Unlocking Opportunity in Affordable Housing: Navigating Challenges, Innovations and Policy Shifts

The affordable housing market is in a constant state of flux, influenced by a myriad of factors, including macroeconomic forces, national and local housing policies, market dynamics, and demographic trends. Drafting plans for a new development, acquisition or rehabilitation gets even murkier when adding in the uncertainty of an election year and more questions than answers about the future of monetary policy.

To provide a clearer view into navigating what is on the horizon, NewPoint senior managing directors Bryan Dickson and Marc Cesare shared their take on the challenges and opportunities at play, and what stakeholders need to know when planning their financing strategies to preserve or create affordability. 

Let us start by quickly framing the issue at hand. Unaffordability is currently at an all-time high, with more than 27 percent of renter households classified as severely cost-burdened (paying more than half of household income toward rent and utilities) . There are now 12.1 million severely cost-burdened households, which is 1.5 million more households than before the pandemic. 

"When you factor in that a third of renters have household incomes below $30,000 and a median cash savings of $300, you start to get a sense of how there is a sizeable portion of our country in a precarious situation regarding housing instability," Dickson said. 

Working to Rebalance Sources + Uses

In theory, the solution to this affordable housing crisis is simple: build and preserve more affordable housing. In practice, however, developers face a widening imbalance between the sources and uses of funds in a project, as we have seen the cost of materials, labor, debt, and insurance increase significantly over the past two years.

"Insurance costs, in particular, have proven to be an unforeseen headwind to deals that penciled out in 2022 or 2023," Cesare said. "We are frequently seeing a 25 percent increase in premiums year-over-year. Unfortunately, the advice to shop around does not always apply in the affordable space, as LIHTC transactions often feature partnership agreements requiring top-rated insurers." 

Interest rates are another factor tipping the uses end of the scale. While rates moderated a bit towards the start of 2024, stickier-than-expected inflation and a strong employment market have seemingly pushed off the prospects of lowering the federal funds target rate to September at the earliest. Despite these challenges, Dickson has found that some unresolved transactions with origins in 2022 and 2023 are now viable in 2024, given a proper structure that boosts the sources of funds. 

"A fundamental principle of NewPoint is to offer creative products that solve typical and atypical issues that arise amidst shifting market conditions," Dickson said. "For example, the NewPoint Impact Synthetic 221(d)(4) execution – which consists of a tax-exempt private placement construction-to-permanent bond followed up by optional HUD/FHA 223(f) permanent financing – is designed to create greater loan proceeds and help get deals done in a creative, yet prudent manner." 

Policies and Programs Take Aim to Ease Affordability Crisis

Economic forces are not the only factors impacting the sources and uses equation. Broader regulatory and policy changes can have a significant impact. For example, the recent decision by HUD to impose a 10% cap on income limit increases and yearly rent increases for LIHTC housing – though well-intentioned – may have unintended consequences.

“Though it is a win for tenants who may see smaller rent increases, stricter constraints for developers to recover costs in an inflationary environment could lead to issues such as deferred maintenance,” Cesare said. “That being said, the brunt of the impact will likely be borne by properties under development that had higher future rents factored into their pro formas.” 

Another set of LIHTC changes on the horizon are included in The Tax Relief for American Families and Workers Act of 224, bipartisan legislation that passed the House and has two key provisions set to benefit the space. First, it would restore the 12.5% annual increase in 9% LIHTC allocations for 2023 through 2025. Second, it would decrease the private activity bond financing threshold for 4% LIHTCs from 50% to 40% for 2024 and 2025. 

“There are estimates that these measures would help finance the creation or preservation of more than 202,000 new rental units,” Dickson said. “The act passed the House in an overwhelming 357-70 vote, so there is hope that it will make it through the Senate as it is one of the rare bipartisan measures to come out of this Congress.”

Additional welcomed adjustments related to financing affordable housing came this year in the form of the FHFA increasing the LIHTC investment caps for both Fannie Mae and Freddie Mac from $850 million to $1 billion annually. Cesare said that this jump is part of a continued emphasis on supporting mission-related transactions, especially those that the FHFA has identified as historically having difficulty attracting investors. He added that the FHFA’s move to exclude workforce housing from its total $140 billion multifamily cap is also helping drive owners toward affordability. 

“We have seen a marked increase in borrowers looking to utilize Agency programs that voluntarily restrict units to workforce housing incomes – 80 percent to 120 percent of AMI – in exchange for pricing and underwriting incentives,” Cesare said. “These programs are proving an effective way to preserve and create affordability in market rate communities, and we expect to see growing interest from the investor community moving forward.”

A Promising Horizon

The landscape of affordable housing remains complex, with many economic, regulatory, and policy factors at play. While challenges persist, such as rising costs and an uncertain future for interest rates, there are also promising developments on the horizon. Innovative financing strategies, like those offered by NewPoint, and new policy shifts are helping to bridge funding gaps and unlock opportunities in an ever-changing market.