays, leading to
increased costs. These factors contribute to why a simple comparison of
Housing Credit and market-rate development costs without context is not
a reasonable analogy.
congressional action is needed to address the rental housing crisis
Despite the vast and growing need and the escalating costs of
production, the Housing Credit has suffered a recent cut to resources.
A hard-won increase in Housing Credit resources, which Senator Cantwell
was instrumental in achieving in 2018, expired at the end of 2021. That
means State HFAs have fewer Credits to provide to developers now, at a
time when their costs have gone up substantially and demand is
unprecedented.
Costs are rising so quickly that projects in the pipeline often
must be re-underwritten before completion, sometimes several times, to
address financing gaps. This has caused tremendous problems as States
and their developer partners try to find creative ways of filling these
unexpected, gaping holes in project financing.
In some cases, developers of projects that were initially provided
Credits in prior years try to fill the gaps by asking for a subsequent
allocation of Credits from the state's current-year authority. Even if
this is possible, backfilling older deals means the State will have far
less Credit authority with which to fund new proposals.
Another reason cost increases are particularly problematic is that
bond-financed projects risk missing the 50-percent threshold
requirement for maximizing Housing Credit resources (discussed further
below). With prices going up quickly, some projects risk failing this
threshold test and thus failing to trigger the full amount of critical
Housing Credit.
The Federal Government has delayed far too long in taking the steps
our Nation needs to address the housing crisis. We are now seeing the
repercussions of that delay in rapidly escalating rents, and it is our
most vulnerable residents who pay the price.
The good news is, we know what works, and we have the right tools
in hand. By far, the most impactful thing Congress could do to meet the
need is to pass Senator Cantwell and Senator Young's Affordable Housing
Credit Improvement Act (AHCIA). More than half of this committee
cosponsored this legislation in the 117th Congress, and I urge all to
do so upon its reintroduction this year.
The AHCIA is comprehensive legislation that would expand and
strengthen the Housing Credit. While it includes many policy changes--
some of which are no-cost, common-sense, good governance improvements
based on over 3 decades of program administration--I'd like to focus on
how the bill would expand the Housing Credit, as these are the
provisions that add to supply.
The AHCIA would make a significant increase in Housing Credit
allocation authority for what we call the ``9-percent'' Housing Credit.
The 9-percent credit is the component of the program that provides the
more substantial subsidy to developments. These Credits are highly
competitive, and States often use them to finance the most challenging
and needed properties for the highest-risk populations. In Washington,
we have prioritized this deeper-subsidy program for supportive housing,
which provides both housing and essential services for the homeless and
most vulnerable. This kind of housing supports special-need populations
not only in Seattle but also in communities of every size across
Washington. This is also the program most impacted by the expiration of
the 2018 expansion to the program--which allowed us to build three more
of these critically needed properties each year for which it was in
place.
The other major provision in this legislation that would
substantially increase supply is the reduction of the bond financing
threshold, sometimes called the 50-
percent test. For Washington, this is probably the most impactful
action Congress could take to increase supply.
To maximize the 4-percent credit equity available to an individual
deal, developers must use multifamily bonds to cover at least 50
percent of the development cost. That means to unlock the 4-percent
credits, States need to make a significant investment of our Federal
Private Activity Bond (PAB) cap in each development.
In Washington State, we have long prioritized our Federal PAB cap
for housing, using every dollar of this finite resource. Yet in our
most recent competitive round for this funding, we received $1 billion
in requests for shovel-ready housing projects, while having only $250
million to allocate. This has become typical: over the past 5 years,
three to four times as much bond authority has been requested as we
could fulfill--all viable, fully ready housing projects that must wait
on the shelf as construction costs continue to rise. More and more
States are like Washington in this regard: according to research by
Novogradac and Tiber Hudson, 18 States were oversubscribed for PAB cap
as of March 2023.
Covering at least 50 percent of a project's total cost with
multifamily bonds, which contribute debt, makes no sense from a
financing perspective. Because the project cannot support that much
debt over the long run, the developer must refinance the project to pay
off the bond debt to put in place permanent financing at a much lower
debt level that the project can reasonably support. This practice is
inefficient, adds cost, and prevents States from spreading bond
resources to more quality affordable housing projects.
If instead this bond-financing threshold was lowered to 25 percent,
half the bond cap would be needed to access the same amount of Housing
Credits for individual properties--effectively allowing us to double
total Multifamily Bond production. According to an estimate by
Novogradac, a reduction to a 25-percent threshold would finance 51,800
additional affordable homes in Washington State over the 10-year period
beginning in 2023. It is this type of common-sense reform to the
Housing Credit and Multifamily Bond programs that will allow Washington
and other States to dramatically scale production to address supply
challenges.
The AHCIA also includes other provisions that would increase
production by providing basis boosts for properties in rural areas,
those benefiting tribal populations, and those housing extremely low-
income households, as well as expanding the number of areas where basis
boosts are allowed because the area qualifies as a Qualified Census
Tract or Difficult Development Area. The AHCIA also gives States
discretion to provide a 30-percent boost to 4-percent credit properties
as needed for financial feasibility.
protecting taxpayers' investment by combating
threats to long-term affordability
Without question, we need to build more affordable housing. But we
also need to preserve the affordable properties in which the taxpayer
has already invested through the Housing Credit and Multifamily Bonds.
Housing Credit properties are expected to remain restricted for at
least 30 years. However, there is a loophole in the law that allows
owners to terminate the affordability restrictions any time after the
15th year through a process called Qualified Contract.
Under the Qualified Contract provision of the tax code, an owner of
a Housing Credit property may, after Year 14, require that the State
Housing Credit Agency find a buyer for the property willing to pay the
Qualified Contract price to purchase the property. This request begins
a 1-year period during which the State seeks a qualified buyer to
purchase the property and maintain it as affordable for the duration of
the extended use period. The required purchase price for a Qualified
Contract, stipulated by section 42, was designed in 1989 to prevent
backend windfalls to owners and investors by limiting them to an
inflation-adjusted return on the original equity contribution at a time
when the Housing Credit was an unproven and temporary program.
In practice, Qualified Contracts have come to function as a nearly
automatic affordability opt-out after just 15 years. This is because
the Qualified Contract formula price in nearly all cases significantly
exceeds the market value of the property as affordable housing. As a
result, it is rare for the State to find a buyer willing to pay the
Qualified Contract price. If the State fails to find a qualified buyer
within 1 year, the property is released from the affordability
requirements of the Housing Credit program. At that point, the owner is
free to either sell the property at market value without any deed
restrictions or continue to own the property and charge market rents
after a 3-year rent protection period for existing tenants.
NCSHA data indicates that the Qualified Contract process is
resulting in the premature loss of approximately 10,000 units annually.
As of 2021, more than 100,000 apartments nationwide had already been
lost from the Housing Credit inventory before what would have otherwise
been the full affordability period for those homes.
Washington State has long had a policy of requiring owners to waive
their right to a Qualified Contract as a condition of receiving Housing
Credits, and thus my State has not lost units to Qualified Contracts.
However, many of my colleagues did not put such policies in place until
much later. Waiver requirement policies will not impact Qualified
Contract losses until 15 years after they are adopted, which means many
States are still losing Housing Credit properties to early termination
due to the Qualified Contract loophole.
Congress can prevent these losses now by closing this loophole in
the law. Senator Wyden's DASH Act has included a provision that would
fix this by eliminating the Qualified Contract provision in section 42
for properties financed after the date of enactment and modifying the
Qualified Contract price for existing properties such that it would be
fair market value of the property, taking into consideration the
property's deed restrictions. We strongly urge all members of the
committee to support this change.
Another essential step Congress can take to ensure long-term
affordability of properties is to protect nonprofit sponsors seeking to
exercise the right of first refusal in their partnership documents as
allowed under section 42. This right has been challenged in recent
years by some investors, primarily outside entities who have obtained
control of investor partnerships from the original investors after all
tax credits have been claimed. These entities--often called
``aggregators''--demand a payoff not contemplated in the partnership
agreement as a condition of exiting the partnership. This has led to
scores of legal disputes and, in many cases, costly litigation.
Nonprofits that do not have the financial wherewithal to fight the
limited partner in court are forced to acquiesce to unexpected investor
monetary demands which may undermine the long-term financial viability
of the property or force the nonprofit to raise rents, decrease
resident services, defer maintenance, or even sell the property to
cover the pay-off.
In Washington State, because of the significant rise in property
values and thus the potential for profits, we represent a prime target
for aggregators looking to quickly maximize profit from housing
properties at the expense of serving residents and communities over the
long term, not to mention protecting the assets our Federal investments
have created. That's why we call on Congress to protect the nonprofit
right of first refusal.
Again, Senator Wyden has been a leader in rectifying this problem.
His DASH Act would provide clarity to the tax code by defining
``property'' to include all partnership assets, not just the physical
structure of the development, and stipulating that, unless the
partnership agreement provides otherwise, no offer from a third party
is required to trigger the right of first refusal; limited partner
consent is not required to exercise the right of first refusal; and the
right of first refusal may be initiated by an offer from any entity,
including a related party. Further, to improve this process in the
future, the DASH Act would replace the right of first refusal with a
purchase option for projects financed after the date of enactment.
Again, I urge all committee members to support this change.
the housing crisis is impacting home ownership opportunities, too
Our Nation's critical affordable housing shortage is not limited to
rental housing. According to a recent analysis by Freddie Mac, the
United States would need to construct nearly 3.8 million for-ownership
homes to meet demand.\15\ Insufficient supply has substantially
increased sale prices of single-family homes, pricing many working
families out of the market. Moreover, recent dramatic increases in
mortgage interest rates have exacerbated affordability challenges. The
average home payment for a new home buyer was up 68 percent year over
year in the fourth quarter of 2022,\16\ putting home ownership out of
reach for many households.
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\15\ One of the Most Important Challenges Our Industry Will Face:
The Significant Shortage of Starter Homes, Sam Kater, Freddie Mac,
April 2021.
\16\ Homeownership Rate Remains High, Despite Ongoing Affordability
Pressure, Hannah Jones, Realtor.Com February 10, 2023.
Another significant challenge facing low- and moderate-income
households seeking to become homeowners is the lack of starter homes on
the market. For some time, builders have reported that building smaller
homes is cost-prohibitive, therefore most new construction is of larger
luxury homes because that is the only way for developers to make the
economy of scale work. The median sale price for a new home in 2022 was
$455,800, a nearly 15-percent increase over 2021.\17\ Just 15 percent
of new homes sold in January 2023 were priced under $300,000, compared
to around 30 percent in January 2021.\18\ Moreover, development costs
for single-family homes are also subject to the same market dynamics as
multifamily production, including significant inflation of common
construction materials, supply chain delays, and workforce disruptions.
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\17\ Monthly New Residential Sales, January 2023, U.S. Census
Bureau, February 24, 2023.
\18\ Ibid.
These market developments have made it harder to address the
longstanding home-ownership gap between White households and households
of color. At the end of 2022, 74.5 percent of White households owned
their home, compared to 61.9 percent of Asian American households, 48.5
percent of Hispanic American households, and 44.9 percent of African
American households.\19\
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\19\ Housing and Homeownership: Homeownership Rate, Federal Reserve
Bank of St. Louis.
A recent study found that, in each of the Nation's 50 largest metro
areas--including Seattle--African American residents own a
disproportionately small share of homes compared with their
population.\20\ One of the biggest factors historically preventing
minority families from purchasing a home is a lack of accumulated
wealth compared to White households, a legacy of our Nation's
discriminatory redlining policies.
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\20\ Black Americans Own Disproportionately Small Share of Homes in
50 Largest U.S. Metros, Jacob Channel, Lending Tree, April 5, 2022.
The current surge in pricing has worsened these disparities by
making it even harder for minority households to amass the necessary
savings to pay for the up-front costs of purchasing a home. While State
HFA down payment assistance programs offer an affordable and
sustainable option for such borrowers, we need a more comprehensive
solution that helps increase supply and improve other home-ownership
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tools.
A healthy and affordable home purchase market is crucial for
economic growth. Home ownership is many working families' primary means
of building generational wealth. Further, an active home purchase
market would open up more rental opportunities for those wishing to
rent as new home buyers leave their apartments.
congressional action to address the needs of home buyers
While addressing these issues will take concerted and multifaceted
action, there are two legislative proposals the Finance Committee can
take up in this Congress to expand the supply of affordable homes and
improve access to home ownership for low- and moderate-income home
buyers. These are the Affordable Housing Bond Enhancement Act and the
Neighborhood Homes Investment Act.
I want to thank committee member Senator Catherine Cortez Masto (D-
NV) for introducing the Affordable Housing Bond Enhancement Act (AHBEA)
in the last Congress. This important bill would enact simple and
impactful improvements to two essential tax incentives that help first-
time low- and moderate-income home buyers: the Mortgage Revenue Bond
(MRB) and Mortgage Credit Certificate (MCC) programs. NCSHA looks
forward to the bill's reintroduction this year.
MRBs historically have been HFAs' primary tool for financing low-
interest mortgages for low- and moderate-income home buyers. Investors
are willing to accept a lower rate of return for Housing Bonds than
they would get on other investments because the interest on the bonds
is exempt from Federal income tax. The lower rate is then passed on to
lower the interest rate paid by lower-income home buyers.
In total, MRBs have helped more than 3.4 million working households
become home buyers. The median income of MRB loan borrowers in 2021 was
64 percent of the national median income. WSHFC utilized MRBs to help
more than 400 Washington families achieve the dream of home ownership
in calendar year 2021, supporting more than $103 million in loans for
low- and moderate-income home buyers.\21\
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\21\ State HFA Factbook: 2021 NCSHA Annual Survey Results, National
Council of State Housing Agencies, 2022.
In addition, HFAs can use their MRB authority to issue Mortgage
Credit Certificates, which provide a nonrefundable Federal income tax
credit for part of the mortgage interest qualified home buyers pay each
year. State HFAs have used MCCs to provide critical tax relief to more
than 386,000 families. WSHFC has issued MCCs to nearly 17,000 home
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buyers.
AHBEA would improve MRBs and MCCs by, among other changes:
Increasing the MRB home improvement loan limit;
Allowing MRBs to be used for refinancing loans;
Providing HFAs additional flexibility in how they utilize
housing bond authority;
Simplifying how a borrower's MCC benefit is calculated;
Reducing the time period for the MRB and MCC recapture tax
from 9 years to 5;
Extending the amount of time HFAs can use converted MCC
authority from 2 years to 4; and
Allowing HFAs to reconvert MCC authority back into MRBs 2
years after the conversion, rather than one.
This legislation is a cost-effective way to improve the MRB and MCC
programs. I urge all committee members to cosponsor this legislation
when it is reintroduced.
Lastly, I'd like to express support for the Neighborhood Homes
Investment Act (NHIA). In many census tracts and rural areas,
developers cannot sell homes for what it costs to construct or
substantially rehabilitate them, known as the ``value gap.'' This is a
problem for which we currently do not have a solution. We need a new
tool in our box.
The NHIA would establish a new tax credit, the Neighborhood Homes
Credit, modeled after the highly successful Housing Credit. It would
incentivize developers to construct new or substantially rehabilitate
housing by closing the value gap, up to 35 percent of eligible
development costs. It is estimated that the equity raised by the
Neighborhood Homes Credit would finance the building and substantial
rehabilitation of 500,000 affordable homes for low- and moderate-income
homeowners over the next 10 years.
I encourage the committee to take up and advance both of these
bills as quickly as possible.
The housing crisis will not get better unless Congress acts.
Enactment of the bills I've addressed in this testimony--the Affordable
Housing Credit Improvement Act, provisions of the DASH Act that would
close the Qualified Contract loophole and protect nonprofit housing
credit sponsors, the Affordable Housing Bond Enhancement Act, and the
Neighborhood Homes Investment Act--would truly address the affordable
housing crisis for both renters and homeowners. WSHFC and all HFAs,
through our national association, the National Council of State Housing
Agencies, urge the committee to act on these bills and Congress as a
whole to enact them this year.
Thank you for your commendable efforts to support affordable
housing. I am honored to have had this opportunity to testify before
the committee.
______
Questions Submitted for the Record to Steve Walker
Questions Submitted by Hon. Todd Young
Question. In your testimony you highlighted the importance of the
Neighborhood Homes Investment Act--legislation I reintroduced with my
Senate Finance Committee colleague, Senator Cardin--in addressing the
value gap between rehabilitation costs and home values.
Can you please discuss further why this legislation is so critical
and how this credit will build upon the important work done through the
Low-Income Housing Tax Credit (LIHTC) program?
Answer. Thank you for your leadership on the Neighborhood Homes
Investment Act (NHIA), which would create a new tax credit tool
designed to make it possible to revitalize thousands of communities
across the nation. The NHIA would solve two of our most pressing
housing and community development problems simultaneously.
The first problem is an extreme shortage of starter homes in good
condition. Home ownership is the primary means of building wealth and
financial security for most families. Yet market-based forces in the
current economic environment are such that it is often not financially
feasible for single-family developers to produce or rehabilitate modest
for-sale properties that most first-time homebuyers can afford. This
means that many households are locked into renting when they are
otherwise good candidates for home ownership, putting added pressure on
the rental market.
The second problem is one of neighborhood conditions in many areas.
Across the nation, thousands of once-thriving communities now suffer
from blight, vacancy, and abandonment because of dilapidated single-
family housing stock. This undermines neighborhood stability and the
local tax base and makes it difficult for these communities to attract
and retain working families. It also harms existing homeowners in these
communities, often African American families, whose property values are
tied to the degradation of their neighborhoods.
This is why NCSHA and its HFA members strongly support the NHIA,
which is designed to close the value gap to allow for reinvestment in
chronically underserved communities, helping low- and moderate-income
homebuyers and homeowners to improve property values and increase
family wealth.
The Neighborhood Homes Credit is modeled after the highly
successful and proven Low-Income Housing Tax Credit (Housing Credit).
Structured as a public-private partnership, the program would be
administered by State HFAs, which have the capacity and experience to
efficiently run such programs. Like the Housing Credit, HFAs would
develop a qualified allocation plan for the Neighborhood Homes Credit,
developers would apply for credit authority to attract investors, who
would provide the equity needed to fill the value gap and jumpstart
neighborhood revitalization. Those investors, and not the federal
government, would assume the risk associated with the development.
Question. As we continue to evaluate the ways State and local
governments can assist in addressing the housing affordability crisis,
one area of concern is overburdensome permitting restrictions that slow
the supply of housing and drive up the market value of homes.
Can you please discuss any work you have done in Washington to
encourage State and local governments to streamline permitting
restrictions?
Answer. Several local jurisdictions in Washington have implemented
innovative policies and taken actions to deal with housing
affordability in their communities. Some examples include enacting a
density bonus to encourage affordable housing development in
Bellingham, waiving impact fees for affordable housing developments in
Kirkland, and decreasing parking requirements to reduce construction
costs in Bellevue and Renton.
Additionally, Seattle has eliminated the lengthy design-review
process for affordable housing to help streamline permitting. The goal
is to assist in the production of low-income housing by exempting these
projects from Design Review and allowing for a waiver of certain
development standards for these projects. The impact accelerates the
permitting of city-funded affordable housing projects, thereby reducing
costs and decreasing the time needed for new affordable units to enter
into service.
This year's State legislative session (still underway) includes
additional legislative efforts to address permitting restrictions. The
following bills have all advanced out of house of origin:
E2SSB 5045--Allows counties to offer to exempt the value of
the ADU (up to 30 percent of original structure) if it's rented
to a low-income household (up to 60 percent AMI) and charge no
more than 30 percent of the tenant's monthly income. Exemption
remains for as long as it's rented to a LI household.
HB1110--Requires cities to allow for middle housing
(townhomes, 2-6plexes, cottage housing) in areas traditionally
dedicated to single-family detached housing that are close to
transit and served by urban infrastructure. Prohibits onerous
requirements on middle housing, allows for administrative
permitting review process and adds requirement of affordable
housing for certain additional units.
SSB5235--Requires the consideration and utilization of ADU's
as a housing option within comprehensive planning. Requires
attached ADU's to have a substantial share within the other
housing unit and shared structural elements. Requires adoption
in next comprehensive plan and prohibits cities and counties
prohibiting ADU construction within urban growth areas as well
as imposing restrictions on ADU development or requiring
covenants or ownership requirements.
ESSB 5466--Prevents city planning under the Growth
Management Act (GMA) from prohibiting multifamily residential
housing on parcels near transit station areas, where any other
residential use is permissible (with some exceptions). Also
prohibits city planning under the GMA from imposing a maximum
residential density in transit-station areas or requiring off-
street parking in these areas, with some exceptions.
______
Questions Submitted by Hon. Sheldon Whitehouse
Question. Rhode Island college graduates of the class of 2020
graduated with an average of $36,791 in outstanding student loan debt.
At the same time, the National Association of Realtors reports that
housing affordability reached the worst level on record in the fourth
quarter of 2022. Last Congress, I introduced several bills to ease the
burden of student loan debt, including canceling student loans for
front-line health-care workers and teachers.
For those with tens of thousands--and in some cases hundreds of
thousands--of dollars of student loan debt, how does their debt affect
their ability to buy a home or afford rent?
Answer. Increasing student loan debt can impact consumers' housing
options over both the short and long term. In the short term, it
reduces the amount of income new graduates can use to pay for housing.
This limits the options available to them as they search for their
first apartment, and increases competition for more modestly priced
units, increasing competition for the Nation's shrinking stock of
affordable homes.
In the longer term, high student loan payments make it difficult
for household to save up to purchase a home. Student loan debt can also
negatively impact consumers credit scores, which restricts the types of
mortgage loans available to them.
From a housing policy perspective, the most important step Congress
can take is to help increase the supply of affordable homes by passing
legislation such as the Affordable Housing Credit Improvement Act and
Neighborhood Homes Investment Act, as well as funding the HOME
Investment Partnership program. All of these programs will bolster the
supply of available homes, helping to reduce costs for all renters and
homeowners.
Another step Congress could take is to increase access to down
payment assistance. State housing finance agencies (HFAs), including
WSHFC here in Washington, administer robust down payment assistance
programs to help credit-worthy households who can't afford to save up
for a down payment assistance, either because of student debt
obligations or other reasons, realize the dream of home ownership. In
2021, HFAs provided down payment assistance to nearly 120,000
homebuyers. WSHFC provided such assistance to more than 7,300
Washington State families that year, accounting for 98 percent of
program borrowers. We currently offer a variety of down payment
assistance options, including five programs targeted to residents of
high-cost jurisdictions in the State, such as Seattle and Clark County.
Question. Over the past 2 decades, the growing cost of child care
has outpaced inflation. Child-care costs for Rhode Island families can
now reach more than $10,000 per year annually for each child, and many
families now are paying nearly 30 percent of their incomes on child
care. At the same time, the National Association of Realtors reports
that housing affordability reached the worst level on record in the
fourth quarter of 2022. Indeed, according to HousingWorksRI, there are
currently no communities in Rhode Island where families earning the
State's median income or less can afford to buy a home, and there's
only one community--Burrillville--where Rhode Islanders can affordably
rent.
How does the high and growing cost of child care affect families'
ability to buy a home or afford rent?
Answer. As with student loan debt, any increase in household costs
will reduce the amount of money available for families to spend on
housing, reducing their options and increasing competition for more
modestly priced homes. This underscores the need for Congress to
support initiatives that will increase housing supply and expand access
to down payment assistance.
Question. Rhode Island is the 2nd-densest State in our Union,
second only to New Jersey.
For States like mine, where people live in much closer proximity to
each other than elsewhere in the Nation but which still have a housing
shortfall, what are the best practices and reforms for encouraging
affordable housing development while still preserving livable
communities and local character?
Answer. One of the keys to the Housing Credit program's long
success is how it has been used to build affordable homes that fit in
with the local character of the community. Housing Credit properties
come in all shapes and sizes. In some places the program finances
larger multistory properties, in others, it finances garden-style
apartments. In some communities, it is used to build townhouse style or
even single family scattered site rental homes. Developers have great
flexibility in how they design their projects to best meet the context
of the surrounding neighborhood and are mostly limited only by cost-
effectiveness.
Question. The Low-Income Housing Tax Credit is one of the primary
Federal programs for creating and preserving affordable housing units.
In Rhode Island, nearly 70 percent of new affordable units are financed
using LIHTC. Last Congress, I cosponsored Senator Cantwell's Affordable
Housing Credit Improvement Act, which would make a number of changes to
LIHTC to further incentivize the building of affordable housing.
How would the bill bolster our affordable housing supply?
Are there improvements to the program that weren't included in the
bill that the Senate should consider?
