[Senate Hearing 117-877]
[From the U.S. Government Publishing Office]
S. Hrg. 117-877
THE ROLE OF TAX INCENTIVES
IN AFFORDABLE HOUSING
=======================================================================
HEARING
before the
COMMITTEE ON FINANCE
UNITED STATES SENATE
ONE HUNDRED SEVENTEENTH CONGRESS
SECOND SESSION
__________
JULY 20, 2022
__________
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Printed for the use of the Committee on Finance
______
U.S. GOVERNMENT PUBLISHING OFFICE
56-312--PDF WASHINGTON : 2024
COMMITTEE ON FINANCE
RON WYDEN, Oregon, Chairman
DEBBIE STABENOW, Michigan MIKE CRAPO, Idaho
MARIA CANTWELL, Washington CHUCK GRASSLEY, Iowa
ROBERT MENENDEZ, New Jersey JOHN CORNYN, Texas
THOMAS R. CARPER, Delaware JOHN THUNE, South Dakota
BENJAMIN L. CARDIN, Maryland RICHARD BURR, North Carolina
SHERROD BROWN, Ohio ROB PORTMAN, Ohio
MICHAEL F. BENNET, Colorado PATRICK J. TOOMEY, Pennsylvania
ROBERT P. CASEY, Jr., Pennsylvania TIM SCOTT, South Carolina
MARK R. WARNER, Virginia BILL CASSIDY, Louisiana
SHELDON WHITEHOUSE, Rhode Island JAMES LANKFORD, Oklahoma
MAGGIE HASSAN, New Hampshire STEVE DAINES, Montana
CATHERINE CORTEZ MASTO, Nevada TODD YOUNG, Indiana
ELIZABETH WARREN, Massachusetts BEN SASSE, Nebraska
JOHN BARRASSO, Wyoming
Joshua Sheinkman, Staff Director
Gregg Richard, Republican Staff Director
(II)
C O N T E N T S
----------
OPENING STATEMENTS
Page
Wyden, Hon. Ron, a U.S. Senator from Oregon, chairman, Committee
on Finance..................................................... 1
Crapo, Hon. Mike, a U.S. Senator from Idaho...................... 3
WITNESSES
Bell, Andrea, Director, Oregon Housing and Community Services,
Salem, OR...................................................... 5
Konter, Jerry, founder and president, Konter Quality Homes; and
chairman of the board, National Association of Home Builders,
Washington, DC................................................. 7
Ohanian, Lee E., Ph.D., senior fellow, Hoover Institution,
Stanford University; and distinguished professor of economics,
University of California, Los Angeles, Los Angeles, CA......... 8
Roberts, Benson (Buzz), president and CEO, National Association
of Affordable Housing Lenders, Washington, DC.................. 10
Wade, Hon. Dana T., chief production officer, FHA finance, Walker
and Dunlop, Bethesda, MD....................................... 11
ALPHABETICAL LISTING AND APPENDIX MATERIAL
Bell, Andrea:
Testimony.................................................... 5
Prepared statement........................................... 37
Responses to questions from committee members................ 43
Crapo, Hon. Mike:
Opening statement............................................ 3
Prepared statement........................................... 49
Konter, Jerry:
Testimony.................................................... 7
Prepared statement........................................... 50
Responses to questions from committee members................ 71
Ohanian, Lee E., Ph.D.:
Testimony.................................................... 8
Prepared statement........................................... 75
Responses to questions from committee members................ 79
Roberts, Benson (Buzz):
Testimony.................................................... 10
Prepared statement........................................... 83
Responses to questions from committee members................ 90
Wade, Hon. Dana T.:
Testimony.................................................... 11
Prepared statement........................................... 94
Responses to questions from committee members................ 97
Wyden, Hon. Ron:
Opening statement............................................ 1
Prepared statement........................................... 101
Communications
AHEPA Affordable Housing Management Company...................... 103
Capital One...................................................... 105
Center for Fiscal Equity......................................... 111
Housing Development Center....................................... 116
National Community Renaissance................................... 117
National Multifamily Housing Council and National Apartment
Association.................................................... 118
New York State Homes and Community Renewal....................... 123
UMH Properties................................................... 125
U.S. Mortgage Insurers........................................... 127
THE ROLE OF TAX INCENTIVES
IN AFFORDABLE HOUSING
----------
WEDNESDAY, JULY 20, 2022
U.S. Senate,
Committee on Finance,
Washington, DC.
The hearing was convened, pursuant to notice, at 10 a.m.,
in Room SD-215, Dirksen Senate Office Building, Hon. Ron Wyden
(chairman of the committee) presiding.
Present: Senators Carper, Cardin, Brown, Bennet, Casey,
Warner, Hassan, Cortez Masto, Crapo, Thune, Portman, and Young.
