Analysis: Is ‘Go Big’ Housing Plan Enough?
A deep dive into Biden’s proposal to tackle the affordable housing crisis, from Yardi Matrix Research Director Paul Fiorilla.
The Biden administration’s bold plan to address the nation’s growing housing affordability problem is a mixed blessing for the industry: It contains both unprecedented support and funding for housing programs along with potential tax increases on real estate firms that might reduce investment.
The administrative and legislative proposals encompass a wide-ranging agenda that includes funding new housing through increased use of low-income housing tax credits, expanding the government-sponsored enterprises’ (GSEs’) ability to finance small rental properties, funding for maintenance of public housing stock, and leveraging federal aid to incentivize local and state governments to reduce barriers to housing supply.
But industry advocates worry that the proposals don’t do enough to spur badly needed new development and that those aimed at financing the infrastructure package could impede the building and preservation of much-needed affordable housing.
“We support additional funds for existing subsidy programs, but more must be done to address the supply side of the equation by focusing on incentive-based programs and ways to streamline regulatory burdens,” said Cindy Chetti, senior vice president of government affairs at the National Multifamily Housing Council.
Sam Gilboard, a public policy manager at the National Apartment Association, called the administration’s actions “a step in the right direction.” But he added that the administrative plans outlined on Sept. 1 might produce 100,000 new housing units, only a fraction of what is needed. “While 100,000 is nothing to be ashamed of, we need 4.6 million new housing units over the next 10 years to meet the demand,” Gilboard said.
The need for affordable housing is at a critical point, as pent-up demand for housing and long-term undersupply have produced a cycle in which both single-family and multifamily prices have shot up at a record pace. U.S. multifamily asking rents were up 10.3 percent year-over-year through August, according to Yardi Matrix, while CoreLogic’s U.S. Home Price Index is up 18.2 percent year-over-year through July.
Meanwhile, the current legislative cycle presents a unique opportunity to “go big” to address the problem. The COVID-19 pandemic has reset attitudes about the deficit and made possible spending proposals that would have been thought outrageous not long ago. Urgency stems from the fact that Democrats have a tenuous majority in both the House and Senate that could disappear after the 2022 elections, raising the incentive to enact far-reaching legislation while they can.
Biden’s housing policy so far has two elements. The first, a series of administrative actions, went into effect immediately upon announcement earlier this month. Those measures increase funding for affordable housing and use the federal government’s muscle to help remove barriers to construction:
- Expanding by $700 million the amount of Low-Income Housing Tax Credit (LIHTC) loans that Fannie Mae and Freddie Mac are authorized to purchase. Each GSE can now purchase up $850 million of LIHTC loans, up from $500 million. LIHTC loans provide a tax break to developers who build units reserved for low- and moderate-income families.
- Using fees from Fannie and Freddie to work with community development and non-profit groups to build affordable housing.
- Expanding the GSEs’ authority to finance manufactured housing units and two- and four-unit apartments, property segments that have traditionally serve lower-income tenants and communities of color.
- Reinstating a Federal Housing Administration program—which was not renewed in 2019—that provides low-cost Ginnie Mae loans to finance new affordable apartments. The revived program has no funding limits, and housing finance agencies have three years to execute deals.
- Directing the Department of Housing and Urban Development (HUD) to employ block grants and work with communities to identify housing affordability solutions. Also directing the GSEs to study the impact of their mortgage purchases on exclusionary zoning.
Taken as a whole, the administrative steps represent a commitment to use federal resources to facilitate development of affordable housing, particularly in low-income communities. While this is commendable and necessary, the normal development timetable and entitlement process mean it will take years before the plans produce much new housing. The administration’s announcement conceded that making a dent in the problem will take time and dedication: “The persistent imbalances in the U.S. housing market have formed over many decades, and it will take concerted effort and iterative policymaking to correct them,” the announcement noted.
The second part of the plan, the infrastructure bill, commits $312.5 billion to housing subsidies, though details must be negotiated in House and Senate committees and final passage is not certain. The proposed amount dwarfs any previous allocation to housing. One industry trade group executive noted how difficult it has been in past decades to “beg” Congress for a few billion dollars.