Answer. Thank you for your support of the Affordable Housing Credit
Improvement Act (AHCIA), passage of which is the single most important
thing Congress could do to address the severe imbalance between supply
and demand for affordable rental housing. As I noted in my testimony,
our Nation has drastically underproduced housing for decades, but
especially since the Great Recession when many developers exited the
industry. This has left us with a 7.3 million rental home shortage just
for extremely low-income households (those at or below the Federal
poverty level or earning no more than 30 percent of their area median
income, whichever is greater). When combined with rental housing
production needed to house other low-income households who earn just
slightly more, the supply gap is staggering.
While there are several proposals in the AHCIA that would bolster
production, the two that have the most substantial impact are the
increase in credit authority for the 9-percent component of the program
and lowering the bond financing threshold from 50 percent to 25 percent
for the 4-percent component of the program. Together, these two changes
are estimated to finance 1.93 million additional homes between 2023 and
2032, housing an additional 4.5 million people and generating nearly 3
million jobs, more than $335 billion in wages and business income, and
nearly $116 billion in tax revenue.
The AHCIA is comprehensive legislation, and while the two primary
production provisions noted above are the most essential for increasing
supply, the bill takes a soup to nuts approach on program modifications
that would strengthen its administration and improve program outcomes.
That said, there are additional critical proposals before Congress
that would greatly improve the Housing Credit that are not included in
the AHCIA, but are in Senator Wyden's Decent, Affordable, Safe Housing
for All (DASH) Act. The DASH Act would protect taxpayers' investment in
Housing Credit properties by combating two threats to long-term
affordability.
First, the DASH Act would close the qualified contract loophole,
which allows owners to terminate the affordability restrictions on a
Housing Credit property long before the end of the property's
affordability period. The qualified contract process is outlined in my
written testimony; however, in summation, this practice has come to
function as a near automatic affordability opt-out after just 15 years
unless the owner has waived their right to the qualified contract,
while Congress envisions this program as one that provides
affordability for at least 30 years, and many States, including
Washington, often require longer affordability periods than that.
NCSHA data indicates that the qualified contract process is
resulting in the premature loss of approximately 10,000 units annually.
As of 2021, more than 100,000 apartments nationwide had already been
lost from the Housing Credit inventory before what would have otherwise
been the full affordability period for those homes.
Second, the DASH Act would protect nonprofit sponsors of Housing
Credit properties seeking to exercise the right of first refusal in
their partnership documents as allowed under section 42. This right has
been challenged in recent years by some investors, primarily outside
entities who have obtained control of investor partnerships from the
original investors after all tax credits have been claimed. These
entities--often called ``aggregators''--demand a payoff not
contemplated in the partnership agreement as a condition of exiting the
partnership. This has led to scores of legal disputes and, in many
cases, costly litigation, often undermining the long-term financial
viability of the property or force the nonprofit to raise rents,
decrease resident services, defer maintenance, or even sell the
property to cover the payoff.
______
Questions Submitted by Hon. Maria Cantwell
Question. As we discussed at the hearing, we have been facing the
housing affordability crisis for too long--both in cities like Seattle
and in rural areas. The pandemic and inflation have made it clear that
it is beyond time that we take the necessary steps to truly address the
housing supply problem.
We all know a shortage of affordable housing is a crisis in every
State--in fact, not one has enough affordable housing for the lowest-
income renters. Heightened demand for rental housing has made rental
markets extremely tight, and new additions to the rental supply have
not kept up with demand.
You mentioned in the hearing that we have under-built housing for
over 20 years. It clear that this housing supply shortage has only
increased the cost of rent relative to median income.
Between 2006 and 2015, the median income in Washington State
increased three percent, but the median rent increased by 18 percent.
Nearly 230,000 Washingtonians pay more than half of their monthly
income on rent. Among extremely low-income renters in the State, 68
percent pay more half or more of their monthly income on rent.
Together with Chairman Wyden and Senators Young and Blackburn, we
are working to take this issue head-on by expanding and strengthening
the Low-Income Housing Tax Credit (LIHTC) by reintroducing the
Affordable Housing Credit Improvement Act (AHCIA).
As I mentioned in the hearing, I would like to determine just how
much we have under built housing in recent decades because I think it
can show exactly how much this is a supply issue. It is critical that
we invest in LIHTC this Congress to address increasing housing costs
and demand for affordable housing.
Supply of affordable housing is not meeting market demand. How much
have we under built affordable housing?
Answer. According to research by the National Low Income Housing
Coalition, our Nation has a shortage of 7.3 million rental homes
affordable and available to renters with extremely low incomes, defined
as those with incomes at or below either the Federal poverty level or
30 percent of median income for the area in which they live. As
staggering as this statistic is, it does not even reflect the need for
affordable housing for other low-income households whose incomes, while
not as low as those considered extremely low-income, are insufficient
to afford rent on the private market.
Washington State alone, according to a report released just last
month by the State Department of Commerce, will need to add more than 1
million homes in the next 20 years. More than half of these need to be
affordable for residents at the lowest income levels. Based on census
data and the Office of Financial Management's population projections,
these final housing projections illustrate that Washington needs more
than 50,000 new units annually to keep pace with expected population
growth.
Question. How far behind are we in terms of meeting rural housing
need? Urban?
Answer. The affordable housing supply challenges are not limited to
any one type of area. The crisis spans urban, suburban, and rural
communities in every State in the Nation. While I do not have a
breakout of exactly how the supply needs can be divided across these
differing geographies, I can tell you that we have underbuilt nearly
everywhere.
According to CohnReznick, the median physical vacancy rate of
Housing Credit properties was just 2.5 percent. This is consistent with
regular turnover of units, and essentially means properties are fully
occupied. In my experience, these properties typically have long
waiting lists because so many people need the lower rents they can
provide.
Question. In your testimony, you and Mark Calabria both spoke about
the need to address the financing gap for rural areas, in particular.
Can you expand on the nature of the challenges for affordable housing
in rural areas?
Answer. Financing affordable housing in any area with very low area
median incomes is particularly challenging because Housing Credit rents
and income limits are set based on the area median income (AMI). Lower
AMIs result in lower rents and less cashflow. That means these
properties can support less debt because cashflow may not be sufficient
for debt service. Even operating costs can make properties cost-
prohibitive if cash flow is insufficient.
According to research by the Housing Assistance Council, there were
377 ``persistently poor counties'' in 2020 based on Census Bureau data.
These are counties in which 20 percent or more of the population has
lived in poverty over the past 30 years. Approximately 81 percent of
these counties are in rural areas.
A second challenge to financing affordable housing production in
rural areas is the lack of economies of scale. Larger properties
typically cost less per unit than smaller properties. However, rural
areas, with their smaller populations compared to urban and suburban
areas, typically cannot support very large properties.
Your legislation, the Affordable Housing Credit Improvement Act,
would make the Housing Credit a more effective tool in rural areas.
First, it would allow States to provide a basis boost for properties
located in rural areas. That would mean we could further reduce the
amount of debt these properties must support. Second, it would make a
technical change to the way income limits are calculated for bond-
financed properties in rural areas, expanding the pool of households
eligible to live in in them, which helps to address the economies of
scale challenges they face. (Congress made this change to the 9-percent
program when it passed the Housing and Economic Recovery Act in 2008.
Your bill provides parity between the 9-percent and 4-percent
components of the program.)
Housing supply challenges in rural areas are exacerbated by
preservation needs, as much of the existing rental housing stock is
old, sometimes substandard, and in desperate need of recapitalization
and rehabilitation. There are over 1.5 million occupied substandard
housing units in rural areas, and over 750,000 of those even lack piped
water.
At its peak in the 1970s, the U.S. Department of Agriculture
subsidized the production of more than 30,000 units per year in rural
communities. By 2011, when the last of the USDA construction loans were
issued, that number had slid to less than 1,000 units. According to the
Housing Assistance Council, an average of 2,000 units per year will
leave the program between 2022 and 2027.
With dwindling resources from USDA, rural areas are more and more
dependent on the Housing Credit for both new production and for the
preservation of older properties originally funded by USDA programs.
Question. LIHTC is a critical tool for producing workforce housing.
What would be the impact for employers and working families if we do
not make critical investments in LIHTC?
Answer. Thank you for this question, as you and I agree that
households living in Housing Credit properties are largely working
households. Those who do not work are often seniors on fixed incomes or
those with severe barriers to employment who need housing and services.
Too often the term ``workforce housing'' is used as a proxy for housing
affordable only to middle-income families and above, but the
implication is that poor people do not work, and nothing could be
further from the truth. Often low-income households are working two or
three jobs just to make ends meet.
The availability of affordable housing is key to economic growth
for any community, and something that employers consider when they are
determining where to locate. When the local workers can't find housing
they can afford, the entire community can suffer. If rents are too high
near places of employment, low-income workers often must move further
away and commute longer distances to work, impacting traffic congestion
and quality of life for everyone. Businesses, like restaurants, child-
care centers, and those in the travel and tourism industry often have a
hard time finding workers at all. And as workers spend more of their
paychecks on housing, there is less available to them to spend on goods
and services in the local economy.
The AHCIA would give State HFAs the resources we need to build more
affordable housing. Our process for selecting proposals for these
finite resources can help us to incentivize siting of these properties
in areas where there is economic growth and access to the amenities
workers need.
Question. As you are aware, housing supply shortages, higher
interest rates, and increased costs of financing construction are
driving up inflation. Increased lumber costs alone have added an
estimated $7,300 to the average per unit construction cost, resulting
in higher rents.
At the same time, LIHTC allocations have declined with the
expiration of the 12.5-percent allocation increase that I helped secure
in 2018. I am concerned that, without increased investments in LIHTC,
housing costs and shortages will continue to increase as the demand for
affordable housing continues to outpace supply.
The bipartisan AHCIA would not only increase affordable housing
supply by over 2 million affordable rental homes over the next decade--
something that goes directly to the impacts of inflation and the
increased costs our constituents are facing--it would also support 3
million jobs, provide $345 billion in wages and business income, and
generate $119 billion in tax revenue.
We have seen time and time again how the AHCIA and LIHTC have
helped ease the supply shortage in communities across the State of
Washington.
In Snohomish County, for example, where families often move to if
priced out of neighboring King County, Housing Hope has continued to
utilize the Low-Income Housing Tax Credit to build 60 units of
affordable housing, half of which are designated for families
transitioning directly from homelessness.
The other 30 units are permanently accessible for low-income
families who will never pay more than 30 percent of their income on
rent.
It's critical to act on housing supply to make any meaningful dent
on inflation--in particular, by increasing the supply of affordable
housing. Housing costs are far too large of a component of the Consumer
Price Index (CPI) to not act.
From your experience as the Executive Director of the Washington
Housing Finance Commission, what has been the impact of inflation on
housing supply? How could the AHCIA help improve the situation?
Answer. The current economic conditions are causing major
challenges in the construction industry, not just for Housing Credit
development but for all types of housing production, both affordable
and market-rate, rental and for-purchase. Lumber is certainly one
construction commodity that has seen severe volatility, but we also
hear from developers about cost increases for everything from
transformers to steel, to paint. Not only are we facing inflation,
supply chain disruptions, and workforce shortages, but we face these
challenges in an environment in which interest rates have been rapidly
rising.
Last summer, NCSHA commissioned an independent third-party study of
cost increases in Housing Credit production since 2019. It found that
nearly all deals awarded credit authority from 2019 through the summer
of 2021 faced significant and unexpected cost increases after having
been awarded credits. As a result, many--if not most--projects had to
seek additional credit authority, soft funding, or other resources from
HFAs and other funders to close the funding gaps. These cost increases
were consistently about 30 percent over the originally anticipated
project costs.
The expiration of the 12.5-percent cap increase at the end of 2021
came at the worst possible time, given these cost increases. Your
legislation, by restoring the cap increase and building a 50-percent
increase on top of it would give us the resources we need to keep
building 9-percent deals.
Another challenge associated with cost increases is that some bond-
financed projects may not be able to pass the 50-percent test because
the amount of bonds initially authorized for the project no longer
covers 50 percent of the total cost. This is devastating for a project
and essentially means it will not be able to move forward. By lowering
the 50-percent test to 25 percent, these projects will no longer be in
jeopardy.
Question. What other steps do you recommend Congress take to help
address the inflated costs of affordable housing?
Answer. I would suggest that Congress weigh in on regulatory issues
such as the implementation of the new Community Reinvestment Act
regulations under consideration, to impress upon bank regulators the
importance of protecting Housing Credit investment in any new system of
CRA regulation.
______
Prepared Statement of Garrett Watson, Senior Policy Analyst
and Modeling Manager, Tax Foundation
reforming the low-income housing tax credit and improving cost recovery
for structures is vital for expanding affordable housing
Chairman Wyden, Ranking Member Crapo, and distinguished members of
the Senate Finance Committee, thank you for the opportunity to provide
testimony on how to improve tax policy to increase affordable housing
supply and serve working families. I am Garrett Watson, senior policy
analyst at the Tax Foundation, where I focus on how we can improve our
Federal tax code.
Today, I will recommend ways to improve the Low-Income Housing Tax
Credit (LIHTC) to ensure it is effective at providing affordable
housing to low-income Americans. I will also discuss how broader
improvements to the tax code, such as providing better cost recovery
for residential structures, would be an effective way to grow the
supply of affordable housing.
reforming the low-income housing tax credit to help vulnerable
americans
LIHTC is the largest source of affordable housing financing in the
United States, using about $13.5 billion in forgone revenue each year
on average. LIHTC has supported the construction of more than 3 million
housing units since its creation in 1986 through 2020.\1\
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\1\ U.S. Congress, ``Estimates of Federal Tax Expenditures for
Fiscal Years 2022-2026,'' Joint Committee on Taxation, December 22,
2022, https://www.jct.gov/publications/2022/jcx-22
-22/. See also Mark P. Keightley, ``An Introduction to the Low-Income
Housing Tax Credit,'' Congressional Research Service, January 6, 2023,
https://sgp.fas.org/crs/misc/RS22389.pdf and Department of Housing and
Urban Development, Office of Policy Development and Research, ``Low-
Income Housing Tax Credits,'' June 5, 2020, https://huduser.gov/portal/
datasets/lihtc.html.
LIHTC provides developers with transferable, nonrefundable tax
credits for the construction of affordable housing developments, which
include limits on tenant income and housing costs.\2\
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\2\ Everett Stamm and Taylor LaJoie, ``An Overview of the Low-
Income Housing Tax Credit,'' Tax Foundation, August 11, 2020, https://
taxfoundation.org/low-income-housing-tax-credit-lihtc/.
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We should consider three big-picture points when evaluating the
effectiveness of LIHTC as a tool to help working families and low-
income households.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
First, while LIHTC has helped expand housing affordability, the
credit's administration could be improved. More detailed information
should be provided on the credit's effectiveness, as recommended in a
2018 report by the Government Accountability Office (GAO).\3\
---------------------------------------------------------------------------
\3\ Daniel Garcia-Diaz, ``Low-Income Housing Tax Credit: Improved
Data and Oversight Would Strengthen Cost Assessment and Fraud Risk
Management,'' Government Accountability Office, September 2018, https:/
/gao.gov/assets/700/694541.pdf.
Notably, GAO recommends that policymakers designate an agency to
collect data to better understand project development costs. Such data
would help inform future reform efforts, ensuring agencies impose
limits on costs, root out fraud, and reform opaque and discretionary
credit allocation processes. The data we have so far has shown, for
example, that developments supported by the credit tend to suffer from
higher-than-average construction costs. A 2017 GAO study found that
only 30 percent of allocating agencies at the State level put limits on
development costs, potentially undercutting the credit's efficiency.\4\
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\4\ Michael Eriksen, ``The Market Price of Low-Income Housing Tax
Credits,'' Journal of Urban Economics 66:2 (September 2009): 141-49,
and Garcia-Diaz, ``Low-Income Housing Tax Credit: Improved Data and
Oversight Would Strengthen Cost Assessment and Fraud Risk Management.''
While the U.S. Department of Housing and Urban Development (HUD)
provides valuable project-level data, additional data such as
information on fees paid to developers and syndicators as well as
outcomes for properties and tenants over time would be valuable for
assessing LIHTC.\5\
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\5\ Congressional Research Service, ``The Low-Income Housing Tax
Credit: Policy Issues,'' October 17, 2019, https://
crsreports.congress.gov/product/pdf/IF/IF11335.
Second, it is important to evaluate LIHTC's broader policy
effectiveness before considering options to expand LIHTC. One area of
concern is how much of the LIHTC's benefit goes to low-income
households. Several studies have found that between one-third and
three-quarters of the subsidy provided by LIHTC goes to low-income
households, with the rest accumulating to other stakeholders such as
developers and investors.\6\
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\6\ Ed Olsen, ``Does Housing Affordability Argue for Subsidizing
the Construction of Tax Credit Projects?'', American Enterprise
Institute, March 24, 2017, https://www.aei.org/wp-content/uploads/2017/
07/Ed-Olsen-AEI-Housing-Affordability.pdf, and Gregory S. Burge, ``Do
Tenants Capture the Benefits from Low-Income Housing Tax Credit
Program?'', December 1, 2010, https://onlinelibrary.wiley.com/doi/abs/
10.1111/j.1540-6229.2010.00287.x.
Similarly, LIHTC projects tend to be located in higher-poverty
neighborhoods, depriving tenants of the benefits of living in places
with more opportunities and amenities.\7\
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\7\ Congressional Research Service, ``The Low-Income Housing Tax
Credit: Policy Issues''; A related policy concern is to what extent
LIHTC crowds out development that would have happened absent the
credit: a 2005 study found that 30 to 70 percent of LIHTC-supported
housing would have been built without the program, a finding echoed by
a separate 2010 study identifying similar displacement of private
construction.
Finally, many of LIHTC's administrative challenges are rooted in
using the tax code to tackle important social problems that may be
outside the proper scope of the tax system. The array of programs
supporting housing, ranging from Federal grants, tax credits for
historic rehabilitation, and tenant-facing assistance, all overlap with
LIHTC both in policy goals and benefiting stakeholders. That overlap
makes it harder to evaluate the effectiveness of the credit compared to
alternatives, such as housing vouchers, an option considered by the
Congressional Budget Office as far back as 1992.\8\
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\8\ Congressional Budget Office, ``The Cost-Effectiveness of the
Low-Income Housing Tax Credit Compared with Housing Vouchers,'' April
1, 1992, https://www.cbo.gov/publication/16375.
While it is important to consider options to improve LIHTC's
administration, oversight, and efficiency, many challenges could be
resolved by reconsidering whether the tax code is specifically the best
place to support housing projects and low-income tenants.
pro-growth tax policy as a tool to expand the supply of affordable
housing
In addition to reforms to LIHTC, a supplementary approach to
expanding the supply of affordable housing is to reduce the tax burden
on investment in housing. One way to reduce the tax burden is by
improving the cost recovery of structures in the Federal tax code.
Currently, investors in residential structures must depreciate
structures over periods up to 27.5 years long, limiting the economic
value of the depreciation allowances. Ideally, all investments would be
fully and immediately deducted from taxable income, but this can pose a
challenge for structures that create a net operating loss for investors
given the large size of the investment.
One solution is to provide neutral cost recovery, which adjusts
depreciation deductions to maintain their value in real terms. This
would improve the economic incentive to invest in structures, expanding
the housing supply while also avoiding challenges posed by fully
expensing such large investments.
According to the Tax Foundation's estimates, providing neutral cost
recovery to residential structures would lead to the construction of up
to 2.3 million housing units in the long run, lower construction costs
by about 11 percent, and raise long-run economic output by 1.2
percent.\9\
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\9\ Erica York, Alex Muresianu, and Everett Stamm, ``Estimating
Neutral Cost Recovery's Impact on Affordable Housing,'' Tax Foundation,
August 7, 2020, https://taxfoundation.org/estimating-neutral-cost-
recoverys-impact-on-affordable-housing/. See also Erica York, ``Options
for Improving the Tax Treatment of Structures,'' Tax Foundation, May
19, 2020, https://taxfoundation.org/neutral-cost-recovery-for-
buildings/.
Pairing better cost recovery with efforts to improve land use and
zoning rules at the State and local levels would magnify the positive
effect of neutral cost recovery.
conclusion
Reforming LIHTC and providing neutral cost recovery for residential
structures would tackle the problem of housing affordability in a
complementary fashion. Neutral cost recovery expands housing supply and
lowers the cost of construction and rents, which can help LIHTC fund
more below-market-rate projects.
These reforms are two important steps that policymakers can take to
ensure the Federal tax code is not a barrier to solving America's
affordable housing challenge.
______
Questions Submitted for the Record to Garrett Watson
Questions Submitted by Hon. Todd Young
Question. To effectively solve the housing affordability crisis, we
must address burdensome local zoning and land use regulations which
stifle housing production and drive up housing prices across the
country. Therefore, I will soon reintroduce my Yes In My Backyard Act
to encourage communities to cut these burdensome regulations and bring
a new level of transparency to the community development process.
Can you please discuss the negative impact restrictive zoning and
land use policies have on effectively addressing the housing
affordability crisis?
Answer. Zoning and land use policies have significant effects on
housing supply and affordability in the United States. For example, one
study found that about 20 percent of the differences in housing growth
between metropolitan areas are explained by differences in density
regulations.\1\
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\1\ Keith R. Ihlanfeldt, ``Exclusionary Land-use Regulations within
Suburban Communities: A Review of the Evidence and Policy
Prescriptions,'' Urban Studies 41:2 (February 2004), https://
journals.sagepub.com/doi/abs/10.1080/004209803200165244.
In addition to driving up the cost of housing, restrictions to
housing supply likely have broader economic harm by limiting the
productivity of workers who would benefit from urban labor markets. One
estimate suggests restrictions on housing supply could have lowered
total U.S. economic growth by up to 36 percent between 1964 and
2009.\2\
---------------------------------------------------------------------------
\2\ Chang-Tai Hsieh and Enrico Moretti, ``Housing Constraints and
Spatial Misallocation,'' American Economic Journal: Macroeconomics 11:2
(2019), https://pubs.aeaweb.org/doi/pdfplus/10.1257/mac.20170388.
Onerous zoning and land use rules reduce the effectiveness of tax
incentives to expand affordable housing. The restrictions add financial
constraints and veto points to block qualifying development, which
reduce the number of viable projects for developers to pursue even with
tax incentives. It is a missed opportunity and a waste of taxpayer
resources if tax incentives merely blunt cost increases driven by
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supply restrictions.
Encouraging States and localities to streamline their land use and
zoning rules complements efforts to expand affordable housing
incentives and improve the tax treatment of investment in housing.
Question. During the hearing, some of my colleagues raised concerns
regarding data reporting and transparency in the administration of the
Low-Income Housing Tax Credit (LIHTC) program. I am interested in
addressing those concerns when Senator Cantwell and I reintroduce our
Affordable Housing Credit Improvement Act (AHCIA) later this spring.
Do you have any specific legislative solutions or suggestions to
improve LIHTC's existing data reporting framework? What would you
recommend Senator Cantwell and I focus on for reintroduction of the
AHCIA?
Answer. One way to improve Low-Income Housing Tax Credit (LIHTC)
data collection would be to designate a specific agency to collect and
maintain data on project costs from credit-allocating agencies. This
idea is the top outstanding matter for congressional consideration
recommended by the Government Accountability Office (GAO) in their 2018
report assessing oversight of LIHTC.\3\
---------------------------------------------------------------------------
\3\ Government Accountability Office, ``Low-Income Housing Tax
Credit: Improved Data and Oversight Would Strengthen Cost Assessment
and Fraud Risk Management,'' September 18, 2018, https://www.gao.gov/
products/gao-18-637.
Credit-allocating agencies often provide data on project costs, but
GAO reports that the lack of a coordinating agency to standardize data
collection and maintenance results in ``inconsistent data quality and
formats among allocating agencies.''\4\ Designating a specific owner
for LIHTC data collection could help with analysis of cost drivers and
help increase LIHTC's efficiency.
---------------------------------------------------------------------------
\4\ Ibid, 65.
Once cost data is standardized and collected effectively, the
effort could be expanded to include data on outcomes for properties and
tenants over time, helping to ensure that LIHTC is meeting its ultimate
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goal of providing affordable housing for low-income households.
______
Prepared Statement of Hon. Ron Wyden,
a U.S. Senator From Oregon
In recent memory the Finance Committee has a proven record of
working together, Democrats and Republicans, to solve big, national
challenges. We've helped more Americans save for a dignified
retirement, cut taxes for families and small businesses, updated the
Medicare guarantee with the CHRONIC Care Act, made progress on helping
Americans get mental health care when they need it, and passed the
Family First Act with groundbreaking new policies to promote kinship
care.
I strongly believe the next opportunity for a big, bipartisan
initiative is affordable housing. Few things unite Americans quite like
the feeling that the rent is too damn high, or that saving enough for a
down payment is a pipe dream.
This is an issue in all 50 States; in big, urban downtowns, medium-
sized cities, and in the suburbs--even in smaller communities and rural
areas.