Also present: Democratic staff: Adam Carasso, Senior Tax
and Economic Advisor; and Joshua Sheinkman, Staff Director.
Republican staff: Jamie Cummins, Tax Counsel; Catherine Fuchs,
Senior Counsel; Gregg Richard, Staff Director; and Jeffrey
Wrase, Deputy Staff Director and Chief Economist.
OPENING STATEMENT OF HON. RON WYDEN, A U.S. SENATOR
FROM OREGON, CHAIRMAN, COMMITTEE ON FINANCE
The Chairman. The Finance Committee meets this morning to
discuss housing. This hearing comes at a time when Americans
are getting clobbered by climbing rents and home prices, key
drivers of inflation.
Data released last week showed that rents increased in June
at the fastest rate since 1986. Buying a home is getting more
expensive. Many young people who have modest incomes or big
student loan debt feel like the dream of home ownership has
slipped out of their reach.
The root cause is the United States is not building enough
housing. It has been that way for decades, and the shortage is
affecting citizens and cities all over America. For example, my
hometown of Portland has skyrocketing rents and low supply of
suitable housing. It is also an issue though in central Oregon,
southern Oregon, and eastern Oregon, where they cannot build
enough housing fast enough to keep up with demand. I would be
willing to bet that every member on this panel is hearing the
same story.
Now, we are going to talk about a number of issues this
morning, and I would just like to raise a relatively new issue
that deserves real scrutiny, and that is: private equity firms
and sophisticated companies armed with terabytes of housing
data are hoovering up properties nationwide. They are jacking
up rents. They are using algorithms to outbid Americans who
just want to own a home.
Why do these big guys want to get into our housing market?
Because there are upward of 330 million people in the country,
and there are not enough homes for all of them. Huge demand,
limited supply--typically, people on a budget are going to come
out on the losing end of that sort of thing every time.
The cost of housing is also pushed up by the snarls of
State and local red tape. Zoning rules too often ban the kind
of construction that is most needed and perpetuate segregation.
In some places it can take years of tireless work to get a
ruling on permits and approval for new construction, and then
you have the big up-front costs.
Fortunately, my home State of Oregon is one of the States
that is stepping up on this issue. Others need to do the same.
It is also a fact that when housing costs go up, homelessness
goes up. You can save a lot of individual suffering and
taxpayer dollars tomorrow by building more affordable housing
today.
The bottom line when it comes to housing? The U.S. needs to
build and then build some more. The Finance Committee plays an
important role in helping get shovels in the ground. That's
because much of housing policy deals with tax policy.
I have proposed the DASH Act, the Decent, Affordable, and
Safe Housing for All bill. It is about getting help to the most
vulnerable: children and families experiencing homelessness. It
would also create a credit for more affordable rental units;
boost LIHTC, the Low-Income Housing Tax Credit; and encourage
the construction of more middle-income housing, without taking
a single penny away from LIHTC. Local officials in Oregon tell
me they badly need more incentives to build housing for middle-
class families.
The Finance Committee has had a bipartisan coalition
working on important housing issues for a long time. In recent
years Senator Cantwell has been the champion of LIHTC, leading
big legislative expansions that are creating more than 150,000
new affordable homes. I think she would agree that that is a
good down payment for housing--at the same time, recognizing
there is lots and lots more to do.
There is another proposal, the Affordable Housing Credit
Improvement Act, which I am proud to cosponsor with Senator
Young and one of our colleagues who is here, Senator Portman.
That bill adds even more punch and even more flexibility to
building even more housing--an estimated 2 million new units
nationwide.
Senator Cardin and Senator Portman have also proposed an
important bill called the Neighborhood Homes Investment Act
that would be a big magnet for new affordable housing in
struggling communities that very much need it.
And finally, thanks to my seat mate here, Senator Crapo, we
continue our bipartisan work with Senator Leahy, Senator
Collins, and I, offering the LIFELINE Act. Our bill creates
more flexibility for States, local governments, and Tribes to
use existing funds to get more affordable housing built. With
costs where they are today, the alternative is a whole lot of
unfinished construction and plans that stall out before they
get out of the gate.
Finally, while there is bipartisan interest in getting this
approach done legislatively, the Treasury also has substantial
authority to accomplish a lot of what we are seeking to do on
their own with rule changes.
So today we are going to make sure that the direction is
getting the Congress and the Treasury Department to move more
quickly together. And getting it done will provide important
progress, again ensuring access to more opportunities for
affordable housing. There are lots of ideas to talk about.
Every member of this committee has an interest in this. So,
I hope we will not be here eating our cereal tomorrow morning
in the Finance room, but I can tell you a lot of our colleagues
have lots of interest and look forward to our discussion.
And I want to again thank Senator Crapo for his good work
on another important issue.
