The financing market for low income housing provides many indicators of economic trends, some complex, some straightforward. According to one new report, the plight of the hard-hit middle class is showing up in the low income multifamily market as a classic problem of heightened demand meeting constrained supply.
As population levels seeking low-income housing options rises, national vacancy rates for such multifamily are falling and the market segment financed by low income housing tax credits, (LIHTC) is struggling to meet demand, says a new report by consulting firm CohnReznick LLP.
The idea that housing supply in the US is generally constrained runs counter to the more common national story in the post-bubble housing market. REO departments at lenders are, the story goes, drowning in foreclosed residential properties. How could it be, nationally speaking, that the market for places to live is at the same time a buyer’s and a seller’s market?
Affordability Is The Answer
In short, there isn’t a single such market. The application of tax credits to finance properties in the multifamily space under regulations requiring rent control and other affordability features has created a tiered national market in multifamily and done its level best to keep communities across the country from widespread homelessness in the wake of a residential property crisis.
According to the CohnReznick report, the trend in the of the LIHTC property market predates the downturn of 2008, where demand has exceeded supply for the past fifteen years.
“For those who think that our country has ‘too much housing,’ the fact is that most markets have a shortage of rental housing,” says Fred Copeman, CohnReznick principal and leader of its Tax Credit Investment Services practice, in a release. “When it comes to affordable rental housing, this report confirms that we have a critical shortage not only in our major cities, but across the entire country. There is, in short, no room at the inn.”
As one indicator, CohnReznick says, occupancy rates in housing credit properties are high, with the median rate exceeding 96% each year between 2008 and 2010. The locally based firm calls this “another indicator of the tremendous imbalance between the increasing demand and short supply of affordable housing properties. Following CohnReznick’s earlier look at the LIHTC segment in August 2011, many survey respondents noted that “unfavorable economic conditions led to enlarged tenant bases across properties in their affordable housing portfolios.”
Cash flow per-unit performance in the LIHTC market is improving, says the study, with a significant decline in the number of such properties performing below break-even 2008-2010.
A number of factors could have contributed to these improved performance metrics, CohnReznick says. They include higher rental rates, lower occupancy turnover or collection losses, lower hard debt service levels and lower-than-projected operating expenses or better expense underwriting practices.
“However, none of these factors can be singled out as a principal or overriding source for improved operations,” according to the report. “Of the various causes explored, CohnReznick found that more efficient expense underwriting and more favorable debt-to-equity ratios are the two primary contributors to improved performance.”
The report also notes that the housing-credit properties compare favorably to their market-rate counterparts in terms of foreclosures. One reason, the report states, is an improvement in terms of forecasting both yield and housing credit delivery.