Let's look at what 5 years of rent increases have done in a handful
of cities relevant to this committee. In my hometown, Portland, OR,
data from Zillow show the average monthly rent jumped by $335, nearly
23 percent. Charlotte, NC: a $558 increase, or 46 percent. Memphis, TN:
a $428 increase, or nearly 50 percent. Boise, ID: a $639 increase,
sending monthly rents 57 percent higher.
The outlook isn't much better for people looking to buy a home,
particularly young people looking to buy for the first time. According
to a new report from the National Association of Realtors, the share of
sales going to first-time homebuyers fell last year to the lowest level
on record. And whether it's unaffordable rents or unattainable
mortgages, oftentimes it's Black and Latino families hit hardest.
So how should Congress go about solving this challenge? For a long
time, you were breaking the rules as a Democrat if you talked about
supply-side ideas. But the fact is, there is no substitute for
increasing the supply of affordable housing.
For many years now, Senator Cantwell has been the champion of the
Low-Income Housing Tax Credit, or LIHTC. It's the most successful
Federal program for affordable housing there is. The bill she and
Senator Young have put forward, the Affordable Housing Credit
Improvement Act, would expand LIHTC to create 2 million new units
nationwide.
Yesterday Senator Cardin and Senator Young introduced the
Neighborhood Homes Investment Act, which is all about giving a private-
investment boost for housing in blighted and struggling neighborhoods
that need it most.
I'm a cosponsor of both of those bills, and they are both
priorities in my comprehensive DASH Act, which stands for Decent,
Affordable, and Safe Housing for All. I am reintroducing the DASH Act
today.
Another component of DASH is what I've named the Middle-Income
Housing Tax Credit, or MIHTC. The idea behind MIHTC comes from
conversations I've had many times with housing authorities and middle-
class Oregonians back home, particularly in Portland and Bend.
Because America has fallen behind in building housing for decades,
the housing shortage has extended into the middle class too.
Firefighters, nurses, teachers, and their families are all finding it
more and more challenging to cover rent and make ends meet. MIHTC would
help fill that gap, and I want to emphasize, it would supplement LIHTC.
If a given State housing agency wanted to use its MIHTC credits for
low-income housing, my bill says it could plow all those resources into
its LIHTC program. Providing the States with that kind of flexibility
is key to increasing housing supply where it's needed most.
You can't talk about housing without addressing homelessness, which
is another major priority in my DASH Act. It's clear that people
experiencing homelessness need more help than they're getting.
Furthermore, building more affordable housing today will reduce
homelessness tomorrow, which will prevent a lot of individual suffering
and save taxpayer dollars.
Members of Congress also need to keep pushing State and local
authorities to cut back on the thicket of zoning rules that get in the
way of building the housing Americans need. That's another area of
bipartisan agreement, because restrictive zoning laws can hurt local
economies, and even worse, they often amount to a backdoor method of
segregation.
So there's a lot for the committee to discuss today. My view is,
along with mental health care, rural health, and several other topics,
affordable housing is an area where this committee can bring together a
bipartisan coalition for real progress.
Every member has an interest in getting more affordable housing
built back home. It's a priority that cuts across State lines and
political lines, and it's clear there are already bold, bipartisan
ideas on the table. So I look forward to our discussion.
______
Communications
----------
Affordable Housing Tax Credit Coalition
1900 M Street, NW
Washington, DC 20036
www.taxcreditcoalition.org
The Affordable Housing Tax Credit Coalition (AHTCC) is a national trade
association comprised of nearly 250 housing organizations advocating to
expand and strengthen the Low-Income Housing Tax Credit (Housing
Credit), our nation's primary tool for financing affordable rental
housing. We thank Chairman Wyden, Ranking Member Crapo and the Senate
Finance Committee for holding this hearing highlighting our nation's
urgent need for more affordable housing and the integral role of tax
policy, particularly the Housing Credit program, in addressing this
shortage. We appreciate the opportunity to provide our perspective on
the importance of expanding and strengthening the Housing Credit to
increase affordable housing production at a time when it is needed more
than ever.
The need for affordable housing has skyrocketed--at the end of 2022,
our country was 3.8 million homes short of meeting the housing needs of
Americans overall,\1\ and 7 million homes short of housing to serve
extremely low-income renters.\2\ The Housing Credit offers a highly
successful solution with a proven track record to address this urgent
issue. Since its inception in 1986, the Housing Credit has helped
produce or preserve more than 3.7 million safe, decent, affordable
rental homes for more than 8 million low-income Americans. The majority
of the households served by the program (52.6%) are considered
extremely low-income being at or below 30% of Area Median Income (AMI)
and nearly 70% of the households served are at or below 40% of AMI.\3\
Despite the growing need for more affordable housing and the strong
support for the program on both sides of the aisle, however, the
Housing Credit is facing an unprecedented cut at a time when it is
needed now more than ever before. Meanwhile, we are turning away
shovel-ready developments; demand for the credit outstrips supply 2.5
to 1 nationwide.
---------------------------------------------------------------------------
\1\ Up for Growth, Housing UnderproductionTM in the
U.S., 2022. Available at: https://upforgrowth.org/apply-the-vision/
housing-underproduction/#::text=Housing%20Underproduc
tion%20occurs%20when%20communities,need%20and%20total%20housing%20availa
bility.
\2\ National Low Income Housing Coalition, The Gap: A Shortage of
Affordable Homes, 2023. Available at: https://nlihc.org/gap.
\3\ HUD LIHTC Tenant Data 2019, https://www.huduser.gov/portal/
Datasets/lihtc/2019-LIHTC-Tenant-Tables.pdf.
The Affordable Housing Credit Improvement Act (AHCIA) is broadly
supported legislation to expand and strengthen the Housing Credit. The
AHCIA has had strong bipartisan support since it was first introduced
in 2016, and in the 117th Congress the legislation was co-sponsored by
over 200 members of the House, 44 members of the Senate, and nearly
half of Congress at large. This legislation is expected to be
reintroduced in both chambers this spring, and we're grateful to have
the support of Senators Maria Cantwell (D-WA), Todd Young (R-IN),
Chairman Ron Wyden (D-OR), and Marsha Blackburn (R-TN) as the lead
---------------------------------------------------------------------------
sponsors on the Senate version of the legislation.
This legislation has become even more urgent as we have incurred a cut
to affordable housing production at this time of unprecedented and
growing need. A 12.5 percent Housing Credit allocation increase enacted
in 2018 expired at the end of 2021, and state housing agencies have far
too few resources available to sustain prior levels of affordable
housing production. Though there was broad support to include the
provision during negotiations surrounding year-end omnibus legislation
last year (including a bipartisan letter from House lawmakers signed by
54 lawmakers \4\), it has not yet been enacted and the timing could not
be worse. Not only does the status quo need to be restored, as
explained above, but an increase in the Housing Credit allocation as
proposed in the AHCIA is critically needed to actually begin to tackle
our nation's shortage of affordable housing.
---------------------------------------------------------------------------
\4\ Reps. DelBene and Wenstrup Letter, November 2022, https://
delbene.house.gov/uploaded
files/delbene_wenstrup_lihtc_letter_final_with_signatures3.pdf.
The AHCIA also included a proposal to lower the 50 percent bond
financing threshold for developments financed with private activity
bonds (``50 percent test''), which would unlock Housing Credit equity
to increase affordable housing supply further. This proposal also has
broad bipartisan support and enacting these two priority proposals--
lowering the 50 percent and increasing the Housing Credit allocation--
would have increased affordable housing production by more than 2
million additional affordable homes over the next 10 years \5\ than
otherwise possible, while also supporting 3 million additional jobs
annually.\6\ This also comes at a time when more than half of states in
the country are nearing or have already hit their Private Activity Bond
cap.
---------------------------------------------------------------------------
\5\ Novogradac Data April 2021, https://www.novoco.com/notes-from-
novogradac/2021-affordable-housing-credit-improvement-act-could-
finance-more-2-million-additional-affordable.
\6\ Ibid.
The AHCIA also contains other provisions that would further increase
affordable housing production and preservation, allowing the Housing
Credit to better serve Americans who are disproportionately impacted by
the affordable housing crisis, including extremely low-income families,
seniors and people with disabilities, veterans, and people experiencing
homelessness or living in hard-to-reach rural areas. It would also
remove barriers to affordable housing preservation and streamline
program rules and promote efficiency. Passage of the AHCIA will also
help address the urgent need for stable workforce housing in a broad
range of areas of need, from cities to rural areas in need of farm-
worker housing while supporting economic growth and opportunity in
communities nationwide. Investing in the Housing Credit is critical to
addressing America's affordable housing crisis. Expanding and
strengthening the Housing Credit by enacting the essential priorities
discussed above will support the production of more affordable rental
housing, and help Americans all across the country have safe, decent,
and affordable places to call home. We urge you to support the AHCIA
and to ensure that the bill's key provisions, particularly the
proposals to increase the Housing Credit allocation and lower the 50
percent test, are included in any tax legislation or other possible
legislative vehicle that emerges this year. We thank you for your
continued leadership and look forward to continuing to work with you
and all the members of the committee on these priorities in the 118th
---------------------------------------------------------------------------
Congress.
______
AHEPA Senior Living
10706 Sky Prairie St.
Fishers, IN 46038
317-845-3410
https://ahepaseniorliving.org/
Statement of Steve Beck, President and CEO
Chairman Wyden, Ranking Member Crapo, and Members of the Committee,
AHEPA Senior Living (ASL), a mission-driven nationwide provider of
affordable multifamily senior living communities, commends the
Committee for holding a hearing to examine the role of tax policy in
increasing affordable housing supply and appreciates the opportunity to
provide our perspective on this very important and timely topic.
We echo the strong support by senators on both sides of the aisle, and
from certain witnesses, for the Low-Income Housing Tax Credit program
(LIHTC). A model public-private partnership, LIHTC is our nation's
primary tool for incentivizing and encouraging private investment in
the production and preservation of affordable housing and vital to job
creation. Since 1986, the affordable housing credit has leveraged
billions in private dollars to build and preserve affordable housing in
every single state. Furthermore, it represents a significant and cost-
effective investment in affordable housing for older adults. Of the
Housing Credit's 3.5 million homes built and preserved since the
program's inception, about 1.1 million Housing Credit homes are headed
by older adults.
We also sincerely thank and applaud Chairman Wyden, Ranking Member
Crapo, and several Senate Finance Committee members, for demonstrating
the important need to strengthen the Housing Credit through the
introduction, or pending introduction, of legislation. For example,
when reintroduced, and if fully enacted, the Affordable Housing Credit
Improvement Act (AHCIA) would support nearly three million jobs and
generate $346 billion in wages and business income and nearly $120
billion in tax revenue. AHCIA's enactment would lead to the production
of an estimated two million more affordable homes.
We also applaud Chairman Wyden's reintroduction of the Decent,
Affordable, Safe Housing for All (DASH) Act. This comprehensive
legislation would, like AHCIA, expand the 9% Housing Credit and lower
the financing threshold for private activity bond financing from 50% to
25%. The DASH Act also would create other tax credit programs that
support affordable housing.
Why the Housing Credit Is Important to Our Mission
We also want to convey the important role LIHTC plays in the production
and preservation of affordable housing for older adults. Recent policy
and administrative developments pertaining to the U.S. Department of
Housing and Urban Development's Section 202 Supportive Housing for the
Elderly program have made LIHTC even more vital to our mission.
Almost our entire affordable housing portfolio is comprised of
affordable independent senior living communities administered by HUD's
Section 202 Supportive Housing for the Elderly program. We manage 87
HUD Section 202 properties in 19 states, totaling 4,467 units. We own
six of the 87 properties. (Although not tax policy related, it should
be noted that according to the American Association of Service
Coordinators, taxpayers save 66% when older adults live independently
with the assistance of a service coordinator as is the case with the
202 program.)
In recent years, HUD has resumed issuing Notices of Funding Opportunity
(NOFOs) that provide capital advances to nonprofits for the
construction of new Section 202 units. These capital advance funds
often must be augmented, or supplemented, with gap financing to help
complete the capital stack. One key financing mechanism utilized to
complete the stack is the Housing Credit.
In September 2021, we were thrilled HUD awarded us two Section
202 Supportive Housing for the Elderly program grants, totaling $16.7
million to support the development of new affordable seniors housing
communities in Des Moines, Iowa, and South Bend, Indiana.
The capital stack for each of these two deals will include 4%
LIHTC financing.
Furthermore, As HUD Section 202 communities have aged, the ability to
finance major renovations to preserve affordable housing for older
adults, used to be a challenge. However, in the FY2018 Omnibus
appropriations bill, Congress provided authority for Section 202
communities with Project Rental Assistance Contracts (``202/PRACs'') to
participate in HUD's Rental Assistance Demonstration (RAD) to
facilitate the preservation of these homes. This policy change provided
HUD 202 PRACs with the ability to utilize RAD to access private capital
for the rehab and preservation of our properties. Here, again, a key
financing mechanism utilized in this process is the Housing Credit.
Thus, will rely upon a strong Housing Credit to help us address our
preservation needs.
In fact, we have ``RAD for PRAC'' deals in the works for three
properties in Montgomery, Alabama, and three properties in Mobile,
Alabama--and they all involve 4% LIHTC.
Finally, the Housing Credit benefits the development of affordable
assisted living communities. We proudly utilized LIHTC to bring
affordable assisted living services to very low-income older adults and
people with disabilities in Indiana. There, the Housing Credit played
an important role with our efforts to expand our mission to include the
development of four affordable assisted living communities, totaling
532 units. Here, the Housing Credit was blended with multifamily
housing revenue bonds to provide financing. Today, we own and manage
all four properties, and we aim to grow the affordable assisted living
model with the help of a strong Housing Credit, which is complemented
with a state's strong Medicaid Waiver program.
Additional Examples
We are pleased to share a few more examples of how the Housing Credit
has help us meet our mission.
The Housing Credit helped us to complete development of a HUD Section
202 property in Ohio. By the time of the project's initial closing, it
was advisable to utilize 4% Housing Credit bonds to augment the
original grant provided in the HUD award to provide the upgrade needed
for construction materials and to meet Greening Guidelines.
In 2014, we utilized the 4% Housing Credit and revenue bonds to rehab
and add much needed common area space to two of our HUD 202 properties
in Mobile, Alabama.
In Michigan, the 4% Housing Credit helped us to renovate a HUD Section
202 property when it was blended with funding from the Michigan State
Housing Development Authority.
The Need and Demand
We would be remiss if we did not share our experiences with the clear
need and demand for affordable senior housing with the Committee. They
demonstrate why strong tax incentives, such as LIHTC, are vital. When
older adults do learn about our HUD Section 202 communities, they are
oftentimes confronted with the harsh realities of lengthy wait-lists
and wait times, unfortunately.
To demonstrate, our nationwide wait-list at our HUD Section 202
communities is 4,760 submissions, an increase of 459 submissions since
a year ago. Nationwide, we have 4,467 units. The wait time for our
applicants range from six months to three years.
In addition to our alarming nationwide wait-list and wait times, here
is what we are hearing from our professionals out in the field:
Some inquiring people don't even request an application because
our waiting lists are too long. They want and need immediate
housing.
The number of seniors unable to afford a safe place to live in
many areas will continue to rise. They are most often faced
with choosing between healthcare and paying rent.
Unfortunately, these sentiments expressed by seniors that amplify our
wait-list and wait time statistics will continue as an increased demand
in HUD-assisted housing, especially for the 202 program, is expected. A
May 2020 Government Accountability Report (GAO) report on Rental
Housing found, ``The late middle-aged group (50-64 years) experienced
the largest estimated increase in the number of renter households--an
increase of 4 million households--and accounted for more than half of
the total increase in renter households from 2001 through 2017.''\1\
The GAO noted many of these households have not recovered from the
financial crisis, and the GAO cited a Harvard Joint Center for Housing
Studies report that this group has lower incomes and higher rentership
rates than previous generations. Moreover, HUD's Worst Case Housing
Needs 2021 Report to Congress found that 2.24 million very low-income
elderly households have worst-case housing needs, paying more than 50%
of their income in rent.\2\ Finally, a 2021 Urban Institute report
predicts there will be 13.8 million new older adult households between
2020 and 2040; 40% of which (5.5 million) will be renter households.\3\
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\1\ https://www.gao.gov/products/gao-20-427.
\2\ https://www.huduser.gov/portal/sites/default/files/pdf/Worst-
Case-Housing-Needs-2021.pdf.
\3\ https://www.urban.org/research/publication/future-headship-and-
homeownership.
Chairman Wyden, Ranking Member Crapo, and Senate Finance Committee
members, AHEPA Senior Living thanks the Committee for the opportunity
to share our views on how and why tax policy is important to affordable
housing, specifically for our nation's older adults, through the HUD
Section 202 Supportive Housing for the Elderly program. We welcome the
opportunity to work with the Committee to ensure older adults have
access to the safe and dignified housing they need to age in place,
live independently, and thrive; and the role tax incentives play in
providing it. Thus, it is imperative that Congress pass bipartisan-
backed legislation such as the AHCIA that strengthens programs such as
the Low-Income Housing Tax Credit to help providers like us to meet the
need and demand. Thank you.
About ASL
AHEPA Senior Living is a mission-driven, nationwide provider of
affordable independent senior living and affordable assisted living
communities. ASL has developed and manages 87 affordable independent
senior living communities in 19 states, totaling 4,467 units, that are
administered by the U.S. Department of Housing and Urban Development's
Section 202 Supportive Housing for the Elderly program.
AHEPA Senior Living also owns and manages four affordable assisted
living communities with 532 units located in Indiana that are supported
by the Low-Income Housing Tax Credit.
ASL is based in Fishers, Indiana.
______
American University, Kogod Tax Policy Center
Professor Caroline Bruckner, Senior Professorial Lecturer,
Accounting and Taxation; Managing Director, Kogod Tax Policy Center
Chair Wyden, Ranking Member Crapo, U.S. Senate Committee on Finance
(the ``Committee'') Members and Staff, thank you for holding a full
committee hearing on March 7, 2023, titled, ``Tax Policy's Role in
Increasing Affordable Housing Supply for America's Working Families.''
My name is Caroline Bruckner and I am a tax professor on the faculty at
American University Kogod School of Business. I also serve as the
Managing Director of the Kogod Tax Policy Center (KTPC), which conducts
non-partisan policy research on tax and compliance issues specific to
small businesses and entrepreneurs. The KTPC's mission is to develop
and analyze research and policy recommendations for tax-related
problems faced by small businesses, and to promote public dialogue
concerning tax issues critical to small businesses and entrepreneurs.
Since 2015, I have focused our research agenda, in part, on the tax and
compliance issues impacting self-employed small business owners as well
as the need for increased tax data transparency. In connection with the
March 7th hearing, I wanted to raise two important issues that are
relevant to the Committee's critical work on studying tax policy's role
in increasing affordable housing for working families. First, more
people are working from home--both as small business owners and
employees. Second, tax expenditure policy discussions need to include
inclusive tax data in order for the Committee to engage in effective
policymaking and conduct proper oversight.
1. People Are Increasingly Working From Home
In recent years, more and more Americans are supplementing their
incomes by working outside of traditional employment.\1\ This is a
trend that tax data research has documented.\2\ Following the onset of
the COVID-19 pandemic, private sector research has found that the trend
for independent work has even accelerated. For example, in 2022, MBO
Partners found that the number of independent workers, ``soared'' by
26% to 64.4 million, which was up from 51.1 million in 2021. This
notable increase followed 2021's ``unprecedented'' 34% year-over-year
increase.\3\ In addition, a McKinsey report from last year confirmed
that ``[i]n the latest iteration of McKinsey's American Opportunity
Survey (AOS), a remarkable 36 percent of employed respondents--
equivalent to 58 million Americans when extrapolated from the
representative sample--identify as independent workers.''\4\ But it's
not just that more people are working independently, it's that more
people are working from home. In fact, the latest U.S. Census data
shows the number of people working from home tripled from 9 million in
2019 up to more than 27 million in 2021. States with the highest
percentage of home-based workers include Washington (24.2%), Maryland
(24.0%), Colorado (23.7%) and Massachusetts (23.7%).\5\
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\1\ Caroline Bruckner and Jonathan B. Forman, Women, Retirement,
and the Growing Gig Economy Workforce, 38 Ga. St. U. L. Rev. 259
(2022).
\2\ See, e.g., Katherine Lim, Alicia Miller, Max Risch and Eleanor
Wilking, Independent Contractors in the U.S.: New Trends from 15 Years
of Administrative Tax Data (July 2019) (unpublished manuscript),
https://www.irs.gov/pub/irs-soi/19rpindcontractorinus.pdf.
\3\ MBO Partners, Happier, Healthier and Wealthier: State of
Independence in American 2022, https://info.mbopartners.com/rs/mbo/
images/MBO_2022_State_of_Independence_Research_
Report.pdf.
\4\ McKinsey and Company, Freelance, side hustles, and gigs: Many
more Americans have become independent workers (August 23, 2022),
https://www.mckinsey.com/featured-insights/sustainable-inclusive-
growth/future-of-america/freelance-side-hustles-and-gigs-many-more-
americans-have-become-independent-workers.
\5\ U.S. Census Bureau, ``The Number of People Primarily Working
From Home Tripled Between 2019 and 2021.'' Press Release (September 15,
2022), https://www.census.gov/newsroom/press-releases/2022/people-
working-from-home.html.
Affordable housing tax policy needs to reflect these massive workforce
changes. One tax expenditure the Committee should consider for
improvement is the home office deduction, which has been a critical
support for small, lower-income businesses. Tax data from 2018 found
that ``about 70% of the home office deduction dollars went to
businesses with annual receipts of less than $100,000.''\6\ At the same
time, meeting the requirements of the home office deduction can be
unnecessarily challenging for small business owners. For example, the
deduction requires that, ``in all cases, a home office must be used
regularly and exclusively to conduct business.''\7\ As a result, using
dining room tables for work purposes during the day or ``spreading work
out on the kitchen table does not qualify, even if it happens every
day, because the area is not exclusively used for work.''\8\ Moreover,
employees that work from home are denied any benefit of the deduction
altogether in circumstances where employers provide ``access to
suitable space on the employer's premises for the conduct by an
employee of particular duties.''\9\
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\6\ Cilluffo, Anthony A., The Home Office Tax Deduction,
Congressional Research Service Insight (September 1, 2021), https://
crsreports.congress.gov/product/pdf/IN/IN11736.
\7\ Dayna E. Roane, Deducting Home Office Expenses, Journal of
Accountancy (May 15, 2020), https://www.journalofaccountancy.com/
issues/2020/may/deduct-home-office-expenses-coronavirus-remote-
work.html.
\8\ Id.
\9\ Joint Committee on Taxation, Present Law and Background
Relating to Residential Real Estate (JCX-4-23), March 3, 2023, https://
www.jct.gov/publications/2023/jcx-4-23/.
These kinds of limitations do not make sense given the Committee's
goals of supporting small businesses and working families, and should
be reconsidered specifically in the context for improving tax policy
for affordable housing. Homes are no longer exclusively use for
residential purposes. Millions of low- and middle-income Americans can
and do work from home to start their side hustle or save on commuting
costs or to spend more time with their families. As a result, the home
office deduction can and should be improved to reflect the reality of
how people work today.
2. The Ongoing Need for Tax Data Transparency
As this Committee has noted in prior hearings, the U.S. tax system
reflects racial, ethnic and gender bias and ``adds to inequality in
this country.''\10\ The pervasive nature of the bias in the U.S. tax
system is compounded by the fact that for the most part, civil rights
protections and data transparency guardrails that require federal
agencies to collect data on beneficiaries of federally-funded programs
don't expressly apply to ``tax expenditures'' (i.e., the special
provisions that provide some taxpayers ``more favorable treatment than
regular income tax'').\11\ In other words, civil rights laws don't
mandate Treasury or IRS collect demographic data on who benefits from
tax expenditures.\12\ So, for example, while federal and state housing
agencies are required to track and publish data on the race, ethnicity,
family composition, age, income, use of rental assistance, disability
status, and monthly rental payments of households residing in low-
income housing tax credit properties,\13\ neither Treasury nor the
Committee has any idea of what the equity implications are for the
corporations that are profiting from them.\14\
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\10\ U.S. Senate Committee on Finance, ``Wyden Statement at Finance
Committee Hearing on Inequality in the U.S. Tax Code.'' Press Release
(April 20, 2021), https://www.finance.senate.
gov/imo/media/doc/
042021%20Wyden%20Statement%20at%20Finance%20Committee%20Hear
ing%20on%20Inequality%20in%20the%20U.S.%20Tax%20Code.pdf.
\11\ Joint Committee on Taxation, Estimates of Federal Tax
Expenditures for Fiscal Years 2022-2026 (JCX-22-22), December 22, 2022,
https://www.jct.gov/publications/2022/jcx-22
-22/.
\12\ Bearer-Friend, Jeremy. Should the IRS Know Your Race? The
Challenge of Colorblind Tax Data (August 14, 2018). 73 Tax Law Review 1
(2019), Available at SSRN: https://ssrn.com/abstract=3231315.