Because Senate Republicans would filibuster a stand-alone bill, the infrastructure package must be passed through a budget reconciliation process that requires revenue neutrality, so new spending must be paid for by existing funds or increased revenues. Once the total amount of the package is determined, Congressional committees will mark up both the details of the spending and revenue offsets.
The spending side of the infrastructure package contains a range of elements that would directly or indirectly have a positive impact on commercial real estate. For example, improving transportation infrastructure drives demand for real estate development and produces jobs. Expanding access in high-speed internet makes rural communities more attractive for development. Action against climate change could help mitigate increasing damage to commercial properties from environmental disasters such as hurricanes, floods and fires. Even proposals related to expanding childcare and immigration reform could produce an indirect benefit by increasing the labor force.
The housing portion of the package involves direct benefits for multifamily. For example, the administration is proposing $95 billion to expand rent subsidies to low-income renters and to incentivize local communities to increase zoning density. Other parts of the plan would allocate up to $80 billion to fund renovations in public housing and new development in low-income neighborhoods, and more than $30 billion for the federal Housing Trust Fund, which provides grants to municipalities to build and preserve affordable housing.
The NAA’s Gilboard said what is most critical is the administration’s plan to conduct listening sessions with stakeholders to air grievances and develop solutions to problems such as exorbitant fees and zoning standards that stymie development. “We think the listening sessions will be very useful in increasing the supply of affordable housing,” he said.
Problems With Pay-Fors
For all the potential benefits, it’s too soon to count the industry’s blessings. For one thing, moderate Democrats have balked at the size of the total package, which means the final bill is likely to be pared back. Because the Democratic majority is so thin and Republican opposition to the reconciliation bill is expected to be universal, any Democratic defection could sink any part of the plan. A handful of Democrats in the House and Senate have raised objections and threatened to vote against the bill if it remains as proposed. It seems all but certain that a large infrastructure bill will pass, but the size and scope of the final product remain in doubt.
Because reconciliation bills are revenue-neutral, the final size of the package will be impacted by changes to the taxation part of the plan. In other words, more spending must be accompanied by more revenue. Real estate industry trade groups have rallied in solidarity against the rumored pay-fors, such as increases in the long-term capital gains rate; taxing carried interest as ordinary income; taxing unrealized capital gains at death; the elimination of like-kind exchanges that enable property owners to defer taxes on property sales if the proceeds are reinvested in property; and capping deductions used by pass-through entities that are involved in affordable housing.
A coalition of 16 real estate trade groups has asked Congress to avoid tax increases that impact housing development.
“Tax reforms should be undertaken with caution, with a focus foremost on supporting the nascent economic and jobs recovery and the capital investment that will drive our economic growth for years to come,” the organizations wrote to lawmakers in a letter dated Aug. 16. “Several of the tax and other offset proposals under consideration would reduce real estate investment and inhibit the capital flows that are so critical to the development and preservation of critically needed housing. In so doing, they would make the production and development of housing more costly and further exacerbate our housing affordability challenges.”
In the end, the affordable housing problem is about money. To create housing that costs less, either the cost of construction must be reduced (not likely, given rising costs of land, materials and labor costs); developers must accept reduced profits (which would eliminate the incentive to build); or the government must provide subsidies (i.e., direct payments, rent subsidies or tax breaks for developers) paid for by tax dollars.
“Everyone agrees we need more affordable housing, and there is no silver bullet or we would all say ‘let’s do that,’” said Mike Flood, a senior vice president of commercial/multifamily policy at the Mortgage Bankers Association.
Given that, there is a delicate balance in the negotiations between what’s been proposed and whether the legislation that is ultimately passed will achieve the intended goal of a significant increase in the supply of affordable housing. “It is important to understand how the proposed investments in affordable housing relate to any proposed tax changes,” Flood said. “Where is the optimal place for the government to increase investment to create more supply of affordable housing, and at the same time provide pay-fors that do not deter investment in affordable housing? This is the $64,000 question, and we will not be able to determine that answer until we see both the investments and the proposed pay-fors.”