As rents continue to rise in American cities, more and more individuals and families are “rent burdened”, spending over 30% of their monthly income on rent and utilities. According to a March 2016 report by New York University’s Furman Center for Real Estate and Urban Policy, a majority of renters in eight of the 11 largest U.S. cities, including San Francisco and New York, qualify as rent-burdened.
So what can we do to make housing more affordable? Politicians often talk about the challenges of providing “affordable housing,” but few explain what financial tools are available to combat rising housing costs and what communities can do to support these efforts.
One of the ways that public officials can create new affordable housing is by using their state or local Housing Finance Agencies (HFAs). HFAs are authorities established to help meet the affordable housing needs of the residents of their states and local communities and although their composition varies widely, most HFAs are operated by an independent board of directors and offer a wide range of affordable housing and community development programs.
HFAs have a number of financial tools available to support their goals. One of their most powerful tools is the ability to issue tax-exempt bonds to fund both their single family, low and moderate-income first-time homebuyer programs, or their multifamily low and moderate and / or mixed income rental programs.
HFA issuers also benefit from subsidies such as Section 8 or Section 236, developed in the 1960s and 1970s, although some of their programs date back to the Great Depression.
How do bonds help HFAs provide affordable housing?
When an HFA sells bonds, they are allowed to make mortgages at a rate higher than the cost of borrowing. While they are limited on their earnings, the spread between their borrowing cost and lending cost is a principal subsidy source used to create additional affordable housing.
For multifamily bond programs, most HFAs utilize municipal bond proceeds with federally-granted Low Income Housing Tax Credits (LIHTC) to create subsidy programs to encourage developers to build new or rehabilitate existing affordable housing units. The use of private dollars to fund affordable housing, both investing in bonds and in providing LIHTC equity, are perhaps two of the best historical examples of public private partnerships in the United States.
In 1974, Montgomery County Maryland became the first municipal government to mandate mandatory inclusionary zoning, or ensuring that large new construction residential buildings would have an affordable housing set aside. Today, LIHTC financings, many of which have either taxable or tax-exempt bonds associated with them, constitute 90 percent of all the affordable housing units built in the United States.
There are many large and successful multifamily HFA bond programs across the country today, including New York State Housing Finance Agency, New York City Housing Development Corporation, Connecticut Housing Finance Agency, MassHousing, Michigan State Housing Development Authority, MaineHousing, Minnesota Housing Finance Agency, Wisconsin Housing and Economic Development Authority, Rhode Island Housing, New Jersey Housing and Mortgage Finance Agency.
How can communities support affordable housing by investing in HFA bonds?
At Neighborly, we believe that creating affordable housing and developing more efficient financing tools to provide all citizens with safe and decent places to live is essential to our nation’s vitality. One way that communities can support HFAs’ efforts to expand the availability of affordable housing is to invest in HFA-issued bonds. Last year HFAs publicly issued more than $10 billion in tax-exempt affordable housing bonds and in the coming months Neighborly will be providing information about investment opportunities in affordable housing to potential investors across the country. To learn more about investing in tax-exempt bonds to fund affordable housing in your community, join us and sign up today.
If you have any questions about financing affordable housing, email us.