[The prepared statement of Chairman Wyden appears in the
appendix.]
OPENING STATEMENT OF HON. MIKE CRAPO,
A U.S. SENATOR FROM IDAHO
Senator Crapo. Thank you, Senator Wyden. And I appreciate
your holding this hearing, as you are highlighting once again
another of the bipartisan issue areas we are building a strong
record in this committee of working on, and this is important.
Last week we learned that consumer price inflation spiked
to 9.1 percent, the highest rate in more than 40 years. The
shelter component of the consumer price index was up 5.6
percent in June relative to a year earlier, and rents were up
by nearly 6 percent.
To continue battling inflation, which was fueled by last
year's partisan American Rescue Plan, the Federal Reserve must
aggressively raise interest rates, and may raise rates later
this month by as much as a full percent.
Inflation must be contained, or we run the risk of the Fed
having to repeat what it did in late 1980 to combat runaway
inflation. Painfully then, overnight interest rates were driven
to nearly 20 percent, which crushed economic activity,
including housing markets, and helped lead to a deep and long
recession.
With higher interest rates set by the Fed, higher mortgage
rates follow, making it all the more challenging for Americans
to buy homes. Housing affordability is a critical issue in
Idaho and all across the country.
Nationwide, there is a shortage of about 7 million
affordable rental homes available to lower-income Americans,
and the gap between demand and supply increases each year. To
provide more affordable housing, there are existing tools in
the tax toolbox that provide incentives for builders to create
more affordable homes.
The Low-Income Housing Tax Credit or LIHTC, for example, is
responsible for generating a majority of all affordable rental
housing created in the United States today and generally enjoys
bipartisan support in Congress.
In Idaho, there are currently 284 LIHTC projects located
across the State, providing 12,000-plus units. These projects
vary in size and are split roughly between urban and rural,
with about 72 percent targeted toward families and 28 percent
for seniors and the elderly. One such project is the Valor
Pointe Apartments in Boise, which targets chronically homeless
veterans.
Several members of this committee have been active in
working to improve existing affordable housing credits and to
create new incentives--and as I indicated, on a bipartisan
basis. Senators Young and Cantwell, as well as several other
members, introduced the Affordable Housing Credit Improvement
Act, which would expand and strengthen LIHTC for developing and
preserving affordable housing.
Senators Portman and Cardin introduced the Neighborhood
Homes Investment Act, which would create a Federal tax credit
that covers the cost difference between building or renovating
a home in urban and rural areas. Numerous other Finance
Committee members are also interested in finding affordable
housing solutions, and I thank all of them for their work.
While LIHTC and other credits are a part of the solution to
developing affordable housing, we must address other drivers
that are increasing housing costs generally. Foremost in the
current economy is the need to reduce inflation. Unfortunately,
it has been allowed to run rampant, and necessary Federal
Reserve actions will probably raise the cost of housing.
Builders are also feeling inflation's effect through more
expensive building materials. And, painfully high fuel prices
continue to put even more pressure on builders' budgets, making
it even more expensive to get materials to the construction
sites.
Additionally, several economic factors have led to a
shortage of affordable housing. One way to alleviate the
shortage would be to look into more manufactured housing.
During his time at HUD, former Secretary Carson created the
Office of Innovation to evaluate new ways to provide housing,
and in doing so highlighted the improved efficiency and
suitability of manufactured homes.
Zoning laws and regulatory barriers, which are often
uncoordinated, unnecessary, or overly cumbersome, also present
challenges to affordable housing by creating excessive costs
that restrain development of affordable housing. Many of the
markets with the most severe shortages in affordable housing
have the most restrictive State and local barriers to
development.
We must work to reduce regulatory barriers, which requires
outside-the-box approaches, as well as teamwork from local,
State, and Federal Governments, and the private sector. This
includes initiatives like Opportunity Zones that were part of
the Tax Cuts and Jobs Act, an area where Senator Scott has done
a great deal of good work.
Data released as recently as March of 2022 by the
Opportunity Zone Fund Directory shows that $49.18 billion has
been committed to anticipated investments, and 60 percent of
those funds target investments in affordable housing and
community development.
Homes are more than just physical structures. Homes are a
foundation for wealth building, family stability, and community
cohesiveness. It is critical that we make the American dream of
home ownership as attainable for as many people as possible,
which will continue to foster the economic success of the
Nation.
I look forward to discussing ways to ensure affordability
and accessibility of home ownership with today's witnesses. And
I thank you all for being here.
Thank you, Mr. Chairman.
[The prepared statement of Senator Crapo appears in the
appendix.]
The Chairman. Thank you, Senator Crapo, and you are spot-on
in saying this is another area where we have an opportunity to
lead the committee to some bipartisan solutions.