\13\ U.S. Department of Housing and Urban Development, Low-Income
Housing Tax Credit (LIHTC): Tenant Level Data, Office of Policy
Development and Research (2019), https://www.huduser.gov/portal/
datasets/lihtc/tenant.html#data.
\14\ JCX-4-23, supra n. 9 at 69 (stating that ``the largest tax
expenditure related to rental housing is the low-income housing tax
credit, with a tax expenditure estimate of $65.0 billion. Approximately
$64.1 billion of the $65.0 billion is attributable to corporations.'').
In recent decades, Congress has increasingly turned to tax expenditures
to deliver critical anti-poverty, health care or housing programming
for taxpayers or to stimulate business activity through deductions for
accelerated depreciation and individuals with business income. As you
know, for budget purposes, tax expenditures are similar to direct
spending programs that function as entitlements.\15\ However, the
absence of inclusive demographic data on taxpayers that claim tax
expenditures raises both equity issues and oversight challenges for
Congress. How can Congress know if the programs funded through the U.S.
tax code are working as intended if they don't track who benefits? How
can the Committee effectively conduct its oversight function of these
``entitlement'' programs absent inclusive tax data?
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\15\ JCX-22-22, supra n. 11 at 3.
Notwithstanding these challenges, legal researchers have been using
data from the private sector and federal agencies--other than IRS--to
estimate the discriminatory racial and gender implications for various
tax expenditures.\16\ Economists and leaders on this Committee have
been increasingly insistent on the need for additional research and
demographic data on how taxpayers benefit from--or are penalized by--
different tax provisions and administrative policies.\17\ Recently,
researchers at Treasury and IRS are stepping up and working to enable
tax expenditure data transparency.\18\ However, Congress needs to do
its part and incorporate and normalize the use of inclusive tax data in
the legislative process. In connection with this, the Committee should
work with Treasury and the Joint Committee on Taxation to include
demographic distribution data when preparing estimates of housing tax
expenditures in connection with the work on improving tax policy for
affordable housing.
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\16\ See, e.g., Bearer-Friend, supra n. 12; Brown, Dorothy A., The
Whiteness of Wealth: How the Tax System Impoverishes Black Americans
and How We Can Fix It (Crown, 2022). Bruckner, Caroline, Doubling Down
on a Billion Dollar Blind Spot: Tax Reform and Women Business Owners,
American University Business Law Review, Vol. 9, Issue 1 (2020),
https://digitalcommons.wcl.american.edu/aublr/vol9/iss1/1/.
\17\ See, e.g., Neubig, Thomas, Disparate Racial Impact: Tax
Expenditure Reform Needed. March 2021. https://www.cepweb.org/wp-
content/uploads/2021/03/Neubig-2021.-Disparate-Racial-Impact-Mar21.pdf;
U.S. Senate Committee on Finance, ``Wyden Statement on GAO Report on
Tax, Demographic Data,'' Press Release (May 18, 2022), https://
www.finance.senate.gov/chairmans-news/-wyden-statement-on-gao-report-
on-tax-demographic-data.
\18\ Julie-Anne Cronin, Portia DeFilippes, and Robin Fisher, Tax
Expenditures by Race and Hispanic Ethnicity: An Application of the U.S.
Treasury Department's Race and Hispanic Ethnicity Imputation, U.S.
Department of the Treasury, Office of Tax Analysis Working Paper 122
(January 2023), https://home.treasury.gov/system/files/131/WP-122.pdf.
Updating housing-related tax expenditures to better reflect how
American families work today along with the Committee's ongoing work
combatting inequality in the U.S. tax system will require sustained
commitment. Holding this housing affordability hearing is an important
step. I stand ready to help the Committee with its work. Feel welcome
---------------------------------------------------------------------------
to contact me with questions regarding the foregoing.
______
Center for Fiscal Equity
14448 Parkvale Road, Suite 6
Rockville, MD 20853
[email protected]
Statement of Michael G. Bindner
Chairman Wyden and Ranking Member Crapo, thank you for the opportunity
to add to the record on affordable housing. This committee last held
hearings on this issue in July 2022, The Role of Tax Incentives in
Affordable Housing. The Ways and Means Committee also held hearings a
week earlier, entitled Nowhere to Live: Profits, Disinvestment, and the
American Housing Crisis. Rather than rehash these issues, I will simply
serve the leftovers in an attachment and highlight a few points.
Point 1: Housing is primarily an income issue.
The best cure for housing affordability is higher income. The
President's budget is on the right track regarding the Child Tax
Credit. I would treble down on his amounts and distribute these funds
through Old-Age, Survivors, Disability and Unemployment Insurance
payouts or with wages. Note that dependent children would only get the
$1000 per month CTC.
Adult and Emancipated Juvenile Students, from ESL to Associates Degree,
should be paid for pursuing their educations at a minimum wage level of
at least $10 per hour (which had been the Republican counter-offer to a
$15 wage). Take the deal and plan on an increase to $12 or just to $11
if the standard work week is cut to 28 hours--seven per day, not
including lunch. Immigrant minors who have been trafficked to the
United States and paroled to relatives or sponsors have had to go to
work. Their only work should be education. No one should be brought in
as a member of a permanent underclass!
The other income issue is how we distribute cost of living raises to
government workers, beneficiaries, government contractors and in the
private sector. While we cannot do much for the last one (except for
offering paid education), the other three are firmly under government
control.
The source of inequality, aside from abandoning the 91% top marginal
tax rate, is granting raises at an equal percentage rather than by an
equal amount. When this started, incomes were fairly equal, so it was
not an issue. Fifty years later, the issue is huge, but not
insurmountable.
From here on in, award raises on a per dollar an hour rather than on a
percentage basis (or dollars per month or week for federal
beneficiaries). Calculate the dollar amount based on inflation at the
median income level. No one gets more dollars an hour raise, no one
gets less dollars per hour in increases. Increase the minimum wage as
above and consider decreasing high end salaries paid to government
employees and contractors. Even without decreases, simply equalizing
raises will soon reduce inequality. Why is this necessary?
Prices chase the median dollar. The median dollar of income is actually
at the 90th percentile, rather than the 77th percentile (which is about
where the median is). This strategy would reduce inflation in both the
long and short terms.
Let me repeat this--prices chase income dollars, not income earners.
On the tax side, limit bracket indexing in the same manner--by dollars
per bracket, not percentages.
Point Two: Abandon the idea of tax incentives for development.
Urban renewal, which relocates poor and largely non-white people, leads
to redevelopment that chases the 90th percentile. The tax incentives in
the President's budget are exactly the wrong approach. Instead, reform
the entire tax system so that most families do not have to file income
taxes. By most, I mean 99%.
If an asset value-added tax is adopted rather than capital gains taxes
then other income taxes, taxes could be replaced with goods and
services taxes on consumption and subtraction value-added taxes on net
business receipts--so that wages and profits would be taxed at an equal
rate, with higher income surtaxes for individuals who receive wages
and/or dividends over the 90th percentile of income at graduated rates
up to $450,000, with a top rate of 25% over the base rate.
Income over $500,000 would be taxed between an additional 5% up to an
additional 25%, with tax prepayment being an optional bond purchase for
years in advance. If enough people or firms shift from holding
marketable debt to tax prepayments, the debt can be reduced more
rapidly and interest costs saved.
Thank you for the opportunity to submit these comments. Please feel
free to contact me further for more detailed discussions, especially
regarding the automatic inequality sourced in bad math.
ATTACHMENT--TAX INCENTIVES IN AFFORDABLE HOUSING, July 2022
HOUSING ISSUES
The Housing Market
Building scientist Belinda Carr highlights why the current economy is
similar to 2005 in a recent YouTube video at https://www.youtube.com/
watch?v=77g6jRBG1
cI&list=WL&index=4&t=570s. Her five main points against an actual
housing shortage are:
1. Declining population growth: Low birth rate, higher death
rates. Permits are meeting population growth rates.
2. People per unit has declined.
3. Number of rental units--large number of investor units,
especially in minority neighborhoods. Investors driving out individual
buyers.
4. Low interest rates have driven up prices, driving up investor
incentives.
5. Mismatch of housing types and locations. The rise of remote
work and possibility of large firms linking wages to housing prices if
a recession occurs (because, as monopsonies, they can).
I recommend asking her for comments or testimony. At least circulate
the YouTube link.
Her research is in keeping with other analyses, including my own, on
the prospect of a housing recession.
Starting in 2009, properties that have been seized in foreclosure have
been purchased with private equity and are so heavily leveraged that
they cannot be sold until the holding company files for bankruptcy in
the next Great Recession. See Homewreckers: How a Gang of Wall Street
Kingpins, Hedge Fund Magnates, Crooked Banks, and Vulture Capitalists
Suckered Millions Out of Their Homes and Demolished the American Dream
by Aaron Glantz. The C-SPAN Book TV discussion with Mr. Glantz will
give the committee a heads-up on what such testimony would include. See
https://www.c-span.org/video/?465567-1/homewreckers.
The long and short of it is that many now have to rent or own leveraged
properties. Our absentee landlords have cashed out and left servicing
companies to bleed us dry. They essentially own us because we have to
work harder and longer to have a place to live while those who have
cashed out live in gated and high-end assisted living communities. In
the last year, Exchange Traded Funds have been all the rage. Who wants
to bet on where the latest pool of junk is hiding?
In 2008, the Troubled Asset Recovery Program was enacted, promising aid
to homeowners. The next year, CNBC Rick Santelli had his ``rant of the
year'' which put the kibosh on any aid to homeowners, although there
was little appetite to provide it from the Larry Summers wing of Obama
economic team anyway. They did, however, stay behind bailing out the
holders of the bad paper.
Let us not repeat (or rather continue to repeat) the bad practices that
left the economy in the doldrums. During the pandemic, the Federal
Reserve has purchased bad paper, but without benefit to those whose
debts are held in those bonds.
This time around, credit card balances and back rent should be forgiven
when the Federal Reserve buys the bonds that hold the debt. Loans could
also be written down, which would stop bondholders from benefiting from
issuing bonds that should never have been issued in the first place.
Renters of both commercial and residential property should be offered
the chance to purchase their locations and homes, with assistance from
Government Sponsored Enterprises, with their paper replacing the debt
paper that has been securitized in Exchange Traded Funds.
ETFs may take a hit, but what was falsely sold as AAA paper would
actually become what was sold. Bad landlords, and Glantz demonstrates
that Mr. Mnuchin and Mr. Ross truly are bad landlords, degrade
properties so that the bonds that were issued for them to cash out are
nowhere near the value at issue.
In 2009, the United States aided and abetted those who created the
crisis. We are currently repeating the mistake. When the inevitable
crisis occurs again, doing the right thing will also be the right
medicine for the economy.
The Opportunity Zone Program and Who It Left Behind (November 16,
2021)
Opportunity zones are the flavor of the decade, proceeding from
enterprise, urban renewal and the destruction of neighborhoods in order
to bring Interstate Highways to cities.
Worse than redlining and segregation, urban renewal, which the civil
rights community calls Negro Relocation. Hispanic neighborhoods are
also suffering the same fate. Time and again, poorer residents are
moved to the suburbs so that coffee shops, high end grocery stores and
luxury apartments can be built for professionals, also known as the
creative class. In short, young and middle aged white people with high
incomes.
Developers bridge the gap between property acquisition and sale so that
those who are displaced leave with lower payments while the developers
benefit from any increase in property values. Such actions are why
Henry George proposed pergovian land value tax, collecting 100% of land
value each year and then distributing a citizens dividend to everyone
(so that poorer people benefit from the price loss experienced by high
end developers.
I usually do not endorse Georgism as the sole solution to inequality.
Creating cooperatives that democratically give members control of the
means of production, consumption, human services and finance is more my
speed; but even I would have the cooperative pay a land value tax to
fund services for those who continue to live in a Smart Growth area
dominated by such a cooperative. It would continue to fund services
after any relocation (unless families wish to join the cooperative.
In the interim, Opportunity Zone provision should be repealed. We need
no more displacement from here on in. This Type of Tax Incentive Is
Counterproductive.
Fair Housing Enforcement
There is a similar matter that needs mention--Fair Housing (especially
considering recent campaign bloviating). In light of recent Supreme
Court rulings including sexual orientation in sex for employment law--
there is no reason to believe that this revised definition does not
apply to every part of the Civil Rights Act--as well as the Fair
Housing Act.
Are civil penalties enough to force compliance? Experience shows that
they do not. A former roommate, who got his Section 8 before I did, was
exposed to possible discrimination couched in the language of credit.
He complained to the Housing Office and the landlord caved in. This was
2018 in liberal Montgomery County. The continued need for training by
the Patricia Roberts Harris National Fair Housing Training Academy
(where I also worked) is less anecdotal.
When I was the Ward 3 Community Relations Representative in the D.C.
Office of the Ombudsman, we were given a talk by the Solid Waste
Management office. Their motto was that there is no better education
than a ticket. This would be equally true in fair housing, as well as
all other civil rights enforcement. It is time to quit talking about
reform and to actually start doing it.
Bias in Housing Policy
When dealing with federal housing, and income support in general, the
desire for economic justice and environmentalism sometimes conflict.
Anti-poverty programs are notorious for not funding those with the
father in the home. This is the result of both racism and the desire to
limit the number of clients. In short, the Zero Population Growth
mentality has made it into housing and income support policy.
There should be no conflict here. The ZPG/racist and cost control
arguments are simply unworthy of American Society, while being endemic
within them. All people of good conscience should resist such nonsense
and I will do so with my last dying breath.
Prior to the Wars on Drugs and on Poverty (the Poor?), the model for
housing in modern America was the three bedroom house. This included a
bedroom for parents, one for the boys and one for the girls. An oldest
child may eventually get his or her own room at some point if there
were a four bedroom or basement/attic space that could be used as a
bedroom.
Aside from the war on the poor, there is no reason that publicly funded
housing should have departed from this norm. This includes Section 8
assistance. If public housing included three bedroom units, there would
not be a drive toward driving families toward ownership that they
cannot afford over the long term.
Federal low and moderate income housing, including the low income
housing my family participated in during the 2000s, gave generous
assistance to get us in, but was not adequate to keep us there. We
mistakenly borrowed using a step-up mortgage. This would have been fine
if the payment itself, rather than the mortgage rate, had ``stepped
up'' by inflation each year. What we received was unsustainable, which
ended in foreclosure, bankruptcy and divorce. I doubt we were the only
ones. See the above discussion on the 2008 bailout for other
difficulties which could have been dealt with via public policy.
Federal rental and purchase support should be two sides of the same
program. As with Medicare, some participants should be dual eligible
for both downpayment assistance and rental assistance. Indeed, everyone
approved for one must be declared eligible for the other. If this were
the case, my family may have stayed in more affordable housing.
The surest way to help federal housing beneficiaries escape the need
for rental assistance, indeed any assistance--including bankruptcy
protection--is to make sure that families have adequate incomes. The
entire low income housing program--from mortgage subsidies to Section
8, as well as most other statutory low income support benefits--could
be decreased or curtailed with adequate support for families through
adequate wages, training programs, child tax credits, and the other
elements of the Build Back Better proposals.
Fix income inequality with higher minimum wages and child tax credits
and the free market will respond to the real needs of families. Two
parent families with more than two kids should be able to demand three
bedroom apartments, all things being equal. End the bias against two-
parent families in current programming and creativity will take care of
the rest.
INCOME SECURITY
It is time to end the two-tier economy. No one should have to work in
what Michael Harrington called The Other America. With the end of
welfare as we knew it, circumstances have actually gotten worse since
Harrington's seminal work. The rise of delivery services, which require
drivers to earn tips, and the gig economy, which prevents easy tipping,
has made things even worse in the name of progress. We are working
harder for less. This Committee can start the ball rolling to fix this.
Minimum Wage
The best option for food security and low income housing is to increase
incomes by increasing the minimum wage and the child tax credit and
indexing them to inflation.
Increasing the minimum wage to $10 wage should take effect immediately,
phasing to $12. You can argue about a $15 or $18 minimum after the
midterm elections. Higher minimum wages increase job growth, as lower
wage employees spend every dime of the increase, as do higher wage
workers below the middle-management level whose wages will also rise.
Provisions should also be included in law to hold franchisees harmless
if minimum wage increases impact their own livelihoods. The conditions
of franchise employment and agreement deserve attention as well in
terms of agreed to standards, payment of franchise owners in low wage
industries and the ability of workers to organize. If some firms decide
to turn franchise employment into full-time employment, so much the
better.
It is indeed a poor job where the physical productivity of workers in
comparison with other factors is under this level, especially when
child tax credits are excluded from the equation. The intermediate goal
should be either a $12 minimum wage (so that it is comparable to the
buying power experienced in 1965) or an $11 wage with a 32 hour work
week.
The perception that doing the right thing makes a business non-
competitive is the reason we enact minimum wage laws and should require
mandatory leave. Because the labor product is almost always well above
wages paid, few jobs are lost when this occurs. Higher wages simply
reduce what is called the labor surplus, and not only by Marx. Any CFO
who cannot calculate the current productive surplus will soon be
seeking a job with adequate wages and sick leave.
The requirement that this be provided ends the calculation of whether
doing so makes a firm non-competitive because all competitors must
provide the same benefit. This applies to businesses of all sizes. If a
firm is so precarious that it cannot survive this change, it is
probably not viable without it.
Childcare and Paid Leave
Childcare is best provided by the employer or the employee-owned or
cooperative firm. On-site care, with separate spaces for well and sick
children, as well as an on-site medical suite to treat sick employees,
will uncomplicate the morning and evening routines. Making yet another
stop in an already busy schedule adds to the stress of the day. Knowing
that, if problems arise at a work-based daycare, they can be right
there, will help parents focus on work.
Larger firms and government agencies can more easily provide such
facilities. Indeed, in the Reeves Center of the District Government,
such a site already exists. Smaller firms could make arrangements with
the landlord of the building where offices or stores are located,
including retail districts and shopping malls. For security reasons,
these would only serve local workers, but not retail customers.
A tax on employers would help society share the pain for requiring paid
leave. Firms that offer leave would receive a credit on their taxes
(especially low wage firms). Tax rates should be set high enough so
that.
Child Tax Credits
The Child Tax Credit should support the income of each dependent child
at median wage levels and be fully refundable. If a parent participates
in education and training, their child tax credit should be paid with a
training stipend set to the minimum wage. Including these benefits with
pay reduces the need for a $15 minimum wage. $12, which is in line with
historical averages prior to 1965, should be adequate.
There are two avenues to distribute money to families. The first is to
add CTC benefits to unemployment, retirement, educational (TANF and
college) and disability benefits. The CTC should be high enough to
replace survivor's benefits for children.
The second is to distribute them with pay through employers. This can
be done with long term tax reform, but in the interim can be
accomplished by having employers start increasing wages immediately to
distribute the credit to workers and their families, allowing them to
subtract these payments from their quarterly corporate or income tax
bills.
Tax Reform
Tax reform will help both low wage and gig/1099/staffing services
workers who are essentially full-time but are not treated as such.
Because these ``vendors'' would have to pay the tax and receive the
breaks, client firms would have the incentive to hire them instead.
Our tax reform plan, which was last adjusted on June 10th of this year,
features a Subtraction Value-Added Tax. This tax can serve as an
employer-based vehicle for distributing child tax credit, healthcare
and childcare benefits.
The S-VAT could be levied at both the state and federal levels with a
common base and tax benefits differing between the states based on
their cost of living (which would be paid with the state levy). The
federal tax would be the floor of support so that no state could keep
any part of its population poor, including migrants. It is time to end
the race to the bottom and its associated war on the poor.
Between the CTC and the Earned Income Tax Credit, the CTC is to be
preferred. Applying for an EITC is part of why it is expensive to be
poor. For most, outside help is needed to calculate it. Having to get
such help is a ``poor tax.'' Our proposed changes to individual payroll
taxes propose a way to end this credit while assuring adequate
retirement savings and family income. The following paragraphs are an
excerpt from our current tax reform plan.
Subtraction Value-Added Tax (S-VAT). These are employer paid Net
Business Receipts Taxes. S-VAT is a vehicle for tax benefits, including
Health insurance or direct care, including veterans' health care
for non-
battlefield injuries and long-term care.
Employer paid educational costs in lieu of taxes are provided as
either
employee-directed contributions to the public or private unionized
school of their choice or direct tuition payments for employee children
or for workers (including ESL and remedial skills). Wages will be paid
to students to meet opportunity costs.
Most importantly, a refundable child tax credit at median income
levels (with inflation adjustments) distributed with pay.
Subsistence level benefits force the poor into servile labor. Wages and
benefits must be high enough to provide justice and human dignity. This
allows the ending of state administered subsidy programs and
discourages abortions, and as such enactment must be scored as a must
pass in voting rankings by pro-life organizations (and feminist
organizations as well). To assure child subsidies are distributed, S-
VAT will not be border adjustable.
The S-VAT is also used for personal accounts in Social Security,
provided that these accounts are insured through an insurance fund for
all such accounts, that accounts go toward employee ownership rather
than for a subsidy for the investment industry. Both employers and
employees must consent to a shift to these accounts, which will occur
if corporate democracy in existing ESOPs is given a thorough test. So
far it has not. S-VAT funded retirement accounts will be equal-dollar
credited for every worker. They also have the advantage of drawing on
both payroll and profit, making it less regressive.
A multi-tier S-VAT could replace income surtaxes in the same range.
Some will use corporations to avoid these taxes, but that corporation
would then pay all invoice and subtraction VAT payments (which would
distribute tax benefits). Distributions from such corporations will be
considered salary, not dividends.
Individual payroll taxes. Employee payroll tax of 7.2% for Old-Age and
Survivors Insurance. Funds now collected as a matching premium to a
consumption tax based contribution credited at an equal dollar rate for
all workers qualified within a quarter. An employer-paid subtraction
value-added tax would be used if offsets to private accounts are
included. Without such accounts, the invoice value added tax would
collect these funds. No payroll tax would be collected from employees
if all contributions are credited on an equal dollar basis. If employee
taxes are retained, the ceiling would be lowered to $85,000 to reduce
benefits paid to wealthier individuals and a $16,000 floor should be
established so that Earned Income Tax Credits are no longer needed.
Subsidies for single workers should be abandoned in favor of radically
higher minimum wages. If a $10 minimum wage is passed, the employee
contribution floor would increase to $20,000.
Pro-Life Scoring
The following paragraphs should be familiar to members and staff. Now
that Roe v. Wade has been overturned, they should be made available to
everyone.
These reforms MUST be scored as pro-life legislation and be funded more
broadly than the President has promised. Having served on the staff of
a major abortion rights organization in the past, I can assure you that
no such organization would ever oppose higher living standards for
women and their families!
The chief obstacle for funding families is not the feminist movement.
It is the so-called right to life movement who would rather women be
penalized for having abortions than subsidized so that they are not
necessary. Over the course of many decades, I have had conversations
with conservative members of the pro-life community. When push comes to
shove, they oppose the measures above because their objections to
abortion are more about sexuality than the welfare of children.
In the pro-choice movement, many jump to the defend women's bodies
argument before first addressing the need for adequate family income.
Doing so now will shame the leadership of the pro-life movement into
supporting these provisions to Build Back Better.
Many in the pro-life movement already do. Catholic Charities USA,
NETWORK and the Catholic Health Association all stand with working and
poor women. They must be very publicly leveraged to get the U.S.
Conference of Catholic Bishops behind them as well--and to have the
bishops insist that these measures be considered must-pass legislation
for the computation of pro-life voting records.
Catholic members of Congress and the President should also lead on this
effort. It is time to stop grandstanding on this issue. These measures
must pass--and on a larger scale than provided for in Build Back
Better.
______
Manufactured Housing Institute
1655 Fort Myer Drive, Suite 200
Arlington, VA 22209
(703) 558-0400
[email protected]
www.manufacturedhousing.org
The Manufactured Housing Institute (MHI) is pleased to submit this
statement for the record for the March 7, 2023, Senate Finance
Committee Hearing on ``Tax Policy's Role in Increasing in Affordable
Housing Supply for Working Families.''
MHI is the only national trade association that represents every
segment of the factory-built housing industry. Our members include home
builders, suppliers, retail sellers, lenders, installers, community
owners, community operators, and others who serve the industry, as well
as 48 affiliated state organizations. In 2022, our industry produced
nearly 113,000 homes, accounting for approximately 11 percent of new
single-family home starts.
MHI appreciates that Chairman Wyden and Ranking Member Crapo are
holding this important hearing assessing the role of tax policies in
increasing the supply of affordable housing. With our nation facing an
affordable housing shortage, manufactured housing is one solution that
can help address this need. Manufactured housing is the most affordable
homeownership option available for low- and moderate-income families in
America. The median household income of a manufactured home resident is
around $35,000--while the median household income of a site-built
homeowner is around $76,000. Commonly, manufactured homes are less
expensive to own than renting.
