LIHTC Has Outsized Role in Poverty-Stricken Rural Areas

The Low Income Housing Tax Credit is proving to be a bulwark in rural counties with persistent poverty, subsidizing 40 percent of all multifamily affordable housing developments in those areas.

According to mortgage agency Freddie Mac, which is mandated to purchase affordable multifamily housing loans by its regulator, the Federal Housing Finance Agency, the LIHTC has been used by developers in areas where unrelenting poverty has depressed unsubsidized multifamily rentals.

Persistent Poverty Counties (PPCs) are defined as having had a poverty rate of at least 20 percent in each of the last three decennial censuses (1990 to 2010). “Today, 7.9 million people live in the rural parts of PPCs, and that constitutes 38.1 percent of the population of these counties,” according to a new report from Freddie Mac.

The LIHTC is a federal program administered by state housing agencies, which authorize tax credit awards for private developments that are then sold to investors by capital market conduits. Since 2000, it has subsidized an average of 54 properties and 2,370 units in PPCs annually, according to the government sponsored enterprise’s report.

In total, of the 151,538 multifamily rental units in rural PPCs, 60,833 (40.1 percent) are currently supported by the LIHTC program. This is more than 50 percent higher than in all rural areas and more than three times higher than the national rate.

“From this finding,” the Freddie Mac report says, “we can conclude that multifamily is far less common in rural PPCs, but that the multifamily housing that does exist is supported by LIHTC subsidies at a higher rate than elsewhere in the country.”

Greater Than Average Poverty

Poverty in these areas is much greater than in all rural areas or the country as a whole: 26.4 percent compared with 15.4 percent for all rural areas and 14.1 percent for the nation. “Fully 29 percent of census tracts in rural PPCs rank in the top 10 percent of all tracts nationwide in terms of highest poverty rate,” according to the report.

Income is 43 percent lower than the national average and 28 percent lower than the rural average. The lack of income means it is hard to support the kind of rent an unsubsidized development would have to show to be profitable, according to the agency.

Freddie reported the median rent in rural PPCs is $608, compared with $1,023 for the nation and $710 for rural areas generally.

Multifamily Goals for 2021

Separately, the Federal Housing Finance Agency has mandated that Freddie Mac and its cousin agency, Fannie Mae, must each purchase mortgages covering 315,000 affordable multifamily units in 2021.

As subsets of that goal, the two agencies must purchase loans for 60,000 very-low income units and loans for 10,000 “small” affordable multifamily units. FHFA defines low income as 80 percent or below of area median income, very low as 50 percent or below AMI, and “small” as developments of between five and 50 units. The LIHTC unit affordability definition varies from the official definition, and is available only to those at 60 percent or less of AMI.

The 2021 goals are the same as they have been for 2018 through 2020, and include both rural and urban areas.

Millions of Units of Production

Freddie Mac notes in its report that the LIHTC has been responsible for the development or preservation of a total of 3.2 million affordable rental units since the program’s inception in 1986. While the agency says the tax credit will continue to play a key role in multifamily development, it “still faces many challenges.”

As an example of one of the challenges, Freddie Mac looked at 9 percent LIHTCs. (There are also 4 percent LIHTCs, which are paired with tax-exempt bonds.)

“Although the current distribution of LIHTC units tends to favor high poverty areas, development in these areas using 9 percent tax credits is typically not incentivized by states in their LIHTC program Qualified Allocation Plans (QAPs),” it said.

“Increasingly, states are incentivizing development in high opportunity areas since these areas are more likely to provide residents with opportunity for upward economic mobility.”

The GSE noted that it has previously studied areas of rural “high housing needs” in Appalachia and the Mississippi Delta, and found many overlaps between these two areas and PPCs.

“In both of these reports, we found that LIHTC-supported units comprised a disproportionately high percentage of the multifamily rental market,” the report said.

“This theme—high LIHTC development activity driven in part by low incomes—continues in the rural PPCs as we find that market conditions in these areas are similar to those of other high-needs regions and populations.”

One difference it found between PPCs and Appalachia and the Delta is that the rural PPCs are spread out across the whole country, meaning the universe of developers is larger for the nationwide market.

About half the PPCs are in the Delta and Appalachia, with many others in Alaska and the Southern and Western states, including American Indian reservations. From a map included in the report, it appears all or substantially all the counties in the Navajo Nation, which sprawls through the states of Arizona, New Mexico and Utah and is the size of West Virginia, have PPC designations.

The 7.9 million people who live in rural PPCs represent 10.7 percent of the nation’s rural population and 2.5 percent of the nation’s total population. They have high concentrations of dependent young people and seniors, meaning there are fewer wage-earning adults to support rents.

“The high dependency ratio in an area does not fully explain the designation of persistent poverty, but it is a contributing factor in some cases,” according to the report.

A Heavy Skew Towards Smaller Property Sizes

Looked at by housing type, “the renter rate in rural PPCs is 32.6 percent, which is low relative to the nation (36.2 percent) but high relative to other rural areas (26.7 percent),” Freddie Mac reported.

“Among rentals, there is a heavy skew toward smaller property sizes. Approximately 64.7 percent of all rentals are in properties with fewer than five units, which is substantially higher than the national rate of 52.1 percent.”

A high proportion of PPC populations lives in rental mobile homes, it added. (Both Fannie and Freddie also are mandated by their regulator to purchase loans on mobile homes, otherwise known as manufactured houses.)

PPCs, including both rural and non-rural areas, have a median income of $41,197 and a median renter income of $30,173, both of which are significantly below the nation’s median income levels, according to the mortgage agency.

“When focusing on just rural parts of PPCs, these numbers drop to $34,299 and $21,325, respectively. Median household income in rural PPCs is 43.1 percent lower than the nation and 28.4 percent lower than all rural areas.” Job opportunity is scare in those areas as well, it noted.

“Rural PPCs have historically suffered from underinvestment of physical and health infrastructure, which has impeded growth potential,” the report concluded.

“Providing more quality, affordable housing can be very beneficial in these areas both in terms of housing stability and economic growth, which underscores the importance of private investment in the rental housing market by means of federal tax credits.”

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Associate Mark Fogarty also contributed to this column.