Let me go to our witnesses. Andrea Bell is here from
Oregon. It is so good to have you here. She is the Executive
Director of Oregon Housing and Community Services. She has
served in differing capacities there since 2019. Previously Ms.
Bell was the Housing Administrator for the Medicaid Health
Plan. So, we are very glad you are here.
Our second witness--we welcome him; he has worked very
closely with us over the years--is Jerry Konter, the chairman
of the National Association of Home Builders. He has spent 45
years building homes and commercial buildings in Savannah, GA.
We are very pleased that he and the Home Builders are
participating.
Our third witness is Lee Ohanian, senior fellow at the
Hoover Institution and distinguished professor of economics at
the University of California, Los Angeles. I would just say to
Dr. Ohanian, my late mother worked at the Hoover Institution
for many years and, with the ultimate compliment, some of the
executives said, ``Mrs. Wyden is so good, but she still is a
Democrat.'' So, we are very pleased that you are here.
Our fourth witness is Benson (Buzz) Roberts--we welcome
you--president and CEO of the National Association of
Affordable Housing Lenders. Previously Mr. Roberts was a
Treasury official working in this area. He has considerable
expertise, and so we appreciate his leadership.
Our fifth witness will be Ms. Dana Wade. She is the chief
production officer at Walker and Dunlop. Ms. Wade previously
served as the Commissioner of the Federal Housing
Administration in 2020. She also has extensive experience in
the executive branch at Management and Budget, but she also has
Senate roots--the Senate Committee on Banking. So we welcome
her.
Because we are going to have so many Senators to
participate, we are going to have to stick really closely to
the 5-minute rule.
Ms. Bell, you traveled the furthest.
STATEMENT OF ANDREA BELL, DIRECTOR, OREGON HOUSING
AND COMMUNITY SERVICES, SALEM, OR
Ms. Bell. Wonderful. Well, thank you, Mr. Chairman and
Ranking Member Crapo, and members of the committee. First, I
just want to acknowledge and appreciate the opportunity to
testify on the vital role that tax incentives play in our
Nation's affordable housing delivery system.
Again, for the record, I am Andrea Bell, Director of Oregon
Housing and Community Services. We serve as the State of
Oregon's Housing Finance Agency.
First off, Mr. Chairman, thank you for your steadfast
leadership for many years, and continuously elevating the needs
of the people of Oregon and their housing needs collectively.
Senator Crapo, I also want to acknowledge and just uplift
your support for affordable housing. Your leadership certainly
does not go unnoticed.
For years our Nation has not built enough rental housing,
but the conditions and circumstances spurred by the pandemic
have made our housing crisis particularly acute, and
individuals with low incomes, individuals and families with
moderate incomes, are bearing the brunt of that impact.
With rising interest rates, escalating home prices,
skyrocketing rents due to the mismatch between supply and
demand, many would-be homeowners are often left renting. And
more than 70 percent of extremely low-income renters across the
United States were spending more than half of their income on
housing in 2021--70 percent. That is 70 percent of individuals
who have to make tough decisions every single month throughout
the year about what bills they will be able to pay, and how
they are going to get by.
The Housing Credit and Housing Bonds are by far the most
essential production tools that we have at our disposal.
Affordable housing simply relies on these programs. The Housing
Credit specifically is a highly successful public and private
partnership. And what we know is, when we stabilize individuals
and we stabilize families, we also stabilize communities, which
has an economic benefit.
In the State of Oregon, nearly 70 percent of all rental
homes financed in the last 5 years relied on bonds. Costs are
increasing due to inflation, supply chain disruptions, many
things that I know that members of this committee are fully
aware of.
Housing finance agencies and our partners across the Nation
are doing everything that we can to prevent deals from falling
through. But the unfortunate reality is that sometimes
financing gaps are simply too large, and in some cases there
are no resources to pull from to help cure the financing gaps.
The most impactful thing that Congress can do is to pass
Senator Cantwell's Affordable Housing Credit Improvement Act.
It would both expand and strengthen the Housing Credit. It
would significantly increase the Housing Credit authority,
allowing us to build more properties like River Bend Place in
rural Ontario, OR.
The Affordable Housing Credit Improvement Act would also
provide States greater flexibility to spread existing bond
resources to more developments by reducing the bond financing
test from 50 percent to 25 percent.
I also urge Congress to pass the bipartisan LIFELINE Act
introduced by Senators Leahy and Collins. This bill would
enable States and localities to most effectively use Federal
fiscal recovery funds to fill financing gaps in Housing Credit
developments.
I also quickly want to mention two pieces of legislation
that the Finance Committee should take up on means of home
ownership. Senator Cortez Masto's Affordable Housing Bond
Enhancement Act would enact simple and impactful improvements
to the Mortgage Revenue Bond and Mortgage Credit Certificate
programs, which are essential to serving low- and moderate-
income first-time home buyers. This is again creating pathways
to home ownership, a dream that many of us have.