Manufactured housing is the most effective source of unsubsidized
housing that serves low- and moderate-income families. Our homes are
built in a controlled factory environment in accordance with a federal
building code administered by the U.S. Department of Housing and Urban
Development (HUD). Unlike site-built homes, which are subject to
numerous differing state and local regulations, manufactured homes are
built to just one uniform federal preemptive code. In place since 1976
pursuant to the National Manufactured Housing Construction and Safety
Standards Act (MHCSS) of 1974, the HUD Code provides a single uniform
regulatory framework for home design and construction of manufactured
homes, including standards for health, safety, energy efficiency, and
durability. This has enabled manufacturers to ship homes across
interstate lines and achieve economies of scale that have brought high
quality affordable homes to millions of people.
As the Committee develops tax incentives to increase the affordable
housing supply, we ask that you ensure that manufactured housing is an
eligible form of housing under such incentives. With respect to
specific proposals and programs, we offer the Committee the suggestions
below.
MHI continues to be very supportive of Chairman Wyden's proposal to
create a first-time home buyer tax credit. The increase in mortgage
rates over the last year has exacerbated homeownership affordability
challenges. Adoption of this provision is potentially even more
important than when the Chairman first proposed it.
MHI also asks the Committee to explore ways to make current tax
incentive programs more effective in generating investments for
manufactured home communities. Manufactured home communities are a
critical affordable housing model. Because of the financial and
lifestyle benefits of owning a manufactured home versus the limitations
that come with renting an apartment or buying a condominium or other
site-built home, millions of individuals and families have chosen to
live in land-lease manufactured home communities. There are more than
43,000 land-lease communities in the country with almost 4.3 million
homesites. Today, half of new manufactured homes are placed in land-
lease communities. Demand for living in land-lease manufactured home
communities continues to rise because these communities provide an
effective way for residents to become homeowners without the
substantial barrier to entry posed by the down payment necessary for
the purchase of land. In the aftermath of the pandemic, where families
are seeking their own outdoor space and neighborhood amenities, the
popularity of land-lease communities is growing, and occupancy rates
are high.
As the Committee analyzes the supply of affordable homeownership in
America, we believe land-lease communities offer a positive example of
what affordable housing should look like. Land-lease communities
provide much more than affordable housing. They offer a sense of
neighborhood and often feature a range of amenities--such as swimming
pools, clubhouses, and playgrounds--and events and activities to
support residents' sense of community. In active senior lifestyle
communities, residents enjoy resort-style amenities and an array of
planned events and activities. In all-age communities, neighborhood
settings with playgrounds, sports courts, and clubhouses offer families
a place to thrive. Many offer events and programming, including after
school programs.
In addition to high occupancy rates and increased demand
demonstrating its attractiveness, the successful hybrid homeownership
model of land-lease communities is also evidenced in consumer research
that shows that residents who live in these communities are highly
satisfied with their housing choice. U.S. Census data and independent
research conducted by MHI shows that manufactured housing residents
report high levels of satisfaction and that they are likely to
recommend it to others. To read more about this research, please visit
https://www.manufactured
housing.org/commresearchresults-2/.
Many existing land-lease communities were built several decades ago
and need an infusion of funds from new investors to address long
neglected capital improvements like roads, sewer, and water. When
properties are not being maintained, they are at risk for closure
because adequate property standards are not being met. In addition, as
surrounding property values rise, some localities are deciding to buy
the land and use it for retail or other uses, removing a significant
source of affordable housing.
Opportunity Zone tax incentives can currently be used to make these
critical investments. However, their use and availability for this
purpose is very limited by the requirement that funds must be a
reinvestment of capital gains from sales taking place within the
previous 180 days. One option to facilitate more investments in
affordable manufactured home communities would be for Congress to fund
additional investments in high poverty Opportunity Zones. Such funds
could be allocated to states, which would re-allocate and target their
use to high priority activities within existing Opportunity Zones,
including workforce housing through investments in manufactured home
communities.
A second option would be a narrowly targeted change to allow
Opportunity Zone tax incentives within existing Opportunity Zones for
investments in affordable manufactured home communities,
notwithstanding the current restriction that this must be a
reinvestment of a recent capital gains transaction.
In addition to making Opportunity Zones more effective in
supporting manufactured housing communities, we believe the Low-Income
Housing Tax Credit program could also be improved to facilitate the
preservation and development of manufactured home communities. Funding
from the Low-Income Housing Tax Credit (LIHTC) has not historically
been directed toward the development or preservation of manufactured
home communities. We ask the Committee to consider specifically naming
development of and preservation of manufactured home communities as
eligible activities under the program. Such provision should allow all
eligible community owners to obtain financing to preserve manufactured
home communities. This could be done as a part of the Committee's
consideration of expanding the credit to increase affordable housing
investments proposed by Senators Cantwell and Young in ``The Affordable
Housing Credit Improvement Act,'' which MHI has endorsed.
Finally, we would ask the Committee to consider incentives for the
replacement of mobile homes with HUD Code manufactured homes.
Manufactured homes built prior to 1976 are known as ``mobile homes.''
In June 1976, the Federal Manufactured Home Construction and Safety
Standards Act (also known as the HUD Code) went into effect, which
established federal standards for manufactured housing design and
construction, strength and durability, transportability, fire
resistance, energy efficiency and quality. The HUD Code also sets
performance standards for the heating, plumbing, air conditioning,
thermal and electrical systems.
Because mobile homes were not built to the HUD Code, many of these
homes do not meet today's rigorous standards and owners of mobiles
homes would benefit from replacing and/or retrofitting their current
homes to HUD Code homes. However, owners of these homes are typically
low- and moderate-income families that lack the resources of financing
options to update their homes to meet today's construction standards. A
tax incentive for repair or replacement could be very impactful to
ensure people have access to resilient, efficient, and quality
homeownership.
Thank you for the opportunity to share our views on the important
matter of preserving and increasing affordable housing across the
country. Increased federal support for boosting the supply of
manufactured housing will not only strengthen homeownership
opportunities for millions of Americans but also provide more options
to consumers hurt by unaffordable rents and the shortage of adequate
housing options. Land-lease communities are critically important to the
availability of affordable housing in America, and we look forward to
working with you on ways to increase and preserve this attainable
homeownership option for more families.
______
National Association of Federally-Insured Credit Unions
3138 10th Street North
Arlington, VA 22201-2149
703-522-4770
800-336-4644
f: 703-524-1082
[email protected]
https://www.nafcu.org/
March 6, 2023
The Honorable Ron Wyden The Honorable Mike Crapo
Chairman Ranking Member
U.S. Senate U.S. Senate
Committee on Finance Committee on Finance
Washington, DC 20510 Washington, DC 20510
Re: Tomorrow's Hearing: ``Tax Policy's Role in Increasing Affordable
Housing Supply for Working Families''
Dear Chairman Wyden and Ranking Member Crapo:
I write to you today on behalf of the National Association of
Federally-Insured Credit Unions (NAFCU) in conjunction with tomorrow's
hearing, ``Tax Policy's Role in Increasing Affordable Housing Supply
for Working Families.'' As you are aware, NAFCU advocates for all
federally-insured not-for-profit credit unions that, in turn, serve
over 135 million consumers with personal and small business financial
service products. We would like to take this opportunity to highlight
our support for the Neighborhood Homes Investment Act and Affordable
Housing Credit Improvement Act, as these two pieces of legislation
would help address America's housing affordability crisis and provide
commonsense housing solutions for underserved communities. Credit
unions continue to focus on serving rural, low-income, and underserved
communities and increasing our presence in these areas.
The housing market is a critical aspect of our nation's economy, and
the future availability of affordable housing is of great importance to
our nation's credit unions and their 135 million members. In the years
since the Great Recession and hardships during the COVID-19 pandemic,
it has become increasingly clear that the status quo is an
unsustainable long-term option. Before, during, and after the financial
crisis and COVID-19 pandemic, credit unions provided and continue to
provide quality loans through solid underwriting practices, and we look
forward to continue being a part of affordable housing solutions.
Neighborhood Homes Investment Act
In urban, rural, and all underserved areas, the absence of quality
homes undermines both neighborhood stability and the opportunity for
families to build wealth through homeownership. Too often the major
impediment to building new homes or rehabilitating abandoned or
deteriorated ones in these communities is that the cost exceeds the
homes' market value upon completion. The Neighborhood Homes Investment
Act would address this problem by providing a tax credit to cover a
portion of the construction and rehabilitation costs of homes for
owner-occupancy.
The new tax credits would be administered by state agencies through
annual competitive application rounds. Tax credits would only be
available for modestly priced homes in communities characterized by
high poverty, low incomes, and low home values. The credits could not
be claimed until the construction is completed, and the home is
occupied by an eligible homeowner, and would only cover the difference
between the eligible development costs and the final sales price. We
ask for your support of this commonsense measure aimed at increasing
accessibility and the volume of quality homes in underserved
communities.
Affordable Housing Credit Improvement Act
This bill would help address the affordable housing crisis by building
or preserving an estimated two million additional affordable homes
through an expansion of the Low-Income Housing Tax Credit.
Specifically, this legislation would increase the current annual Low-
Income Housing Tax Credit allocation by 50 percent, allow for a more
efficient use of bond resources resulting in even more Low-Income
Housing Tax Credit production and preservation, and boost resources for
states to better serve rural, tribal, and underserved communities.
Since the Low-Income Housing Tax Credit's inception in 1986, it has
been responsible for virtually all the production and preservation of
affordable housing in the United States. NAFCU urges you to support the
expansion of this tried-and-true method for increasing and preserving
affordable housing.
We thank you for your leadership and appreciate the opportunity to
share our thoughts on improving housing affordability. Should you have
any questions or require any additional information, please contact me
or Jake Plevelich, NAFCU's Associate Director of Legislative Affairs,
at [email protected].
Sincerely,
Brad Thaler
Vice President of Legislative Affairs
______
National Association of Realtors
500 New Jersey Ave., NW
Washington, DC 20001
(800) 874-6500
March 21, 2023
The Honorable Ron Wyden The Honorable Mike Crapo
Chairman Ranking Republican
U.S. Senate U.S. Senate
Committee on Finance Committee on Finance
215 Dirksen Senate Office Building 215 Dirksen Senate Office Building
Washington, DC 20510 Washington, DC 20510
Dear Chairman Wyden and Ranking Member Crapo:
On behalf of the more than 1.5 million members of the National
Association of Realtors', thank you for holding the March 7,
2023, hearing entitled ``Tax Policy's Role in Increasing Affordable
Housing Supply for Working Families.'' Few issues in our Nation are
more topical and urgent than finding effective ways to reduce the dire
shortage of places for American families to live.
There is little or no debate around the question of whether the U.S.
has a shortage of residential units. Rather, the question is how large
the supply gap is. Estimates of the gap vary from about 3.8 million
units to over 7 million.
But even if we could wave a magic wand and have this many additional
housing units appear overnight, many experts believe we would still
face an affordability issue. Thus, the number of additional homes
needed to provide safe and affordable places to live for all who need
and want them is likely a multiple of the numbers above.
Perhaps even more vital is the question of how best our national
policies can be changed to begin to meet these needs. And specific to
this Committee, how can tax policies be changed to incentivize the
creation of more affordable housing units?
Realtors', who consider the lack of supply of housing as an
issue of the highest order, are heartened to learn that the lack of
supply is recognized by members of the Finance Committee and other
policymakers in Congress as a grievous problem. And we are also
relieved to see that this recognition is bipartisan.
We urge you to consider the following ideas as components of an overall
plan of Federal tax changes to incentivize the creation of more housing
units for Americans:
Enact tax credits to lower the cost of converting unused
commercial real estate to residential units. These properties can be
warehouses, offices, shopping malls, or even old schools. And they can
be found in cities, suburban areas, as well as in small towns and rural
parts of the Nation. Each residential unit thus created would assist
with the housing shortage. And it would provide the additional bonuses
of shoring up the commercial markets, boosting the economy and creating
new jobs.
Provide a capital gains tax rate reduction (perhaps 50 percent
of the current rate) to owners of residential rental properties who
sell a unit to a first-time buyer who will occupy it as their home.
Some 10 million owner-occupied homes were purchased by investors of all
types and sizes and converted to rentals in the wake of the housing
crisis of 2008, significantly lowering the supply of available homes
for purchase. This incentive could be limited to small investors, who
still own the great majority of all rental homes. Because this would
not require new construction, this idea could likely create new
ownership opportunities for first-time buyers more quickly than any
other incentive idea.
Increase the exclusion on the gain on sale of a principal
residence. Record jumps in home prices over the past few years has
disincentivized older homeowners from selling their homes in order to
move to smaller ones or to retirement facilities, simply because the
resulting capital gains tax would leave too little to afford to replace
the sold home. The result is that there are fewer homes available for
younger or newer homeowners to move into, thus driving demand and
prices even higher.
Pass the Affordable Housing Tax Credit Improvement Act. This
bipartisan legislation would improve the way the Low Income Housing Tax
Credit works by increasing the credit allocation by 50 percent while
making other improvements to what many regard as the most successful
affordable housing program in the Nation's history. These changes are
projected to provide over 2 million additional affordable homes over
the next 10 years.
Approve the Neighborhood Homes Investment Act. This legislation,
which also enjoys broad bipartisan support, would make an appreciable
increase in the housing supply over the next 10 years by mobilizing
private investment to build or rehabilitate as many as 500,000
affordable homes for moderate- and middle-income homeowners in
distressed neighborhoods.
These tax incentive ideas would go a long distance toward creating a
strong down payment on the new affordable residential units that we
need to stave off an even deeper crisis of under-housed Americans.
Again, thank you again for holding this hearing and expressing publicly
the urgency of these needs. We look forward to continuing to work with
you and your colleagues on this most important issue.
Sincerely,
Kenny Parcell
2023 President
______
National Community Renaissance
9421 Haven Avenue
Rancho Cucamonga, CA 91730
www.nationalcore.org
Statement of Jeff Burum, Chairman of the Board of Directors
On behalf of National Community Renaissance (``National CORE'') I
am pleased to have the opportunity to submit this statement for the
record for the March 7, 2023 Senate Finance Committee Hearing on ``Tax
Policy's Role in Increasing Affordable Housing Supply for Working
Families.''
The construction of new affordable rental housing units is a
significant challenge, necessitating entities like National CORE to
obtain substantial amounts of equity from a range of sources, including
federal sources such as housing tax credits and HUD HOME and CDBG
funding. These challenges are particularly difficult in high-cost
areas, such as California, where National CORE is active.
I am writing to suggest the Committee explore opportunities to
create targeted capital gains exemptions for long-time holdings of
rental housing developments, contingent on donation of such properties
to a non-profit affordable housing developer/owner that covenants to
keep and maintain the housing units affordable for an extended period.
An unutilized opportunity to more efficiently create affordable
rental housing occurs when an owner of existing rental housing
properties, where the owner has held the property for a long period of
time, and currently has an exceptionally low tax basis, both because
the property has appreciated and because the owner has taken
significant deprecation. In such cases, it is common for older owners
of such properties not to sell the properties, but instead wait to
obtain the stepped-up basis at death, in order to avoid paying capital
gains and recapture taxes.
Our proposal would be to provide targeted tax relief from capital
gains, including depreciation recapture. This would incentivize such
owners to donate the property to a qualified non-profit affordable
housing owner who agrees to keep the units affordable. We believe the
tax costs would be very low or de minimis, because as noted above,
owners in such situations typically do not sell these properties, but
wait for the step-up basis.
We note that the Commonwealth of Massachusetts has adopted a
similar concept, creating a donation tax credit (DTC), similarly
designed to incentivize donation of rental properties for affordable
housing use. However, a federal tax incentive would be even more
dynamic and broad-based.
At National CORE, we have developed and modeled such tax incentive
options at the federal level, and would be happy to discuss our
findings with the Committee.
______
National Low Income Housing Coalition
1000 Vermont Avenue, NW, Suite 500
Washington, DC 20005
Chair Wyden, Ranking Member Crapo, and members of the Committee, thank
you for the opportunity to submit a statement for the record on the
role of tax policy in increasing affordable housing supply.
The National Low Income Housing Coalition (NLIHC) is dedicated to
achieving racially and socially equitable public policy that ensures
people with the lowest incomes have quality homes that are accessible
and affordable in communities of their choice. NLIHC members include
state and local affordable housing coalitions, residents of public and
assisted housing, nonprofit housing providers, homeless service
providers, fair housing organizations, researchers, faith-based
organizations, public housing agencies, private developers and property
owners, local and state government agencies, and concerned citizens.
While our members include the spectrum of housing interests, we do not
represent any segment of the housing industry. Rather, we work on
behalf of and with low-income people who receive, as well as those who
need, federal housing assistance, especially extremely low-income
people and people who are experiencing homelessness.
Even before the pandemic, millions of extremely low-income households--
disproportionately people of color--were struggling to remain housed,
always one financial shock away from falling behind on rent and being
threatened with eviction and, in the worst cases, homelessness. On any
given night, more than half a million people experienced homelessness,
and millions more were at risk.\1\
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\1\ National Alliance to End Homelessness, (2021). State of
Homelessness: 2021 Edition, retrieved from: https://
endhomelessness.org/homelessness-in-america/homelessness-statistics/
state-of-homelessness2021/.
The underlying cause of America's housing and homelessness crisis is
the severe shortage of homes affordable and available to people with
the lowest incomes and the widening gap between incomes and housing
costs. There is a national shortage of 7 million homes that are
affordable and available to America's lowest-income renters--those with
incomes less than either the federal poverty guideline or 30% of their
area median income (AMI), whichever is greater. The severe shortage of
affordable and available homes for extremely low-income renters is a
structural feature of the country's housing system, consistently
impacting people in every state and nearly every community.\2\
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\2\ National Low Income Housing Coalition (2022), The Gap: A
Shortage of Affordable Homes, Washington, DC, retrieved from: https://
nlihc.org/gap.
Housing costs are out of reach for too many of the lowest-income
renters.\3\ Rents are far higher than what the lowest-income and most
marginalized renters, including seniors, people with disabilities, and
working families, can spend on housing. Despite the clear and urgent
need, Congress only provides housing assistance to one in four eligible
households.\4\
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\3\ National Low Income Housing Coalition (2020), Out of Reach: The
High Cost of Housing, retrieved from: https://nlihc.org/oor.
\4\ Fischer, W. and Sard, B. (2017), Federal Housing Spending Is
Poorly Matched to Need, Center on Budget and Policy Priorities,
retrieved from: https://www.cbpp.org/research/housing/federal-housing-
spending-is-poorly-matched-to-need.
Without affordable housing options, 10 million of the lowest-income
renter households pay at least half of their income on rent, leaving
them without the resources they need to put food on the table, purchase
needed medications, or otherwise make ends meet.\5\ Paying so much of
their limited income on rent leaves the lowest-income families always
one financial shock--whether from a sick child, broken-down car, high
heating bill, or other unexpected expense--away from facing eviction
and, in the worst cases, homelessness.
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\5\ National Low Income Housing Coalition (2022), The Gap: A
Shortage of Affordable Homes, Washington, DC, retrieved from: https://
nlihc.org/gap.
Now, renters are faced with increased inflation, higher rents, eviction
filing rates that are reaching or surpassing pre-pandemic averages,
and, in many communities, worsening homelessness. Rent increases are
exacerbating our country's affordable housing crisis, pushing more
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people into homelessness each year.
To help end our nation's housing and homelessness crisis, Congress must
increase investments in long-term solutions to the underlying shortage
of affordable, accessible homes and improve renter protections for the
lowest-income people. This should include making rental assistance
universally available to everyone in need, preserving and expanding the
supply of homes affordable to people with the lowest incomes,
preventing evictions and homelessness, and strengthening and enforcing
renter protections. These solutions must be paired with reforms to
break down barriers that prevent access to critical resources and that
deepen racial disparities.
This year, the Senate Finance Committee has the opportunity to improve
our nation's response to the housing crisis by expanding and reforming
the Low-Income Housing Tax Credit (LIHTC) so that it better reaches
those households with the greatest, clearest needs. LIHTC is the
primary source of financing for the construction and preservation of
affordable housing. While it is an important resource, LIHTC, on its
own, rarely builds or preserves homes affordable to households with the
lowest incomes. To ensure that the tax credit program better serves
people experiencing or at risk of homelessness, Congress should pair
any expansion of LIHTC with key reforms, including those included in
the bipartisan ``Affordable Housing Credit Improvement Act'' (AHCIA)
and other legislation.
Moreover, Congress should reject any proposal to create a new tax
credit to build housing affordable to middle-income households, such as
the proposal introduced by Chair Wyden. As outlined below, this
proposal is misguided and wasteful, essentially subsidizing developers
to build market-rate housing. To meet the housing needs of middle-
income households, Congress should instead incentivize or require
communities to address zoning and land use barriers that restrict the
ability of the private sector to build apartments, increasing rental
costs for everyone. Limited federal resources should be directed
towards those with the greatest and clearest needs, and for whom the
private market on its own cannot build an operate homes affordable to
them: extremely low-income households.
Underlying Causes of the Housing Crisis
Shortage of Affordable Housing for the Lowest-Income Renters
Even before the COVID-19 pandemic, the country was in the grips of a
pervasive affordable housing crisis, impacting rural, suburban, and
urban communities alike. An underlying cause of America's housing
crisis is a market failure that results in a severe shortage of rental
homes affordable to people with the lowest incomes. Nationwide, there
is a shortage of 7 million homes affordable and available to extremely
low-income renters, whose household incomes are at or below either the
federal poverty guideline or 30% of their area median income (whichever
is greater). For every 10 of the lowest-income renter households, there
are fewer than four homes affordable and available to them.\6\
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\6\ National Low Income Housing Coalition (2022), The Gap: A
Shortage of Affordable Homes, Washington, DC, retrieved from: https://
nlihc.org/gap.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]The shortage of affordable and available homes for the lowest-
income renters ranges in severity depending on state and congressional
district, but there is no state or district with enough affordable
homes for its lowest-income renters. For example, in Chair Wyden's
state of Oregon, there are just two affordable homes available for
every 10 of the lowest-income renter households. Ranking Member Crapo's
state of Idaho faces a similar situation, with only four available
homes for every 10 of the lowest-income renters.\7\
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\7\ National Low Income Housing Coalition (2022), Congressional
District Housing Profiles: Oregon, Idaho, Washington, DC, retrieved
from: https://nlihc.org/gap.
Systemic racism, past and present, has led to significant racial
disparities in both renter demographics and adverse outcomes
experienced by renters, such as cost burdens, evictions, and
homelessness. The unaffordability of the rental market
disproportionately harms Black and Latino households because they are
more likely at all income levels to be renters: 30% of white households
are renters, compared with 58% of Black households and 46% of Latino
households.\8\
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\8\ U.S. Census Bureau (2022), 2020 American Community Survey 5-
year Subject Tables [Data set], retrieved from: https://
data.census.gov/cedsci/table?q=United%20States.
Moreover, renters of color are much more likely than white households
to be extremely low-income renters. Twenty percent of Black households,
18% of American Indian or Alaska Native (AIAN) households, 15% of
Latino households, and 10% of Asian households are extremely low-income
renters, compared to only 6% of white non-Latino households. Renters of
color are also more likely to experience housing cost burdens than
white, non-Latino renters. While 43% of white renters are cost-
burdened, 53% of Latino renters and 55% of Black, non-Latino renters
are cost-burdened. Thirty-one percent of Black, non-Latino renters and
28% of Latino renters are severely cost-burdened, compared to 22% of
white, non-Latino renters.\9\
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\9\ National Low Income Housing Coalition (2022), The Gap: A
Shortage of Affordable Homes, retrieved from https://nlihc.org/gap.
Nationwide, 10 million of the lowest-income renters pay at least half
of their income on rent, leaving them without the resources they need
to make ends meet. Housing cost burdens are concentrated among the
lowest-income renters. Eighty-six percent of extremely low-income
renters are cost-burdened, and 72% of extremely low-income households
are severely cost-burdened.\10\ Research indicates that the lowest-
income households spend significantly less on other necessities--such
as food, clothing, transportation, and healthcare--when they are forced
to spend more than half of their income on rent and utilities.\11\
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\10\ National Low Income Housing Coalition (2022), The Gap: A
Shortage of Affordable Homes, retrieved from https://nlihc.org/gap.
\11\ Joint Center for Housing Studies of Harvard University (2022),
America's Rental Housing 2022, Cambridge, MA, retrieved from: https://
www.jchs.harvard.edu/sites/default/files/reports/files/
Harvard_JCHS_Americas_Rental_Housing_2022.pdf.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
The Gap between Incomes and Housing Costs
A major cause of housing instability is the fundamental mismatch
between growing housing costs and stagnant incomes for people with the
lowest incomes. NLIHC's Out of Reach: The High Cost of Housing \12\
annual report estimates each locality's ``Housing Wage''--the hourly
wage a full-time worker must earn to afford a modest apartment without
spending more than 30% of their income on housing. In 2022, the
national Housing Wage was $25.82 per hour for a modest two-bedroom
rental home and $21.25 per hour for a modest one-bedroom rental home.