Senator Cardin's and Portman's Neighborhood Homes
Investment Act would establish a new tax credit modeled after
the highly successful Housing Credit. Simply put, the housing
crisis simply will not get better if Congress does not act.
In my last few seconds, I would just both urge and elevate
my appreciation for this committee, and we need Congress to
act. The action is going to come after this hearing and what
decisions the committee will be able to make in service to the
American people.
I appreciate the time.
[The prepared statement of Ms. Bell appears in the
appendix.]
The Chairman. Well said. Thank you.
Let's go next to Mr. Konter.
STATEMENT OF JERRY KONTER, FOUNDER AND PRESIDENT,
KONTER QUALITY HOMES; AND CHAIRMAN OF THE BOARD,
NATIONAL ASSOCIATION OF HOME BUILDERS, WASHING-
TON, DC
Mr. Konter. Good morning, and thank you for the opportunity
to testify today.
Every American deserves access to safe, decent, and
affordable housing. Even after over 40 years in business, I
still enjoy nothing more than handing over keys to the first-
time buyer.
Delivering an entry-level product is difficult. Sixty-nine
percent of American households cannot afford the median price,
but a year ago, nearly one quarter of new homes were priced
under $300,000. Today, it is 10 percent.
We also face challenges with minority home-ownership
opportunities. Of households under the age of 35, which is your
typical first-time buyer, 46 percent of White households owned
a home, but only 17 percent of African American households did
so. And as a multifamily developer, I also understand how
affordable rental housing creates stability for tenants.
The housing affordability crisis is a result of failing to
produce enough housing to match demand. If we are going to
solve our housing affordability crisis, we must drive down the
cost to build, as well as the cost to own or rent. Well-
structured housing tax incentives can help achieve this.
Many of these incentives that serve the public interest
remain effective, including the Low-Income Housing Tax Credit.
However, others have failed to keep up with changes to the tax
code, such as the mortgage interest deduction.
For over 100 years, the MID made home ownership more
accessible. But the MID remains rooted in an increasingly
outdated space in the tax code--itemized deductions.
The change brought by the Tax Cuts and Jobs Act--namely,
doubling the standard deduction--significantly reduced the
number of taxpayers who itemize. Prior to those reforms,
typically 70 percent of homeowners with a mortgage claimed MID.
Today, that number has dropped below 27 percent.
In 2017, 80 percent of the MID was deducted by taxpayers
earning less than $200,000. In 2018, that fell to 58 percent.
The MID is simply missing the mark. The most effective way to
promote and enable home ownership is to eliminate the mortgage
interest deduction and replace it with a tax credit. A 15-
percent tax credit claimed against mortgage interest and real
estate taxes paid would offer a more effective and progressive
tax incentive.
The credit should be phased out for single filers with
incomes above $250,000 and joint filers with incomes above
$500,000. A credit structured along these lines can be enacted
on a revenue-neutral basis starting in the 2026 tax year.
In the next few years, many of the provisions enacted in
2017 will expire. This presents an opportunity to refocus the
home-
ownership tax incentives so that the benefit flows to those who
need it: middle-class, lower-income Americans from all
backgrounds.
We also recommend enacting the Affordable Housing Credit
Improvement Act to boost production of affordable rental
housing, and we support Chairman Wyden's proposal for a middle-
income housing tax credit which addresses a growing need for
affordable workforce rental housing.
Congress should also address the many housing incentives
that are not indexed for inflation, such as the capital gains
exclusion. And we urge you to reconsider the current limits on
the SALT deduction.
NAHB greatly appreciates the bipartisan Senate support to
solve our affordable housing crisis. After all, shelter is a
basic human need. And the headwinds we are facing are strong.
The index of builder sentiment had its second largest drop ever
for July, and single-family starts fell to a 2-year low.
We have an opportunity to do something that not only makes
good economic sense but will uplift the lives of millions of
Americans.
Thank you.
[The prepared statement of Mr. Konter appears in the
appendix.]
The Chairman. Thank you very much for important points, and
I note that you are the president of your own homebuilding
firm, so we are very glad that you are here.
Our next witness will be Dr. Lee Ohanian.
STATEMENT OF LEE E. OHANIAN, Ph.D., SENIOR FELLOW, HOO-
VER INSTITUTION, STANFORD UNIVERSITY; AND DISTIN-
GUISHED PROFESSOR OF ECONOMICS, UNIVERSITY OF
CALIFORNIA, LOS ANGELES, LOS ANGELES, CA
Dr. Ohanian. Chair Wyden, Ranking Member Crapo, and members
of the Finance Committee, thank you for inviting me to testify
today.
Significantly increasing housing affordability requires
progress on two fronts. One is expanding housing supply. The
other is building new housing at much lower costs than current
cost levels. There are policy reforms that may be implemented
using government incentives that would advance these goals.
Today I will focus on two reform areas.
One is increasing the use of manufactured housing, which is
much less expensive to build than traditional housing. The
other is in the process of building subsidized housing, which
has become very expensive in some States, including my State of
California.
Residential construction costs are high in part because the
process of homebuilding has not changed all that much over time
compared to other sectors in the economy. It has not advanced
nearly as much as modern production methods.
Interestingly, this point has been made within the Federal
Government for at least the last 85 years. Now, in terms of
documenting how construction costs are so high, I note that the
Bureau of Labor Statistics reports labor productivity growth in
residential construction grew just 11 percent between 1987 and
2016. This stands in sharp contrast to a 150-percent
productivity growth in durable manufacturing over the same
period, which reflects substantial and continued technology
innovations in our factories that lower costs.
Manufactured homes are much lower-cost alternatives to
traditionally built homes. The use of factory-built homes
produces modern cost-saving technologies. Census data shows
that production costs of manufactured homes are about 60
percent lower than traditionally built homes.
Because of substantially lower costs, manufacturing housing
production boomed after World War II, accounting for about 60
percent of construction in 1972. But since then, regulatory
burdens have reduced this adoption. Removing these burdens
could substantially increase this importance.
One important HUD requirement is that these homes sit on a
permanent chassis. This imposes a negative aesthetic on the
home, as they are pejoratively labeled as mobile homes or
trailers. The undesirable aesthetic of a home placed on a
chassis induces cascading negative effects, including local
zoning ordinances excluding manufactured housing from many
neighborhoods. This means these homes are often placed in
mobile home parks, which in turn means they are financed with
personal loans or chattel loans, both of which tend to be more
expensive than longer-duration traditional mortgages, and
neither of which would provide homeowners with mortgage
interest tax deductibility.
Recommendations to reduce burdens placed on manufactured
housing date back at least to President Reagan's 1982 Housing
Commission Report. These recommendations for manufactured
housing were also made in a 2011 report commissioned by HUD.
Eliminating the chassis requirement, together with creating
specific programs that incentivize State and local agencies to
accept manufactured housing outside mobile home parks, could be
a game changer, increasing affordability, and would be squarely
consistent with President Biden's recently announced proposals
to increase affordability.
I will now discuss the importance of reducing the costs of
building subsidized housing. Construction costs of subsidized
housing have grown enormously, particularly in the western
United States. One San Francisco subsidized project is costing
nearly $1.1 million per small apartment unit, just for
renovation and refurbishment.
The 2018 GAO study of LIHTC projects found extremely large
cost disparities in subsidized construction across States,
ranging from a minimum of below $100,000 per unit in one Texas
allocation location to a maximum of $750,000 per unit in
California, based on 2011-2015 data.
The GAO found that only a few allocating agencies have
requirements to guard against misrepresentation of costs, which
is a fraud risk. The GAO also found weaknesses in data quality,
inconsistencies in measuring and reporting cost-related
variables, and the practice of not including the full extent of
some indirect costs.
The GAO also found financing inefficiencies, particularly
the fact that there are typically many lenders. UC Berkeley's
Terner Center for Housing Innovation estimates that each
additional lender adds an additional $6,400 in cost per unit.
Lawsuits also delay affordable development and increase
costs. In California, lawsuits against affordable housing are
often filed under the auspices of the California Environmental
Quality Act, which is recognized within my State and is often
used to block and delay development, rather than being used for
its expressed purpose of protecting the environment.
I recommend Congress revisit the GAO recommendations,
including standardization of cost data from agencies that are
collected and analyzed by a single Federal entity.
American home affordability can be increased substantially
by the adoption of low-cost production techniques, improving
efficiency, and helping State and local agencies create
acceptable building development opportunities in areas that are
in high demand.
Thank you so much.
[The prepared statement of Dr. Ohanian appears in the
appendix.]
The Chairman. Thank you very much, Dr. Ohanian.
Mr. Roberts?
STATEMENT OF BENSON (BUZZ) ROBERTS, PRESIDENT AND
CEO, NATIONAL ASSOCIATION OF AFFORDABLE HOUSING
LENDERS, WASHINGTON, DC
Mr. Roberts. Well, good morning, Chairman Wyden, Ranking
Member Crapo, and other members of the committee. And thank you
very much for your leadership on affordable housing.
The National Association of Affordable Housing Lenders is
an alliance of major banks, nonprofits, and other mission-
driven lenders and investors in affordable housing and
inclusive neighborhood revitalization. Our member banks in 2020
provided over $180 billion to finance affordable low-income
housing and other community development activities, and our
members are the primary investors in Low-Income Housing Tax
Credits.