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\12\ National Low Income Housing Coalition (2022), Out of Reach:
The High Cost of Housing, retrieved from: https://nlihc.org/oor.
Eleven of the 25 largest occupations in the U.S. pay a lower median
hourly wage than the wage a full-time worker needs to earn to afford a
modest one- or two-
bedroom apartment at the national average fair market rent. More than
24 million people work in the five lowest-paying occupations--retail
sales, food and beverage services, food preparation, home health aide
and personal care services, and building cleaning. Workers in these
occupations earn median wages that fall more than $6 short of what a
full-time worker needs for a one-bedroom apartment.\13\
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\13\ National Low Income Housing Coalition (2022), Out of Reach:
The High Cost of Housing, retrieved from: https://nlihc.org/oor.
The average minimum wage worker must work 96 hours per week (nearly two
and a half full-time jobs) to afford a two-bedroom rental home, or 79
hours per week (two full-time jobs) to afford a one-bedroom rental home
at the fair market rent. People who work 96 hours per week and need
eight hours per day of sleep have around two hours per day left over
for everything else--commuting, cooking, cleaning, self-care, caring
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for children and family, and serving their community.
Low-wage workers are not the only renters who struggle to afford their
housing. Housing is unaffordable for low-income families in a variety
of circumstances. Three-quarters of the nation's 4.4 million senior
renters with incomes less than 50% of AMI are housing cost-burdened.
Over 2 million households are very low-income, have a disability, and
are not in the labor force, with most of these households paying more
than 30% of their income toward rent. Of the country's approximately
850,000 very low-income householders who are single-adult caregivers or
students, 93% are cost-burdened.\14\, \15\
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\14\ U.S. Census Bureau (2022), 2016-2020 American Community Survey
Public Use Microdata Sample [Data set].
\15\ National Low Income Housing Coalition (2022), Out of Reach:
The High Cost of Housing, retrieved from: https://nlihc.org/oor.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Lack of Federal Resources
The shortage of rental homes affordable to the lowest-income people is
caused by market failures and the chronic underfunding of solutions.
Government intervention, in the form of subsidies, is necessary to fill
the gap between what the lowest-income people can afford to pay and the
costs of developing and operating rental homes. Congress has
consistently underfunded housing subsidies such that only one in four
households eligible for housing assistance receives any.\16\ Millions
of families are placed on wait-lists for housing assistance, many of
them faced with homelessness or overcrowding while they wait.\17\
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\16\ Fischer, W. and Sard, B. (2017), Federal Housing Spending Is
Poorly Matched to Need, Center on Budget and Policy Priorities,
retrieved from: https://www.cbpp.org/research/housing/federal-housing-
spending-is-poorly-matched-to-need.
\17\ Acosta, S. and Guerrero, B. (2021), Long Waitlists for Housing
Vouchers Show Pressing Unmet Need for Assistance, Center on Budget and
Policy Priorities, retrieved from: https://www.cbpp.org/research/
housing/long-waitlists-for-housing-vouchers-show-pressing-unmet-need-
for-assistance.
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Critically Needed Reforms to the Low-Income Housing Tax Credit
Deeper Income Targeting
To address America's housing crisis, Congress must prioritize federal
housing investments to address the severe shortage of homes affordable
and available to our nation's lowest-income and most marginalized
households.
Despite the incredible need, the nation's primary source of financing
to build and preserve affordable homes--LIHTC--is not sufficient on its
own to build homes affordable to extremely low-income households. LIHTC
is targeted to build homes affordable to households earning up to 50%
or 60% of the area median income. As a result, extremely low-income
households generally can only afford rent in a LIHTC development if
they receive rental assistance. The majority (58%) of extremely low-
income renters living in LIHTC developments who do not receive rental
assistance are severely cost-burdened, paying more than half of their
limited incomes on rent.\18\ One emergency or unexpected expense could
send these households into homelessness.
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\18\ O'Regan, K.M. and Horn, K.M. (2013), What Can We Learn About
the Low-Income Housing Tax Credit Program by Looking at the Tenants?
Housing Policy Debate, 23, 597-613, retrieved from: https://nlihc.org/
sites/default/files/Improving-Low-Income-Housing-Tax-Credit-Data-for-
Preservation.pdf.
To help increase the supply of deeply affordable housing for America's
lowest-income households, Congress should include in any housing supply
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tax legislation:
A 50% basis boost for housing developments where at least 20% of
units are set aside for households with extremely low incomes or those
experiencing homelessness. This reform, as included in the Affordable
Housing Tax Credit Improvement Act, would help facilitate the
development of more affordable housing for populations with special
needs, such as formerly homeless individuals and people with
disabilities.
A 10% set-aside of tax credits to help offset the costs to build
these homes, as proposed by Chair Wyden (D-OR) in the ``Decent,
Affordable, Safe Housing for All (DASH) Act.'' To ensure that more
housing developments built using LIHTC serve extremely low-income
households, Congress should set aside 10% of the program's resources
for developments where at least 20% of units are set aside for
households with extremely low incomes or those experiencing
homelessness.
Improved Access in Rural and Tribal Communities
Likewise, rural communities face unique barriers to developing
affordable rental homes, including lower incomes, higher poverty rates,
and lack of access to private capital. Indigenous people have some of
the worst housing needs in the U.S. They face high poverty rates and
low incomes, overcrowding, lack of plumbing and heat, and unique
development issues. Despite the growing need for safe, decent homes,
however, federal investments in affordable housing on tribal lands have
lagged for decades, particularly in more rural and remote areas. As a
result, far too many rural families live in rental homes that are
unaffordable or are in substandard condition. To address the
significant housing needs for Indigenous people and those in rural
America, Congress should include in housing supply tax legislation:
Changes to designate tribal communities as ``Difficult to
Develop Areas'' (DDAs). Most tribal areas do not qualify under current
DDA standards. This reform, as proposed in the Affordable Housing
Credit Improvement Act, would make housing developments in tribal
communities automatically eligible for a 30% basis boost, making it
more financially feasible for developers to build affordable homes in
these areas.
Changes to designated rural communities as ``Difficult to
Develop Areas'' (DDAs), making housing developments in rural America
automatically eligible for a 30% basis boost.
Preservation of LIHTC Developments
Congress must use LIHTC to ensure long-term affordability of LIHTC
properties.
Eliminate the ``Qualified Contract'' loophole from the LIHTC
program, as proposed in the DASH Act. Under the Qualified Contract
loophole, LIHTC owners can avoid federal and state affordability
restrictions after just 15 years, rather than the 30-year minimum
requirement. The QC loophole has led to a substantial loss of
affordable rental homes, harming low-income residents and wasting
scarce federal investments.
Clarify and strengthen the ``right of first refusal'' (ROFR) for
nonprofit owners, as proposed in the DASH Act. By statute, Congress
provides nonprofit organizations with a ROFR to help facilitate their
ability to purchase LIHTC developments. In recent years, some private
investors have challenged the ROFR in hopes of preventing the
preservation sale in order to raise rents or of extracting additional
payments from the nonprofit. This puts the long-term financial health
and condition of the properties at risk.
Other Needed Reforms
Other reforms are needed to provide greater oversight and transparency
of LIHTC and ensure renter protections for those living in these homes.
Provide HUD access to IRS data on LIHTC properties. HUD's LIHTC
database, the primary data source about LIHTC properties, includes
critical information needed to protect residents and preserve federal
investments. However, the database is incomplete and some data points
can be unreliable. While HFAs report critical property-level data to
IRS, federal law does not allow IRS to share this data with HUD.
Without more accurate and complete data, long-term tracking of LIHTC
properties and the ability to preserve these homes is more difficult.
Extend renter protections to tenants living in LIHTC properties.
Tenants in LIHTC properties have few protections, placing tenants and
applicants in a vulnerable position, as they may be evicted or denied
admission for arbitrary or unlawful reasons.
Opposition to the Middle-Income Housing Tax Credit
During today's hearing, Chair Wyden may bring attention to his DASH
Act. While some provisions in the DASH Act provide critically needed
resources to help struggling households, other measures--such as a
proposal to create a Middle-Income Housing Tax Credit (MIHTC)--are
misguided and wasteful. NLIHC is eager to work with Chair Wyden, and
the Finance Committee, and craft legislation to ensure that tax
legislation addresses the needs of the lowest-income renters.
The DASH Act includes several housing provisions that would help
address America's housing crisis. By fully funding rental assistance
and investing robust resources in the national Housing Trust Fund, the
bill would ensure that millions of households can afford their rent.
The bill also includes an innovative proposal to create a new project-
based renters' tax credit that could be layered onto LIHTC to ensure
that homes built with the tax credit are affordable to people living in
poverty. Among other important reforms, the legislation would close
loopholes in the LIHTC program that developers have exploited to
convert federally assisted properties to market rate and prevent
nonprofit organizations from preserving the properties as affordable.
NLIHC strongly opposes any efforts to create a tax credit for middle-
income households, as there is no sound rationale for using scarce
federal resources for this purpose. The DASH Act would create a new
federal tax credit to incentivize developers to build and preserve
market-rate apartments--housing that is affordable to families earning
100% or below of the area median income (AMI). Research shows, however,
that middle-income families comprise less than 1% of those facing
significant housing challenges, while 92.5% of these households have
very low or extremely low incomes and would not be served by this new
tax break for investors. At a time when there are more than four times
as many homeless households as there are severely cost-burdened middle-
income renter households, we must target federal funding to where it is
most needed: making homes affordable for the lowest-income and most
marginalized people.
To address the housing needs of middle-income households, Congress
should instead incentivize or require state and local governments that
receive federal transportation and infrastructure funding to eliminate
restrictive zoning rules that increase the cost of development, limit
housing supply for all renters, and reinforce segregation and
structural racism in housing and other systems. Local communities can
and must do their part in eliminating the exclusionary zoning policies
that put pressure on middle-income renters in a handful of metro areas.
Other Innovative Tax Approaches
To address the housing crisis, Congress should expand rental assistance
to make it universally available to all eligible households in need.
Making rental assistance available to all eligible households is
central to any successful strategy for solving the housing crisis.
Rental assistance is a critical tool for helping the lowest-income
people afford decent, stable, accessible housing, and the program has a
proven record of reducing homelessness and housing poverty. A growing
body of research finds that rental assistance can improve health and
educational outcomes, increase children's chances of long-term success,
and advance racial equity.
The Senate Finance Committee should consider legislation to use the tax
code to help bridge the gap between incomes and housing costs. NLIHC
supports the creation of a renters' tax credit, like the programs
proposed in both the ``Rent Relief Act of 2022'' (S. 4728, H.R. 8357)
introduced in the 117th Congress by Senator Raphael Warnock (D-GA) and
Representative Danny Davis (D-IL), and the ``Housing, Opportunity,
Mobility, and Equity Act'' (S. 5228, H.R. 9466) introduced in the 117th
Congress by Senator Cory Booker (D-NJ) and Representative Jim Clyburn
(D-SC).
A new, refundable tax credit could put more money in the pockets of
families at a time when growing inflation is making housing even more
unaffordable, particularly for people with the lowest incomes, who are
disproportionately people of color. Based on the success of the Child
Tax Credit, a renters' tax credit should provide monthly support to the
lowest-income renters who spend at least 30% of their gross income on
rent and utilities. Through this design, a renter's tax credit could
help serve the three in four households eligible for rental assistance
who are unable to receive assistance because of chronic underfunding by
Congress.
Conclusion
Thank you again for the opportunity to submit a statement for the
record for this hearing on tax policy's role in affordable housing. By
holding this hearing, the Committee is taking important steps in using
the tax code to increase housing supply. NLIHC will continue to support
efforts to expand and reform the Low-Income Housing Tax Credit so that
it better meets the needs of extremely-low income families. We look
forward to working with members of the Committee to enact vital tax
policy that improves families' access to affordable housing.
______
Statement Submitted by Ed Olsen,* Professor Emeritus,
Department of Economics, University of Virginia
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* This submission reflects the views of its author. It does not
represent the official position of the University of Virginia. The
University has an official position on low-income housing policy.
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P.O. Box 400182
Charlottesville, VA 22904-4182
[email protected]
Does Housing Affordability Argue for Subsidizing
the Construction of Tax Credit Projects?
The low-income housing tax credit program (LIHTC) is the largest
and fastest growing low-income housing program in the U.S. It
subsidizes the construction and renovation of more units each year than
all other government housing programs combined. The tax credits
themselves involved new commitments of about $20 billion in 2021 (U.S.
Congress, Joint Committee on Taxation, 2022, Table 4).\1\ However,
these projects received substantial additional subsidies from federal,
state, and local governments. The magnitude of these additional
subsidies has not been documented for the entire country since the
early years of the program (Cummings and DiPasquale 1999), but a recent
study of tax credit projects in California indicated that the tax
credits accounted for only half of total subsidies (Lang and Olsen
2023).\2\ If this result applied to the entire country, the taxpayer
cost of providing housing in projects that were allocated tax credits
in 2021 would have been about $40 billion. Adding tenant rents to
public subsidies yields a total cost of about $55 billion to provide
housing in the projects approved in 2021 over their 30-year use
agreements.
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\1\ The tax credits awarded in a year are claimed in ten equal
installments. The amounts reported in this source refer to the amounts
that will be claimed in a single year. These amounts must be multiplied
by ten to obtain the total commitment.
\2\ About half of the additional subsidies are rental assistance
payments received by developers who have renovated older HUD and USDA
housing projects that continue to receive deep subsidies from the
programs involved.
Proposed legislation \3\ in the Senate would greatly expand the tax
credit program. This is billed as a solution to a housing affordability
problem described in terms of the many families that devote a large
fraction of their income to housing, and many argue that the expansion
is necessary to house the homeless. Neither argument withstands
scrutiny.
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\3\ https://www.congress.gov/bill/117th-congress/senate-bill/1136.
Building new projects is a very expensive solution to the housing
affordability problem described. We don't need to build new housing
projects to help families that spend a large fraction of their income
on housing. They are already housed. If we think that their housing is
unaffordable, the cheapest solution is for the government to pay a part
of the rent. HUD's housing voucher program does just that at a much
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lower cost than the tax credit program.
Furthermore, it's neither necessary nor desirable to construct new
units to house the homeless. The number of people who are homeless is
far less than the number of vacant units--indeed, far less than the
number of vacant units renting for less than the median rent. In the
entire country, there are less than 600,000 homeless people \4\ on a
single night, and because some are families with children and couples
without children, less than 470,000 units are needed to house them.
Although the vacancy rate is relatively low now, there are more than
2.7 million vacant units \5\ available for rent. All homeless people
could easily be accommodated in vacant existing units, and that would
be much less expensive than building new units for them. The reason
that they are homeless is that they don't have the money to pay the
rent for existing vacant units. A housing voucher would solve that
problem. A major HUD-funded random assignment experiment called the
Family Options Study \6\ compared the cost and effectiveness of housing
vouchers and subsidized housing projects for serving the homeless.
Short-term housing vouchers were as effective and much less expensive
than transitional housing projects.
---------------------------------------------------------------------------
\4\ https://www.huduser.gov/portal/sites/default/files/pdf/2022-
AHAR-Part-1.pdf.
\5\ https://fred.stlouisfed.org/series/ERENTUSQ176N.
\6\ https://www.huduser.gov/portal/sites/default/files/pdf/Family-
Options-Study-Full-Report.pdf.
The evidence indicates that the tenant-based housing voucher
program is by far the most cost-effective approach to delivering
housing assistance.\7\ The best study of HUD's largest program that
subsidized the construction of privately owned projects indicated that
the total cost of providing housing under this program was at least 44
percent greater than the total cost of providing equally good housing
under the housing voucher program (Wallace and others \8\ 1981). This
translated into excessive taxpayer cost of at least 72 percent for the
same outcome. It implies that housing vouchers could have served all
the people served by this program equally well and served at least 72
percent more people with the same characteristics without any increase
in public spending.
---------------------------------------------------------------------------
\7\ Olsen (2008, pp. 9-15) summarizes the evidence, http://
eoolsen.weebly.com/uploads/7/7/9/6/7796901/final.olsenpaper-1.pdf.
\8\ https://eoolsen.weebly.com/housing-policy-info.html.
We don't have a cost-effectiveness study of this quality for the
LIHTC program. The best national evidence available suggests that tax
credit projects cost 16% more than the voucher program to provide units
with the same number of bedrooms in the same metro area (GAO 2001).\9\
This is almost surely an underestimate because it omits some of the
public subsidies to developers of tax credit projects such as land sold
or leased to them by local public agencies at below-market prices,
local property tax abatements received by some developers, and
subsidies for renovating the projects during the initial use agreement.
A recent study of the tax credit program in California revealed that
the total taxpayer cost of providing housing in tax credit projects is
at least a third greater than the cost of assisting the same families
with standard housing vouchers (Lang and Olsen 2023).
---------------------------------------------------------------------------
\9\ https://www.gao.gov/assets/gao-01-901r.pdf.
The best evidence available also indicates that occupants of tax
credit projects capture a small fraction of the subsidies provided to
developers. Burge (2011, p. 91) finds that the present value of the
rent saving to tenants (the difference between the market rent of the
unit and the rent paid by its tenant) is only 35% of the present value
of the tax credits provided to developers. Combining this result with
Cummings and Di Pasquale's finding that tax credits account for about
two-thirds of development subsidies for tax credit projects leads to
the conclusion that tenants capture at most 24% of the development
subsidies. Combining Burge's result with Lang and Olsen's finding that
tax credits account for only half of the taxpayer cost of tax credit
projects leads to the conclusion that tenants capture only 18% of the
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public subsidies.
A PBS Frontline documentary called Poverty, Politics, and Profit
\10\ illustrates one of the reasons for this outcome, namely, LIHTC
fraud. A follow-up piece \11\ with NPR, Department of Justice news
releases,\12\ and articles \13\ in The Miami Herald provide more
details. One investigation \14\ of several developers revealed excess
subsidies of $36 million for 14 projects. Because subsidies are
proportional to construction cost, developers have an incentive to
overstate them. In the fraud uncovered in this investigation, the
developer who was awarded tax credits persuaded contractors to provide
inflated invoices for their work combined with kickbacks to the
developers. Due to the difficulty of determining true construction cost
and perhaps lax enforcement by some state housing agencies, developers
succeed in greatly overstating them. The documentary indicated that the
developer of one project overstated its development cost by 17%.
Because the fraud involved is difficult to detect, the few cases
uncovered so far are surely the tip of the iceberg. Recent
investigations have uncovered fraud in Los Angeles,\15\ New York
City,\16\ Dallas,\17\ and Maine,\18\ and other investigations \19\ are
underway.
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\10\ https://www.pbs.org/video/poverty-politics-and-profit-bhkmpo/.
\11\ https://www.npr.org/2017/05/09/527046451/affordable-housing-
program-costs-more-shelters-less.
\12\ https://www.justice.gov/usao-sdfl/pr/seven-defendants-
sentenced-federally-their-role-36-million-fraud-scheme-involving-low.
\13\ http://www.miamiherald.com/news/local/community/miami-dade/
article29949909.html.
\14\ https://www.justice.gov/usao-sdfl/pr/seven-defendants-
sentenced-federally-their-role-36-million-fraud-scheme-involving-low.
\15\ https://www.latimes.com/local/lanow/la-me-ln-housing-
indictment-20160205-story.html.
\16\ https://www.justice.gov/usao-edny/pr/real-estate-developer-
sentenced-6-months-imprisonment-soliciting-300000-kickbacks-nyc.
\17\ https://www.justice.gov/archive/usao/txn/PressRel10/
DCC_potashnik_brian_cheryl_sen_
pr.html.
\18\ https://www.pressherald.com/2016/04/14/maine-man-admits-
embezzling-80000-in-low-income-housing-funds/.
\19\ https://www.bizjournals.com/southflorida/news/2017/06/16/
federal-investigation-widens-into-affordable.html.
The reasons for the excess cost of tax credit projects go beyond
fraud. The program contains incentives that lead to housing with a low
market value compared with its cost. Because the tax credit subsidies
are proportional to construction cost and developers receive a
substantial bonus for locating their projects in the poorest
neighborhood, developers have an incentive to build expensive new
buildings on inexpensive land. This is not done in the private market
because the rents that tenants are willing to pay for these units falls
well short of their cost. And due to the program's rent ceilings,
owners have no incentive to provide routine maintenance.\20\ The
developer cannot charge higher rents for better maintained units unless
the market rent falls below the ceiling rent. In that event, the unit
provides no subsidy to its tenant.
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\20\ The property's owner does have an incentive to make repairs
that avoid major damage to the property because he or she will own it
without restrictions at the end of the use agreement.
Another reason for the excess cost of tax credit projects is the
cost of soliciting subsidies from multiple sources and adhering to
their restrictions. Developers are willing to incur the extra cost
because it enables them to produce projects with higher market values
and they own the project. Building a more expensive project also leads
to higher developer fees. The cost of soliciting subsidies from
multiple sources and adhering to their restrictions adds to the cost of
the project beyond the cost of the inputs used to produce or renovate
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housing.
It's often argued that the large expense of subsidizing the
construction of new tax credit projects is justified by low vacancy
rates that prevent potential recipients from using housing vouchers. On
this argument, subsidized construction is necessary to serve additional
families in the tightest housing markets. Table 1 shows that the
location of new tax credit projects is inconsistent with this
justification. The construction of tax credit projects is not focused
on metro areas with low vacancy rates. Over the decade studied, most
tax credit units were built in metro areas with vacancy rates in excess
of 8%. Almost 40% of all tax credit units were built in metro areas
with vacancy rates greater than 10%. McClure (2019, Table 6) produces
similar results at the census tract level. About half of tax credit
units are in tracts with vacancy rates greater than 7% even though only
42% of census tracts are in this category. Furthermore, new
construction projects are not concentrated in census tracts with the
lowest vacancy rates, and rehabilitation projects are not concentrated
in tracts with the highest vacancy rates.
Furthermore, low vacancy rates do not prevent potential recipients
from using housing vouchers. Many are used in the tightest housing
markets--more than 200,000 in the New York metro area, 100,000 in metro
Los Angeles, and 50,000 in metro San Francisco. When the Housing
Authority of the City of Los Angeles opened its voucher waiting list
for two weeks in October 2022, about 223,000 families \21\ applied.
This has happened throughout the country when voucher waiting lists
have been opened to new applicants. Why would so many apply if housing
vouchers could not be used?
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\21\ https://laist.com/news/housing-homelessness/section-8-housing-
choice-voucher-los-angeles-city-applications-lottery-hacla-affordable-
homelessness.
How are voucher recipients able to use vouchers in the tightest
markets? Many families offered vouchers already occupy housing meeting
the program's standards. We don't need vacant units for these families.
They can participate without moving. Other families offered vouchers
live in housing that doesn't meet program's minimum housing standards,
but their landlords are willing to repair them to meet the standards in
exchange for higher rents. In the tightest housing markets, it is more
difficult for subsidized and unsubsidized families to find a unit
preferred to their current housing. However, some families with and
without vouchers do it. In some cases, voucher recipients find units
that meet the program's minimum housing standards. In other cases, they
find apartments that do not initially meet the standards but are
upgraded to meet them. About half of the units occupied by voucher
recipients have been repaired to meet the program's minimum housing
standards (Kennedy and Finkel 1994). They did not meet minimum housing
standards when first inspected but were repaired to meet them. The
tenant-based voucher program substantially increases the supply of
apartments meeting minimum housing standards without building new units
---------------------------------------------------------------------------
for the families involved.
The Housing Assistance Supply Experiment of the Experimental
Housing Allowance Program (EHAP) provides additional evidence on the
ability of tenant-based vouchers to increase the supply of apartments
meeting minimum housing standards.\22\ The Supply Experiment involved
operating an entitlement tenant-based housing allowance program in two
metropolitan areas for ten years. During the first five years of the
experiment, about eleven thousand dwellings were repaired or improved
to meet program standards entirely in response to tenant-based
assistance (Lowry 1983, p. 24). This represented more than a 9 percent
increase in the supply of apartments meeting minimum housing standards
in these two metro areas.
---------------------------------------------------------------------------
\22\ Olsen and Zabel (2015, pp. 903-904) provide a brief account of
the experiment and its main results.
Contrary to popular perceptions, programs that have subsidized the
construction of privately owned low-income housing projects have had
little effect on the size of the housing stock. The evidence indicates
that these programs have crowded out unsubsidized construction to a
considerable extent (Murray 1983, 1999, Malpezzi and Vandell 2002, and
Eriksen and Rosenthal 2010). The most recent study finds that LIHTC has
almost no effect on the number of units built. Tax credit projects have
almost completely crowded out unsubsidized apartment buildings. The
unsubsidized construction crowded out would not be housing built for
low-income families. It would be built for families with higher incomes
that are willing and able to spend more on their housing. However, when
these middle-income families vacate their existing units to move into
newly built housing, their existing units would become available to
families with lower incomes. This is the normal mechanism through which
the private market provides housing to low-income families (Rosenthal
2014). LIHTC doesn't add to housing supply to any significant extent.