So today we have bad news and good news. The bad news of
course is the tremendous cost of housing, increasing the
affordability problem. According to the National Association of
Realtors, prices and rents rose nearly 20 percent last year.
But housing is not just a casualty of inflation, it is a cause
of inflation. Even in 2020, home prices went up 11 percent when
the CPI was rising only 1.4 percent.
So, building housing is really essential if we are going to
get our long-term inflation challenges under control. Last
October, about half of all Americans said that affordable
housing in their communities was a major problem, and that
exceeded what they cited for other really important problems,
like drugs, crime, and the COVID-19 health and economic
consequences.
The good news, though, is we know what to do. The Low-
Income Housing Tax Credit is widely considered the most
effective and successful United States policy to produce
affordable rental housing ever: 3.6 million units so far, and
about 130,000 annually. That is virtually all the affordable
production over the last 35 years, and it is equivalent to more
than one-third of all comparably rent-priced multifamily
housing in the United States. So it has had a major impact, and
it could do much more.
It has also performed exceedingly well. The cumulative
foreclosure rate on Housing Credit properties is 0.57 percent.
That is not an annual foreclosure rate, that is a cumulative
foreclosure rate. As far as we know, that is the best-
performing asset class in all real estate. Pretty amazing for
low-income housing.
The proposed Neighborhood Homes Investment Act would take
many of the lessons learned from the Housing Credit and apply
them to a different problem, which is to revitalize struggling
communities and provide home-ownership opportunities there, by
building starter homes and rehabilitating homes.
And so, we urge Congress to pass the bipartisan Senate bill
98, sponsored by Senators Cardin, Portman, and 20 other
Senators. That would produce half a million homes for home
ownership in struggling communities over the next 10 years.
The broad increases in housing prices really mask
tremendous diversity across this country. The median price of a
home in San Jose is $1.6 million. In Toledo, OH, it is one-
tenth of that, less than $160,000. And every State has
communities that are struggling. In those communities, it is
not economical to rehab or construct new homes. The numbers
just do not pencil out. We need to have Neighborhood Homes to
fix that.
The Housing Credit too has been so effective. Our priority
for the Housing Credit, of course, would be to pass the
Cantwell-Young bill, the Affordable Housing Credit Improvement
Act. The key elements to address are to, first, restore the
temporary 12.5-percent increase in Housing Credit allocation
authority that expired at the end of last year. And so, we are
actually losing ground rather than gaining ground today.
Second, to increase the State allocation caps by 50 percent
over 2 years. That would help every State in the country to
produce more. Third, as Ms. Bell suggested, reduce the bond
financing requirement to access tax credits from 50 percent to
25 percent. And finally, to reform the Qualified Contract and
right-of-first-refusal provisions in order to preserve
affordability and expand nonprofit control of properties.
So, we do know what to do. We just need to do more, and we
hope you will do it.
Thank you.
[The prepared statement of Mr. Roberts appears in the
appendix.]
The Chairman. Thank you very much, Mr. Roberts.
We will have questions in a moment. But we have Ms. Wade.
Welcome.
STATEMENT OF HON. DANA T. WADE, CHIEF PRODUCTION OF-
FICER, FHA FINANCE, WALKER AND DUNLOP, BETHESDA,
MD
Ms. Wade. Thank you. Good morning. And, Chairman Wyden,
Ranking Member Crapo, thank you for your bipartisan leadership
on this issue.
My name is Dana Wade. I am a chief production officer at
Walker and Dunlop. I am a former FHA Commissioner. I am a
former Assistant Secretary at the Department of Housing and
Urban Development. And, Mr. Chairman, as you mentioned, I am
also a former Senate staffer. So, it is a real honor for me to
be on the other side of the dais.
Walker and Dunlop, where I work, is one of the largest
providers of capital to the multifamily industry, and the
fourth largest lender for all commercial real estate. We
employ, at Walker and Dunlop, 1,400 people in 40 offices across
the country. As a top affordable housing lender and the sixth
largest Low-Income Housing Tax Credit syndicator, we see every
day both the need to build more affordable housing and the
barriers that stand in the way.
This panel has already talked a lot about the data, which
is pretty clear, on the need to build more affordable housing.
One recent report showed a shortage of 3.8 million homes in the
United States. Ten million low-income households spend more
than half of their income on rent. And the list goes on. Add to
that the kind of everyday struggles. Millions of Americans
spend more time getting to work--transit, in their cars, on
buses, on trains--than they do with their family. So there are
definite and very real hardships that are presented by the lack
of affordable housing.
That is why the conversation on increasing the housing
supply that this committee is having today is so important. The
Affordable Housing Credit Improvement Act is a very important
step forward, and very briefly--I know, Mr. Roberts, you
mentioned the benefits of that, but specifically we think it
will be very helpful to increase the already over-subscribed 9-
percent tax credit, lower the threshold for Private Activity
Bonds from 50 percent to 25 percent, as well as making
important reforms to allow the 4-percent tax credit to more
easily be used for rehab projects.