Instead, it increases the number of low-income families living in newly
built units and decreases the number of middle-income families living
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in such units.
Finally, evidence indicates that tenant-based vouchers lead to a
larger increase in the number of occupied housing units than
construction programs (Sinai and Waldfogel 2005). It's reasonable to
believe that all subsidized housing programs lead to some increase in
the number of occupied dwelling units by increasing the demand for
distinct units. The offer of housing assistance of any type induces
some individuals and families living with others to move to their own
units. Abt (2006) indicates that about 26 percent of the families on
the housing voucher waiting list were living with friends or relatives
and 2 percent were living in a homeless shelter or transitional
housing, and voucher usage resulted in corresponding decreases in these
numbers. Since doubling up and homelessness are more common among the
poorest families, the programs that serve them will have the greatest
net effect on the number of occupied housing units. The voucher program
serves somewhat poorer families than HUD's privately-owned subsidized
projects and much poorer families than LIHTC (O'Regan and Horn 2013,
Table 2).
Given the available evidence on program performance, we should
certainly not expand the tax credit program. The existing evidence
argues for terminating it or phasing it out. If we want to serve
additional families, we should expand the much more cost-effective
housing voucher program. If the tax credit program is retained,
Congress should insist on independent analyses of the highest quality
that compare the cost-effectiveness of housing vouchers with the
different types of low-income housing tax credit projects, including
ones that renovate private and public housing projects built under HUD
and USDA programs.
References
Abt Associates Inc. 2006, Effects of Housing Vouchers on Welfare
Families, Washington, DC: U.S. Department of Housing and Urban
Development, Office of Policy Development and Research.
Burge, Gregory S. 2011, ``Do Tenants Capture the Benefits from the Low-
Income Housing Tax Credit Programs?'' Real Estate Economics
39(1): 71-96.
Cummings, Jean L., and Denise DiPasquale, 1999, ``The Low-Income
Housing Tax Credit: An Analysis of the First Ten Years,''
Housing Policy Debate 10: 251-307.
Eriksen, Michael D. and Stuart S. Rosenthal, 2010, ``Crowd out Effects
of Place-Based Subsidized Rental Housing: New Evidence from the
LIHTC Program,'' Journal of Public Economics 94 (11-12): 953-
966.
Kennedy, Stephen D., and Meryl Finkel, 1994, Section 8 Rental Voucher
and Rental Certificate Utilization Study, Washington, DC:
Office of Policy Development and Research, U.S. Department of
Housing and Urban Development.
Lang, Bree J. and Edgar O. Olsen, 2023, The Hidden Subsidies of Low-
Income Tax Credit Projects. Working Paper.
Lowry, Ira S., ed. 1983, Experimenting with Housing Allowances: The
Final Report of the Housing Assistance Supply Experiment,
Cambridge, MA: Oelgeschlager, Gunn and Hain.
Malpezzi, Stephen and Kerry Vandell, 2002, ``Does the Low-Income
Housing Tax Credit Increase the Supply of Housing?'' Journal of
Housing Economics 11(4): 360-380.
McClure, Kirk, 2019, ``What Should Be the Future of the Low-Income
Housing Tax Credit Program?'' Housing Policy Debate 29(1): 65-
81.
Murray, Michael P. 1983, ``Subsidized and Unsubsidized Housing Starts:
1961-1977,'' The Review of Economics and Statistics 65 (4):
590-597.
------. 1999, ``Subsidized and Unsubsidized Housing Stocks 1935 to
1987: Crowding Out and Cointegration,'' Journal of Real Estate
Finance and Economics 18 (1): 107-124.
Olsen, Edgar O. 2008, ``Getting More from Low-Income Housing
Assistance,'' The Brookings Institution, Hamilton Project,
Discussion Paper 2008-13.
Olsen, Edgar O. and Jeff Zabel, 2015, ``U. S. Housing Policy'' in Giles
Duranton, J. Vernon Henderson, and William Strange (eds.),
Handbook of Regional and Urban Economics, Volume 5. Amsterdam:
North-Holland.
O'Regan, Katherine M. and Keren Horn, 2013, ``What Can We Learn about
the Low-Income Housing Tax Credit Program by Looking at the
Tenants?'' Housing Policy Debate 23(3): 597-613.
Rosenthal, Stuart S. 2014, ``Are Private Markets and Filtering a Viable
Source of Low-Income Housing? Estimates from a `Repeat Income'
Model,'' American Economic Review, 104 (2): 687-706.
Sinai, Todd and Joel Waldfogel, 2005, ``Do Low-Income Housing Subsidies
Increase the Occupied Housing Stock?'' Journal of Public
Economics 89 (11-12): 2137-2164.
U.S. General Accounting Office (GAO), 2001, Federal Housing Programs:
What They Cost and What They Provide, GAO-01-901R, Washington,
DC: GAO (July 18, 2001).
U.S. Congress, Joint Committee on Taxation, Present Law and Background
Relating to Tax Incentives for Residential Real Estate (JCX-16-
22), July 18, 2022.
Wallace, James E., Susan Philipson Bloom, William L Holshouser, Shirley
Mansfield, and Daniel H. Weinberg, 1981, Participation and
Benefits in the Urban Section 8 Program: New Construction and
Existing Housing, Vol. 1 and 2. Cambridge, MA: Abt Associates
Inc. (January).
Table 1. Tax Credit Units v. Vacancy Rates
75 largest metro areas, HVS vacancy rates, 2005-2014
Vacancy Rate Tax Credit Units Placed in Tax Credit Units as % of
(%) Service Occupied Rental Units
2.0-3.9 13,931 0.24
4.0-5.9 117,729 0.20
6.0-7.9 145,076 0.27
8.0-9.9 84,894 0.21
10.0- 223,220 0.25
Total 584,850 0.24
Note: Each observation refers to a single metro area in one year.
Sources: Vacancy rates, https://www.census.gov/housing/hvs/data/
ann15ind.html.
Tax credit units placed in service, https://www.huduser.gov/portal/
datasets/lihtc.html.
Occupied rental units, http://factfinder.census.gov/faces/nav/jsf/pages/
index.xhtml.
______
UMH Properties
3499 Route 9, Suite 3C
Freehold, NJ 07728
Statement of Sam Landy, President and CEO
I am pleased to submit this statement for the record for the March
7, 2023, Senate Finance Committee Hearing on ``Tax Policy's Role
Increasing in Affordable Housing Supply for Working Families.''
I am submitting this statement in order to request that the
Committee consider adoption of legislation to amend the existing
Opportunity Zone statute to promote affordable workforce housing.
I am the President and CEO of UMH Properties Inc., one of the
premier owners and operators of manufactured home communities in the
Nation. UMH Properties is publicly traded on the New York Stock
Exchange. We currently own 135 manufactured home communities in 11
states with approximately 25,700 developed homesites. Seven of our
communities are currently located in Opportunity Zones. I have worked
in the manufactured housing industry since 1985 and have been President
of UMH Properties since 1994.
UMH Properties has a 55-year history of providing quality
affordable housing in manufactured home communities. Videos of our
communities are available on our website and showcase the high-quality
affordable housing that can be delivered through investment in
manufactured home communities. We rent 1,000 sq. ft. three bedroom, two
bath, modern, energy efficient, vinyl sided, shingle roofed homes on
5,000 sq. ft. lots for $800 per month and up, to families with
household income of $32,000 and up. We also sell both single section
1,000 sq. ft. homes and 1,800 sq. ft. multi-section manufactured homes
to people who buy the home and rent the lot. Those homes sell from
$80,000 to $250,000 and have lot rents as low as $400 per month in our
community.
Manufactured housing is the most affordable homeownership option
available for low- and moderate-income families in America. The average
income of a manufactured home buyer is $35,000--while the average
income of a home buyer buying a site-built home is over $100,000.
Residents of manufactured home communities consist of people of all
ages, family status, and incomes. We find that many residents seek
manufactured housing based on the lower monthly payment derived from
owning a financed manufactured home and renting a lot in a community as
compared to owning land for the home and paying a mortgage and taxes on
that land or renting an apartment or buying a house. Other residents
use the proceeds of the sale of an existing home to pay all cash for a
manufactured home and then only pay the lot rent. And other residents
do not have the down payment or other ability to qualify for financing
the purchase of a manufactured home and chose to rent the manufactured
home. Further many people see themselves as needing a short term, less
then three-year, affordable housing solution and see renting a
manufactured home in a community as the best lowest cost solution.
Since 2011 we have rented over 9,000 manufactured homes for monthly
rent as low as $800 per month.
Manufactured home communities--also known as land-lease
communities--are a critical model for the delivery of affordable
manufactured homes, 51% of new manufactured homes are currently being
placed in manufactured home communities. There are more than 43,000
land-lease communities in the U.S., representing almost 4.3 million
homesites. These communities offer sites for families to place their
manufactured homes, with professional management of the community and
amenities that go with it.
One of the greatest challenges facing older manufactured home
communities is the need for an infusion of funds to address neglected
capital improvements like roads, sewer, and water. UMH Properties has
been highly successful in purchasing aging manufactured home
communities in need of significant capital repairs--in order to
modernize them and thereby protect the value of the investments of the
manufactured homeowners living in those communities at affordable land
lease rental rates. Further we add rental homes to fill the vacant lots
in those communities and increase the supply of affordable work force
housing in the community.
These purchases and improvements of aging communities require
significant investments. UMH Properties has a total market
capitalization of approximately $2 billion, with gross revenue of over
$190 million per year. UMH invests over $70 million a year in new
rental homes and capital improvements to improve our manufactured home
communities. These investments allow us to provide our residents with
the highest quality affordable housing at the most reasonable rates.
UMH shareholders include the pension funds that our residents have
equity interests in.
UMH has successfully renovated and upgraded seven manufactured home
communities in opportunity zones and sees the brilliance of the idea of
tax incentives attracting capital to previously underinvested areas of
the country. UMH's experience in opportunity zones and renovating
communities in Nashville and Memphis convince us that the concept of
providing investors who make ten-year investments in affordable housing
in opportunity zones with tax benefits results in the increased supply
of badly needed affordable housing and further attracts employers and
additional jobs and tax revenue to areas of the country that previously
suffered from economic stagnation.
UMH believes that the current opportunity zone fund law could be
amended slightly so that far more meaningful investment is made in
affordable housing in opportunity zones. Our experience is that the
existing law inadvertently limits the pool of capital available to
create affordable housing in opportunity zones by requiring those funds
come from existing capital gains. That requirement is the basis for the
criticism of the opportunity zone program only being available to the
wealthy who have capital gains. We believe opening up affordable
housing investments through opportunity zones to all investors will
greatly increase the pool of capital flowing into opportunity zones to
create affordable housing.
It is our opinion that the greater the supply of funds invested in
affordable housing in opportunity zones the quicker the area will
become economically able to be self-sufficient from growing tax revenue
that employers seeking the quality work force a supply of affordable
housing will bring to the areas provide.
We therefore seek removal of the existing opportunity zone
requirement that investments be a reinvestment of funds from a capital
gain realized in the preceding 180 days provided the investment is for
affordable housing through manufactured homes in opportunity zones.
With this amendment any funds invested in affordable housing in
opportunity zones should receive a stepped-up basis if the investment
is held for ten years or longer. Legislatively, this could be achieved
in a simple manner, by creating a short new subsection in the statute
that would grant authority for this. We have attached a draft of our
proposal.
With this change, we are confident that UMH Properties and other
manufactured home community operators could access significant new
investment funds to help build and modernize communities in opportunity
zones nationwide that facilitate the most affordable housing option
available, manufactured homes.
This approach is narrow and targeted. It would not facilitate
investments that could be criticized as deviating from the objectives
and intent of the Opportunity Zone program. It is limited to
investments that facilitate affordable manufactured housing- a high
priority for Congress and the Administration and an important public
policy objective.
Finally, it would not allow investors to access the deferment and
potential permanent elimination for capital gains that have already
taken place. Since the latter is the most costly component of
Opportunity Zone tax treatment and since the proposed flexibility is
narrowly targeted to a specific limited activity, we believe the tax
scoring cost of this provision would be very small, while the societal
and economic benefits would be substantial.
I also understand that inflation is currently creating hardship for
some resident homeowners in manufactured home communities due to rent
increases and I'd like to address that issue based on my 47-year
experience in the industry. The solution to the problem regarding newly
built communities is to follow the Florida policy of requiring a
prospectus from the community owner disclosing all potential fees and
rent increases before a person purchases a home or moves it into a
community. That prospectus coupled with a long-term lease that matches
the term of the loan on the home results in fairness for the community
owner and the resident. In the case of UMH new home buyers are offered
a long-term lease, usually 20-25 years, that allows rent increases of
CPI or 5%, whichever is more, plus pass through of increases in water,
sewer, garbage and taxes. This results in reasonable rent increases
that cause minimal to no friction between UMH and our residents. Except
for the 2009-2011 period anyone who bought a home from UMH was able to
sell it for more than they paid us for it, provided they properly
maintained it.
Regarding existing communities there are laws on the books in most
states prohibiting unconscionable rent increases. Further there is a
covenant of good faith and fair dealing in all contracts. There are
43,000 existing communities and I am certain the problems you hear
about pertaining to rent increases are coming from a very small
percentage of those communities.
In closing, I thank the Committee for the opportunity to submit
this statement and I would be happy to make myself available to
Committee staff to discuss this initiative in more detail.
Appendix
Draft Legislative Language to Opportunity Zone Statute
26 US Code 1400Z-2 is amended by adding the following new subsection
(and renumbering the subsequent subsections):
``(d) Additional Flexibility for Investments in Manufactured Home
Communities
Investments in manufactured housing communities that meet all other
requirements of this section shall be eligible for the tax treatment in
subsection (c), notwithstanding a failure to meet the requirements of
subsection (a)(1)(A) of having a gain during the 180-day period prior
to such investment.''
______
Urban Homesteading Assistance Board
120 Wall Street, 20th Floor
New York, NY 10005
[email protected]
Currently housing cooperatives are effectively excluded for the federal
government's only significant support for affordable housing, the Low-
Income Housing Tax Credit (LIHTC) program. This is because in LIHTCs
currently require a syndication, usually 99.9% owned by a for-profit
entity with significant taxable income, to own the project for the
first 15 years, in order to take advantage of the tax credits. This
partnership means that a participating housing co-op would only have a
chance of truly owning the property after 15 years and the obstacles to
cooperative ownership a bridge too far to call homeownership for most
residents.
Direct Pay Investment Tax Credits (ITCs) for sustainable energy
projects were included in the IRA (Climate Bill) that Congress recently
passed. The National Rural Electric Cooperative Association (NRECA) had
made the inclusion of Direct Pay tax credits their top legislative
priority. With Direct Pay the electric co-ops can file tax returns
directly with the IRS for refunds of these energy tax credits without
having to partner with for-profit entities, through such vehicles as
power purchase agreements, in order to take advantage of the federal
incentives. Here is a link to an article on the importance Direct Pay
from NRECA. At the bottom of the article is a video, https://
www.electric.coop/house-passes-direct-pay-incentives-for-co-ops.
If Direct Pay for LIHTCs was available, housing co-ops would, similar
to the electric co-ops, be able to file tax returns with the IRS and
receive refunds of the tax credits. This would provide much needed
equity into projects. Also, many states require that projects they
finance qualify for and receive LIHTCs, effectively excluding most
housing co-ops.
One difference with Direct Pay, both for electric co-ops and if passed
for housing co-ops, is that projects that might rely on tax credits
would not be able to gain any value from depreciation costs, which is a
significant part of the value in the syndication of tax credits.
Therefore, a benefit from a federal standpoint is that the cost of
these project would actually be less since there would be no additional
forfeited federal tax revenue on these projects. A second benefit of
this change is that no new federal budget authority (either expenditure
or forfeited tax revenues) would be required since it would not call
for an expansion of the LIHTC program. The final benefit for the
federal government is that it would allow LIHTCs to be used to support
permanently affordable housing rather than the current system which
requires not only co-ops but also non-profits and governments to grant
project ownership to for-profit entities in order to participate in the
LIHTC program.
In summary, Direct Pay LIHTC would be a similar ``game changer'' for
housing co-ops as NRECA envisions Direct Pay will be for electric co-
ops. With the support of other co-ops, the non-profit development
community and local governments, we could see a new era for housing co-
ops.
Peter Dean
Director, National Cooperative Community Services
______
U.S. Mortgage Insurers et al.
1101 17th Street, NW, Suite 700
Washington, DC 20036
https://www.usmi.org/
March 21, 2023
The Honorable Ron Wyden The Honorable Mike Crapo
Chairman Ranking Member
U.S. Senate U.S. Senate
Committee on Finance Committee on Finance
219 Dirksen Senate Office Building 219 Dirksen Senate Office Building
Washington, DC 20510 Washington, DC 20510
Dear Chairman Wyden and Ranking Member Crapo:
U.S. Mortgage Insurers (USMI) appreciates the opportunity to submit
this letter for the record for the Committee on Finance's March 7th
hearing titled ``Tax Policy's Role in Increasing Affordable Housing
Supply for Working Families.'' We are very pleased that the committee
held a hearing on this important topic and USMI believes that there are
tax policies that can be improved in order to help families achieve the
American Dream of homeownership. More specifically, we strongly support
the tax deduction for qualified mortgage insurance (MI) premiums and
USMI encourages Congress to reinstate and enhance the impact of this
important middle class tax deduction.\1\ Our industry applauds Senator
Hassan for her work, including bipartisan legislation last Congress,
the Middle Class Mortgage Insurance Premium Act of 2022 (S. 3590), to
make the deduction permanent and expand taxpayer eligibility.
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\1\ 26 U.S.C. 163(h)(3)(E). The tax deduction currently does not
apply to amounts paid or accrued after December 31, 2021.
USMI is a trade association comprised of the leading private MI
companies in the U.S. and represents an industry dedicated to a housing
finance system backed by private capital that enables access to prudent
and affordable mortgage finance for borrowers while protecting
taxpayers.\2\ Our member companies are focused on ensuring that home-
ready borrowers have access to affordable and sustainable mortgages
within a well-functioning U.S. housing finance system. The private MI
industry has a 67-year track record of underwriting and actively
managing single family mortgage credit risk in order to facilitate
access to low down payment conventional mortgages. Since 1957, private
MI has helped more than 38 million families purchase a home or
refinance an existing mortgage, including more than 1 million families
in 2022 alone.\3\
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\2\ USMI membership comprises: Enact Mortgage Insurance; Essent
Guaranty, Inc.; Mortgage Guaranty Insurance Corporation; National
Mortgage Insurance Corporation; and Radian Guaranty, Inc.
\3\ GSE aggregate data.
Low down payment mortgages are critical for many families, most notably
first-time, lower wealth, and minority homebuyers, to secure mortgage
financing. Affordability remains a persistent barrier to homeownership
across the country due to rising interest rates, high home prices, and
constrained housing inventory, and MI helps bridge the down payment gap
for borrowers who lack the resources for large down payments. In 2022
alone, nearly 2.5 million families obtained mortgages with some form of
MI, including more than 1 million conventional mortgages with private
MI, more than 850,000 mortgages insured by the Federal Housing
Administration (FHA), and nearly 600,000 mortgages guaranteed by the
U.S. Department of Veterans Affairs (VA).\4\ Further, the vast majority
of borrowers with MI are first-time homebuyers, traditionally the
driving force of the housing market. For purchase mortgages originated
in 2022, more than 60% of mortgages with private MI, 80% of FHA-insured
mortgages, and 50% of VA-guaranteed loans went to first-time
homebuyers.\5\
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\4\ GSE aggregate data, VA Lender Loan Volume Reports, and FHA
Single Family Monthly Production Reports.
\5\ GSE aggregate data and eMBS data.
In order to make homeownership more affordable, USMI has long supported
the tax provision allowing a deduction for MI premiums paid in
connection with a mortgage on a qualified residence. Since 2007, the MI
Deduction has been a powerful tool in prudently promoting homeownership
for low- and moderate-income (LMI) families. The provision has been
extended several times with broad bipartisan support, including most
recently in the Further Consolidated Appropriations Act of 2020.\6\
During the time period when MI premiums have been deductible, the
deduction was claimed over 43 million times by qualified homeowners for
an aggregate $61.6 billion in tax deductions.\7\ For 2020, the most
recent tax year for which detailed Internal Revenue Service (IRS) data
is available, nearly 1.4 million households benefited from the MI
deduction, for an average tax deduction of more than $2,100.\8\
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\6\ Pub. L. 116-94 (December 20, 2019).
\7\ IRS, Statement of Income Tax Stats--Historical Table 2.
\8\ Id.
However, two key aspects of the MI deduction diminish its
effectiveness: (1) its temporary nature; and (2) its relatively low
Adjusted Gross Income (AGI) phaseout and cap. Bipartisan legislation
last Congress from Senators Hassan and Blunt, the Middle Class Mortgage
Insurance Premium Act of 2022 (S. 3590), would have addressed both
those shortcomings and expanded taxpayer eligibility by raising the
income level at which the phaseout begins, specifically increasing the
income phaseout trigger to $200,000 for joint filers and $100,000 for
single filers. This would be the first AGI adjustment for the MI
deduction since it took effect in 2007 and be a welcome statutory
change to take into account the natural erosion of the reach of this
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deduction with the passage of time.
The MI deduction is a sound and targeted tax policy that provides
meaningful benefits to hardworking families across the country and
should be a permanent part of the U.S. tax code. Homeownership remains
the primary vehicle for families to enter the middle class and build
long-term generational wealth, and the MI deduction is an important
tool for policymakers to support homeownership opportunities for more
Americans. In fact, data from the Federal Reserve indicates that the
median net worth of a homeowner is more than 40 times that of a
renter.\9\
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\9\ Federal Reserve, 2019 Survey of Consumer Finance (SCF). The
median net worth of a homeowner was $254,900 in 2019 dollars compared
to $6,270 for a renter.
Senator Hassan's bill from last Congress is included as Annex A and on
March 7, 2023 Representatives Buchanan and Panetta reintroduced
bipartisan legislation, H.R. 1384, in the House of Representatives. In
addition, a November 2022 letter from 14 housing organizations to the
Committee on Finance in support of Senator Hassan's bill is attached as
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Annex B.
USMI thanks you for devoting needed attention to the extremely
important issue of housing, especially around tax policies that promote
affordable and sustainable homeownership, and stands available as a
resource to the committee. We appreciate the opportunity to discuss the
MI deduction, a tax policy that has long enjoyed bipartisan support,
and requests for additional information may be directed to Brendan
Kihn, USMI's Senior Director of Government Relations, at [email protected]
or 202-280-1820.
Very truly yours,
Seth D. Appleton
President
U.S. Mortgage Insurers
Annex A
117th CONGRESS
2d Session
S. 3590
To amend the Internal Revenue Code of 1986 to increase the income cap
with respect to the mortgage insurance premium deduction, and to make
such deduction permanent.
_______________________________________________________________________
IN THE SENATE OF THE UNITED STATES
February 7 (legislative day, February 3), 2022
Ms. Hassan (for herself and Mr. Blunt) introduced the following bill;
which was read twice and referred to the Committee on Finance
_______________________________________________________________________
A BILL
To amend the Internal Revenue Code of 1986 to increase the income cap
with respect to the mortgage insurance premium deduction, and
to make such deduction permanent.
Be it enacted by the Senate and House of Representatives of the
United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ``Middle Class Mortgage Insurance
Premium Act of 2022''.
SEC. 2. INCREASING THE INCOME CAP FOR AND MAKING PERMANENT THE MORTGAGE
INSURANCE PREMIUM DEDUCTION.
(a) In General.--(1) Section 163(h)(3)(E) of the Internal Revenue
Code of 1986 is amended--
(1) in clause (ii), by striking ``$100,000 ($50,000'' and
inserting ``$200,000 ($100,000'', and
(2) by striking clause (iv).
(b) Effective Date.--The amendments made by this Act shall apply
to taxable years beginning after December 31, 2021.
______
Annex B
November 17, 2022
The Honorable Ron Wyden The Honorable Mike Crapo
Chairman Ranking Member
U.S. Senate U.S. Senate
Committee on Finance Committee on Finance
219 Dirksen Senate Office Building 219 Dirksen Senate Office Building
Washington, DC 20510 Washington, DC 20510
Dear Chairman Wyden and Ranking Member Crapo:
The undersigned organizations, representing a diverse coalition of
stakeholders in the housing finance system of lenders, real estate
professionals, homebuilders, mortgage insurers, and affordable housing
advocates, are writing regarding the tax treatment of mortgage
insurance premiums. We appreciate the opportunity to provide our
collective perspective on this important tax provision and encourage
congressional action to support existing homeowners and prospective
homebuyers by modifying current law to make the mortgage insurance
premium tax deduction permanent and increase its income phaseout. The
tax deduction for mortgage insurance premiums has long enjoyed
bipartisan support and, as Congress considers any year-end tax package,
our organizations firmly believe this deduction is both good tax policy
and housing policy.
Affordability remains a persistent barrier to homeownership across the
country due to rising interest rates, strong home price appreciation,
and limited housing supply.\10\ Since this time last year, the average
interest rate for a 30-year fixed-rate mortgage has more than doubled
and currently stands at nearly 7%,\11\ the most recent CoreLogic Home
Price Index shows nationwide prices rose 11.4% from September 2021 to
September 2022,\12\ and, while housing inventory has improved from a
historical low point, the current 3.2 months of supply \13\ is still
well below pre-pandemic and long-term historical levels. Despite these
challenges, each year mortgage insurance helps bridge the down payment
gap for millions of borrowers who lack the resources for a 20% down
payment or have less than perfect credit. Low down payment mortgages--
including conventional mortgages with private mortgage insurance and
loans insured or guaranteed by the Federal Housing Administration
(FHA), U.S. Department of Veterans Affairs (VA), and U.S. Department of
Agriculture Rural Housing Service (RHS)--have proven critical for many
first-time, low- and moderate-income (LMI), and minority homebuyers to
secure financing and attain the American Dream of homeownership. Using
low down payment mortgages allows families to buy homes sooner than
they otherwise would be able and to reap the benefits of homeownership,
including financial stability and building intergenerational wealth.
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\10\ Mortgage Bankers Association Purchase Applications Payment
Index (PAPI). The national median payment was $1,941 in September 2022,
a 40% increase since the beginning of the year.
\11\ Freddie Mac Primary Mortgage Market Survey (PMMS) for 30-Year
Fixed-Rate Mortgages, 3.10% for the week ending Thursday, November 18,
2021, and 6.61% for the week ending Thursday, November 17, 2022.
\12\ CoreLogic ``U.S. Home Price Insights--November 2022''
(November 1, 2022).
\13\ National Association of Home Builders (NAHB), New Existing
Home Sales, Updated October 26, 2022, for data through September 2022.
In 2021 alone, approximately 4.6 million families obtained mortgages
with some form of mortgage insurance, including nearly 2 million
conventional loans with private mortgage insurance, nearly 1.4 million
FHA-insured mortgages, and nearly 1.3 million VA-guaranteed
mortgages.\14\ Further, the vast majority of borrowers with mortgage
insurance are first-time homebuyers, traditionally the driving force of
the housing market.\15\ Low down payment lending options are critical
for these first-time homebuyers, as evidenced by the fact that in
recent years approximately 80% of first-time homebuyers relied on low
down payment options to purchase homes.\16\
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\14\ GSE Aggregate Data, HUD quarterly reports to Congress on the
``Financial Status of the Mutual Mortgage Insurance Fund,'' and VA
Lender Loan Volume Reports.
\15\ For purchase mortgages originated in 2021, nearly 60% of
mortgage with private mortgage insurance, approximately 85% of FHA-
insured mortgage, and 50% of VA-guaranteed loans went to first-time
homebuyers. GSE Aggregate Data and eMBS.
\16\ Enact MI First-Time Homebuyer Market Reports.
Since 2007, the tax code has treated mortgage insurance premiums as
qualified residential mortgage interest and they have been tax
deductible, subject to an income phaseout for taxpayers with adjusted
gross incomes (AGI) over $100,000 ($50,000 if single or married filing
separately).\17\ During the time period that mortgage insurance
premiums have been tax deductible, millions of LMI homeowners have
benefited from this provision of the tax code. Based on the most recent
estimate from the Internal Revenue Service (IRS), more than 1.3 million
households benefited from the mortgage insurance deduction for tax year
2020 for an average deduction of more than $2,100.\18\ As you know, the
Tax Cuts and Jobs Act of 2017 (TCJA) \19\ modified numerous aspects of
the tax code and doubled the standard deduction. Prior to the enactment
of the TCJA, more than 4 million taxpayers claimed the deduction each
year and the number of households eligible to benefit from the
deduction are sure to increase upon the expiration of the TCJA
individual tax policies at the end of 2025.
---------------------------------------------------------------------------
\17\ 26 U.S.C. 163(h)(3)(E).
\18\ Internal Revenue Service (IRS), SOI Tax Stats: Table 2.1
(Estimates Based on Samples for Tax Year 2020). 1,344,179 tax returns
that claimed the mortgage insurance premiums deduction for an aggregate
amount of $2,834,901,000.
\19\ Pub. L. 115-97 (December 22, 2017).
Our organizations have long supported the mortgage insurance premium
tax deduction as a means to support homeownership for LMI households,
but two key aspects of the current tax code hamper its effectiveness:
(1) its temporary nature; and (2) its relatively low AGI phaseout and
status as the only itemized deduction subject to an AGI cap and/or
phaseout. The current AGI phaseout represents a burdensome eligibility
criterion for American families to claim the mortgage insurance
deduction and many more hardworking families would benefit from a
permanent extension that increases the AGI phaseout. The AGI cap has
remained the same since the deduction took effect in 2007 and an
increase is warranted to account for the natural erosion of the value
---------------------------------------------------------------------------
of the dollar with the passage of time.
Senators Maggie Hassan and Roy Blunt have introduced S. 3590, the
Middle Class Mortgage Insurance Premium Act of 2022, and we encourage
the Committee on Finance to consider this bipartisan legislation for
inclusion in any final 2022 tax package. Thank you for your
consideration of our recommendation that the tax deduction for mortgage
insurance premiums be made permanent and that the AGI phaseout be
increased. We welcome the opportunity to further engage on this
important issue to support access to affordable and sustainable
homeownership for American families.
Very truly yours,
American Bankers Association
Asian Real Estate Association of America
Community Home Lenders of America
Housing Policy Council
Independent Community Bankers of America
Leading Builders of America
Manufactured Housing Institute
Mortgage Bankers Association
National Association of Federally-Insured Credit Unions
National Association of Hispanic Real Estate Professionals
National Association of Home Builders
National Association of Realtors'
National Housing Conference
U.S. Mortgage Insurers
______
Western Governors' Association
1700 Broadway, Suite 500
Denver, CO 80290
(303) 623-9378
https://westgov.org/
JARED POLIS MARK GORDON JACK WALDORF
governor of colorado governor of wyoming executive director
chair vice chair
_______________________________________________________________________
March 8, 2023
The Honorable Ron Wyden The Honorable Mike Crapo
Chairman Ranking Member
United States Senate United States Senate
Committee on Finance Committee on Finance
219 Dirksen Senate Office Building 219 Dirksen Senate Office Building
Washington, DC 20510 Washington, DC 20510
Dear Chairman Wyden and Ranking Member Crapo:
In light of the Committee's March 7, 2023 hearing, Tax Policy's Role in
Increasing Affordable Housing Supply for Working Families, attached
please find Western Governors' Association Policy Resolution 2023-04,
Housing Is Foundational to the Success of the West.
This policy resolution addresses the challenges of increasing the
availability and affordability of housing in the West. It highlights
the need to pass legislation lowering the threshold of Private Activity
Bond financing from 50 percent to 25 percent, ensure that the Low
Income Housing Tax Credit (LIHTC) Program works more effectively for
underserved communities, and review and adjust the formulas for the
LIHTC Program.
I request that you include this document in the permanent record of the
hearing, as it articulates Western Governors' policy positions and
recommendations related to this urgent issue.
Thank you for your attention to this matter and your consideration of
this request. Please contact me if you have any questions or require
further information.
Sincerely,
Jack Waldorf
Executive Director
______
Attachment
Western Governors Association
Policy Resolution 2023-04
Housing Is Foundational to the Success of the West
A. BACKGROUND
1. The West has undergone extraordinary growth in recent years.
According to the 2020 U.S. Census, the region has experienced
population growth of 9.2 percent from 2010 to 2020, the second
highest rate nationally, with more than 78 million new
residents. The three fastest growing states by percentage--
Utah, Idaho, and Colorado--are all western states. In addition,
towns with less than 5,000 people in the Rocky Mountain and
coastal areas of the West have experienced the highest
nationwide population growth rates at 13.3 percent.
2. The COVID-19 pandemic accelerated and spurred several noteworthy
trends. Over the past 10 years, moves to large and expensive
cities have plateaued in favor of smaller cities and suburbs.
The U.S. Census reports that while overall moving rates
continued to decline, starting in 2021, the West began to see a
dramatic increase in net migration to the region. During the
public health crisis, people fled big cities at increased rates
for less dense areas that offered warmer weather, more outdoor
recreation activities, and greater opportunities to safely
social distance as telework became the new normal and employees
were no longer tethered to a physical office. The Pew Research
Center estimated that 1 in 5 adults, especially young
professionals, relocated during the pandemic or know someone
who did.
3. This growth in the West has led to housing shortages in communities
large and small. Shortages have been exacerbated by Great
Recession development delays and stops and a lack of workforce,
which have resulted in a housing slump and left communities
across the West struggling to keep up with demand and a near-
record rise in the number of American homeowners. As the market
began to recover, the spread of COVID-19 hit builders with
similar issues, including supply chain delays and a workforce
deficit.
4. According to the Federal Reserve, while home sales have boomed, the
number of active housing listings in January 2022 dropped to
its lowest in at least five years--60 percent below the number
on the market just two years previously--causing home sale
prices to skyrocket. Nationally, prices have increased by
nearly 20 percent, with the West seeing some of the greatest
increases.
5. The West's natural beauty brings people from across the nation and
globe. While western states welcome the growth in remote
workers and visitors to tourism and outdoor recreation-based
economies such as resort towns and gateway communities,
unmanaged growth has caused ``big city'' issues for some areas.
Additionally, many residences have been converted into
temporary rental units through services like Airbnb and VRBO.
The unchecked proliferation of these rentals can heighten
housing shortages, drive costs higher, and diminish the
availability of places for residents and workers to call home.
Long-time community residents and workers are often forced to
move out of the communities they grew up in and are culturally
connected to, exacerbating disparities and making it difficult
for social services, businesses and government to retain and
attract employees from within the community. Rapid population
influxes also strain existing infrastructure and resources in
areas that already have limited planning capacities.
6. Rural communities face unique challenges when addressing housing
issues. Construction costs in rural areas are often higher than
in urban areas and are further compounded by a lack of critical
infrastructure. There are limited numbers of investors and
contractors who are willing to mobilize or invest in small
communities, making the cost of new or improved housing too
high for middle-
income residents. Rural areas can also lack access to lenders
and credit, which reduces funding for the production of new
units and the maintenance of existing housing stock. As a
result, a disproportionate amount of the nation's occupied
substandard housing is in rural communities. According to the
U.S. Department of Agriculture (USDA), approximately half a
million of its multifamily housing properties will need a total
of $5.6 billion in investments to maintain suitable living
conditions for residents.
7. Despite a recognized need for more housing and housing of different
types, existing homeowners often oppose increasing the housing
supply in their communities, especially the construction of
denser housing. This opposition, and the signal it sends to
city leaders, zoning boards, and planning commissions,
represents a significant impediment to addressing the housing
shortage and can lead to restrictive local land use
regulations. Some western communities are addressing these
challenges in part through the development of communities that
combine housing of different types and sizes with commercial
properties in ways that promote affordability, walkability,
diversity of homeowner type, and a higher quality of life.
8. In downtown submarkets and dense neighborhoods, apartment
absorption rates show that landlords are quickly leasing vacant
apartment units, driving strong rent costs. From October 2020
to October 2021, rental costs increased 15.9 percent, with the
median cost of advertised rentals rising to above $2,000 for
the first time. Rental occupancy, new lease signings, and lease
renewal rates show strong growth, indicating an increase in
rental demand across the market. The West plays a strong role
in this growth, with half of the top twenty predicted strongest
markets in 2022.
9. All available data suggests that homelessness, including among
families with children, has risen during the current housing
crisis, likely attributed to surging rents, which compound
personal and societal causes of homelessness. Homelessness and
housing instability make it harder to find and keep a job,
treat or manage medical conditions, and learn in school. It
destabilizes communities and lowers outcomes across public
systems. No one institution can end this issue on its own.
10. Housing is foundational to economic development and community
vitality. In the long run, it is more cost effective for public
systems to house those in need with wrap around service. Models
like permanent supportive housing or transitional housing with
supportive services keep residents off the streets and provide
upstream interventions that lessen costs for justice and health
systems. The need for a greater diversity of housing options
goes beyond the obligation to treat people with dignity, as it
is also cost effective for governments.
11. The HOME Investment Partnerships Program (HOME) and the Housing
Trust Fund are federal housing programs administered by the
Department of Housing and Urban Development (HUD). HOME is the
largest federal block grant to state and local governments for
affordable housing. It provides formula grants for building,
buying, and rehabilitating affordable housing or direct rental
assistance to low-income households. The Housing Trust Fund
provides grants to states to develop and preserve affordable
housing for extremely low-income households. Although both
programs are administered by the same agency, they have
separate environmental review requirements. Some projects
utilize both programs, resulting in a taxing process that can
yield conflicting results.
12. Section 3 of the Housing and Urban Development Act of 1968 (12
U.S.C. 1701u) requires recipients of HUD funding to direct
employment, training, and contracting opportunities to low-
income individuals and the businesses that employ these
persons. Davis-Bacon and related acts require federal
government construction contractors on covered public buildings
and public works to pay the ``prevailing wage'' to laborers.
Applying Section 3 or Davis-Bacon to multifamily projects
significantly increases the administrative burden of projects.
In tight construction markets in the West, affordable
multifamily projects often struggle to find contractors willing
to accept the regulatory burden. These projects receive far
fewer bids than non-federal projects and frequently face higher
construction costs. An Oregon affordable housing cost driver
study found that prevailing wage determinations, some related
to Davis-Bacon, increased costs by 9 percent when controlling
for other factors.
13. The Federal Housing Administration (FHA) insures mortgages on
single family homes, multifamily properties, residential care
facilities, and hospitals and is critical to sustaining and
financing affordable housing across the nation. However, it has
become increasingly arduous to work with FHA and its third-
party contractor. A significant amount of time and effort is
expended on delinquency reporting, filing claims, and the
foreclosures process due to a lack of guidance, staffing
shortages, and antiquated technology. Applicants must navigate
multiple systems for delinquency reporting and filing claims
and interpret handbooks if they have questions, as FHA no
longer has state staff to consult and is frequently
unresponsive to requests for guidance.
14. FHA determines lending limits annually based on median house
prices, a percentage of the national conforming limit, and the
county in which the property is located. In rural areas and
non-disclosure states, there may not be current sales data or
information may not be public, which generally means loan
limits are not raised in spite of the fact that prices have
increased.
15. Private Activity Bonds (PAB) are used to develop affordable housing
and provide mortgages to low- and moderate-income home buyers,
allocated from the federal government with Congressionally set
caps. Many states in the West have hit their PAB cap, meaning
their ability to advance housing solutions and leverage state
and local funds is limited. Additionally, the PAB cap restricts
the use of the 4 percent Low Income Housing Tax Credit (LIHTC)
because 50 percent of these developments must be funded with
PAB. States that invest state and local resources in housing
development are unable to fully leverage federal funds,
creating the perverse disincentive of limiting how much state
and local partners invest in housing.
16. The Community Development Block Grant (CDBG) Program, administered
by HUD, provides flexible resources to states and localities to
fund housing and economic development opportunities for low-
and moderate-income communities. For single-family residential
projects, HUD requires states and localities to identify all
properties for funding upfront and to work on them as a single
project, but this is an obstacle for small, rural communities.
These communities struggle with getting contractors and finding
the workforce to do everything at once. The burden of
administration is also extremely high and there is a tremendous
amount of risk involved with the cost of compliance for CDBG.
Audits may occur years after funding has been disbursed and
projects have begun, and states and localities must bear the
costs if projects are not compliant.
17. Federal formulas for funding do not always function effectively for
states. While costs for projects have grown significantly and
federal funds are often crucially important to offsetting these
extreme per unit costs for affordable units, minimum
allocations have stayed relatively constant. In addition, some
programs utilize formulas that have been designed for other
programs. For example, the traditional Emergency Solutions
Grants (ESG) Program uses the CDBG formula despite the vast
differences between their program goals. Although the
traditional ESG formula is effective at making allocations
quickly, it does not adequately serve places with homelessness
needs because it is designed to address more general community
development needs. The ESG formula used for the second wave of
Coronavirus Aid, Relief, and Economic Security (CARES) Act
funding was more aligned with program goals and led to more
targeted investments to drive improved outcomes.
18. Rural states often receive the minimum allocation of federal grant
funds. Consequently, they receive a much smaller administrative
allocation even though every project must follow the same steps
and requires the same administrative responsibilities as more
populous states. Insufficient administrative funding makes it
difficult for these states to leverage federal housing
programs.
19. Across the West, wildfires and other natural disasters are
devastating communities and creating real and persistent
impacts on the lives of Americans. Federal Emergency Management
Agency (FEMA) resources do a poor job of supporting those in
need, particularly renters and communities with little trust in
government. The federal process requires extensive
documentation--which is often lost, especially in fires--and
multiple rounds of applications and appeals. CDBG-Disaster
Recovery (CDBG-DR) funds require Congressional allocation,
which delays implementation of recovery activities. In
addition, the program is not well suited to support the
immediate needs of wildfire recovery. Homes are a total loss in
wildfires, unlike floods or hurricanes, and infrastructure
needs are beyond what CDBG-DR can support.
20. Manufactured and modular homes could help address the housing
shortage in the West. These prefabricated structures are
partially or fully constructed in off-site factories, which
makes them affordable housing options because they are
significantly less expensive and faster to build. Manufactured
homes are built to HUD standards and are moveable, while
modular homes are held to local, state, and regional building
codes for on-site homes. While there is a huge opportunity for
growth in this industry, regulatory barriers threaten to dampen
or halt their expansion. A recent Department of Labor (DOL)
proposal to expand the ``site of work'' definition for Davis-
Bacon could drive up costs for manufactured and modular
housing, making it harder for Americans to access affordable
housing.
21. Affordable and quality housing is essential for an effective
military and the recruitment and retention of military
personnel and civilians. On military bases, the government
provides single and unaccompanied military installation housing
rent-free. There are also houses on bases, which are commonly
privately-owned. The federal government provides military
personnel with a Basic Allowance for Housing (BAH) to offset
the costs of renting these houses or renting or buying off-base
housing. Civilians do not receive a BAH, but they are allowed
to utilize base housing if it is available. BAH rates are set
by surveying the cost of rental properties in each geographic
location. However, the Government Accountability Office (GAO)
has noted that these rates do not always accurately reflect the
cost of suitable housing for service members. Furthermore, GAO
has reported that remote military bases typically lack critical
services and amenities, prompting personnel and civilians to
search for housing in communities that are farther away or to
commute long distances to access them.
B. GOVERNORS' POLICY STATEMENT
1. Western Governors urge Congress to pass legislation lowering the
threshold of PAB financing from 50 percent to 25 percent to
infuse equity into local economies, which would result in an
immediate increase in affordable housing opportunities and
hundreds of thousands of additional homes being built or
preserved.
2. Inflation, increased material costs, and labor shortages are
already constraining affordable housing development. Western
Governors urge the federal government to reduce the
administrative burden associated with federal housing programs
to better facilitate and expedite affordable housing
development, using the U.S. Department of the Treasury's (USDT)
administration of the Emergency Rental Assistance (ERA) Program
as a model. Reducing administrative burdens would enable
affordable housing to compete on a more even field.
Specifically, Western Governors support subsidy layering review
and efforts to streamline the National Environmental Policy Act
or use other environmental reviews in its place and urge HUD to
streamline environmental review requirements for the HOME and
Housing Trust Fund Programs so that projects utilizing both
programs only have to complete one review. The Governors also
encourage DOL to consider providing Davis-Bacon waivers for
multifamily projects in small and rural communities, which
often have a limited pool of contractors.
3. Western Governors request that HUD change provisions of 24 CFR
92.241(b) requiring property rehabilitation to adhere to strict
minimum property standards for the HOME Program. Flexibility
and discretion for rehabilitation funding would allow states to
make critical improvements to the housing stock without
projects dying due to the identification of other, less
critical problems during HOME assessments.
4. Western Governors urge Congress to appropriate funding to FHA to
upgrade their technology and processing systems. We recommend
that FHA streamline its cumbersome claim filing process by
creating one efficient, centralized, and modern claim system.
In addition, FHA should provide ongoing and up-to-date guidance
to state and local housing authorities or authorize and train
its third-party contractor to provide guidance to state and
local housing authorities to avoid costly consequences that
hinder housing improvements in states. Western Governors also
encourage FHA to consider having designated state staff again
to improve communication and coordination between states and
the federal government.
5. Western Governors request that the federal government support state
housing finance and public housing agencies and explore ways to
improve the services and resources provided to them.
6. Western Governors encourage HUD to review and allow for alternative
processes in non-disclosure states to address the increasing
price of housing and adjust loan limits accordingly.
7. The federal government should enable the LIHTC Program to work more
effectively for underserved communities, including rural,
tribal, high-poverty, and high-cost communities, as well as
extremely low-income and formerly homeless tenants. Western
Governors encourage the USDT and HUD to ensure that they better
preserve the nation's existing affordable housing inventory by
simplifying and aligning program rules. In addition, we
recommend that the federal government reauthorize the expansion
of 9 percent low-income housing tax credits that expired at the
end of the 2021 and move forward by increasing Housing Credit
allocations by 50 percent to help meet the need for affordable
housing.
8. The federal government should review and adjust the formulas that
determine minimum allocations granted to states for housing
programs, including the Housing Trust Fund, the LIHTC Program,
and the HOME Program, to account for the high administrative
and regulatory costs associated with these programs. Increased
allocations would allow the states to produce more impactful
projects in our states. In addition, federal formulas should
include data elements that directly relate to program goals,
especially for the ESG Program, to ensure federal funding
serves those who need it most.
9. Western Governors call for HUD to add a flat administrative fee for
minimum allocation states in addition to the percentage amount
for administration that is granted to them. Although projects
in these states tend to be smaller, the administrative costs
are the same as they are for larger projects and the
administrative funds determined by the percentage formula is
insufficient to cover these costs.
10. Western Governors request flexibility from HUD when utilizing CDBG
funds for housing, which will ensure necessary adaptability in
challenging rural markets. We encourage HUD to implement a
similar approach to USDA and allow grantees to identify
properties over the course of a project, instead of identifying
all properties before a project begins. Focusing on one or a
few properties at a time will open opportunities to grow and
improve the housing stock, especially in rural areas. We also
request ongoing guidance and communication from HUD to ensure
that states are in compliance and are not surprised by updated
guidance and penalized when projects are already underway or
finished.
11. Western Governors recommend that the federal government make FEMA
programs and CDBG-DR funds better tools for disaster relief.
FEMA resources should require less documentation requirements
after wildfires, given that many records are destroyed with
little time for households to evacuate a fire zone. For CDBG-
DR, HUD allocations should consider infrastructure needs and
include additional resources to support rebuilding costs in the
West.
12. Western Governors urge Congress to pass legislation facilitating
the purchase of federal land by state or local governments at a
reduced price for the purpose of increasing the supply of
residential housing. We also request that the federal
government honor existing commitments to transfer land to state
or local governments in a reasonable amount of time.
13. Western Governors support manufactured and modular housing and
recognize the important role they play in providing affordable
housing for communities, particularly in rural areas. We
encourage DOL not to expand the ``site of work'' definition to
factory-built housing for Davis-Bacon wages, as it would
significantly impact the affordability of these housing
options.
14. Western Governors urge Congress and the Department of Defense to
consider how housing costs affect recruiting, retention, and
quality of life for military personnel and civilians, and
solutions to the challenge. This should include adjusting the
formula and process for determining the cost of housing on and
near military installations; the process and frequency of
adjusting locality pay, housing allowance, and remote site pay;
the formula for deciding which services and amenities should be
offered to personnel living on remote military installations;
and other adjustments that could improve the affordability of
housing and quality of life for both civilian and uniformed
personnel.
C. GOVERNORS' MANAGEMENT DIRECTIVE
1. The Governors direct WGA staff to work with Congressional
committees of jurisdiction, the Executive Branch, and other
entities, where appropriate, to achieve the objectives of this
resolution.
2. Furthermore, the Governors direct WGA staff to consult with the
Staff Advisory Council regarding its efforts to realize the
objectives of this resolution and to keep the Governors
apprised of its progress in this regard.
This resolution will expire in December 2025. Western Governors enact
new policy resolutions and amend existing resolutions on a semiannual
basis. Please consult http://www.westgov.org/resolutions for the most
current copy of a resolution and a list of all current WGA policy
resolutions.
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