Increasing the housing supply, using these tax credits, as
we have seen, has translated into better economic
opportunities, a better quality of life. As one real-world
example, if you will allow me, of the differences these tax
credits make in people's lives, Walker and Dunlop recently
financed an apartment complex in Portland, OR, called
Kentonwood. One hundred percent of the units in Kentonwood were
income-restricted to those making 60 percent or less of the
area's median income, something made possible with LIHTC. All
units have access to high-speed Internet and energy-
efficient appliances. And Kentonwood is a walkable, transit-
oriented project close to a light rail station.
That is just one example. We have many, many examples. From
where we sit, there are other benefits of LIHTC, including, as
Mr. Roberts mentioned, very low cumulative foreclosure rates,
low vacancies, as well as a strong compliance for
affordability.
While LIHTC is very important--I think it will be a big
topic today--as the ranking member alluded to, it is just one
side of the equation. We must cut through regulatory barriers
at the Federal, State, and local level that are holding back
housing supply. An estimated 40 percent of development costs
can be attributed to regulation at all levels. Record-high
costs for labor and materials are only adding fuel to the fire.
Federal obstacles include long time frames for
environmental and labor decisions, as well as some antiquated
rules. One example is HUD's noise restrictions. Local policies
like zoning, density limits, lengthy permitting and approval
processes, and other land use restrictions are all examples.
While zoning and other issues are in the hands of local
citizens and their governments, as they should be, Federal
policymakers can provide a forum for best practices. Congress
can and does leverage the supply of Federal resources like
LIHTC to increase the housing supply.
Governments can also work together at all levels to
standardize policies, practices, and timelines across different
programs.
In conclusion, you know I think everyone on this panel will
agree that we need a combination of a lot of smaller, local
ideas as well as the big ideas to solve the housing crisis.
Thank you again for the opportunity to be here, and I look
forward to answering your questions.
[The prepared statement of Ms. Wade appears in the
appendix.]
The Chairman. Thank you very much. You have been an
excellent panel.
Mr. Konter, let me start with you. I have town hall
meetings in each of my 36 counties, and overwhelmingly what
employers tell me their top issue is, is that they cannot find
enough workers. And invariably that involves that folks cannot
get housing. And my concern is particularly for the missing
middle this morning, the
middle-class folks--nurses and firefighters would be a pretty
good example.
And I want to ask you, and my colleagues--we always try to
operate under the theory that you've got to build a bipartisan
coalition and focus on what works. We have all been talking
about LIHTC, the Low-Income Housing Tax Credit program.
So what I have said is--quaint idea--why don't we build on
what works? And that is what my Middle-Income Housing Tax
Credit is all about: to try to get shelter for folks like
nurses, firefighters, and middle-income people across the
country. And when we talk about middle-income people, we are
talking about families with incomes between 60 percent and 100
percent of median income. Obviously, it depends on the area in
which people live.
But I would like your thoughts on how home builders feel
about the Middle-Income Housing Tax Credit. I heard you touch
on it a little bit, but I understand that you all support it,
and that is some good news.
As you know, in the Pacific Northwest this also relates to
the well-being of the wood products industry, because it
creates more opportunities in rural communities for timber and
forestry.
So, your thoughts?
Mr. Konter. First, I would start with that we strongly
support your bill. We believe that the missing middle is the
hardest area to serve, because typically they buy entry-level
homes if they are on the home-ownership side. And if they are
on the multifamily side, they do not qualify for LIHTC or other
subsidies, even direct subsidies such as the section 8 program.
So they have a disproportionate amount of their income
spent towards shelter. And they do not have the ability to
accumulate down payments for even the lowest-priced housing
that is available within the private sector.
So this tax credit would solve part of that problem, and
that is why we do strongly support it. But many of the people
on the panel have already talked about the regulatory burden in
producing housing, and, you know, NIMBYism is a large part of
that also. I know that in my community I experience people who
want school teachers and police officers and fire people to
serve their community, but they put in restrictions that affect
housing prices that force them not to live within that
community.
And so, I will tell you that my colleagues in the building
industry want to build for every sector of America. We do not
concentrate on one sector over another.
The Chairman. We will be working with you, and we very much
appreciate your support with respect to the Middle-Income
Housing Tax Credit. And obviously we need to have fresh
approaches in terms of trying to unsnarl some of that red tape
at the local level.
Let me get one more question in. I am going to ask this of
you, Mr. Roberts. You heard me say I am very concerned about
this trend of some in the private-equity industry. What some
are doing in the industry is exploiting loopholes in the tax
code to maximize their own returns, while jeopardizing the low-
income purpose of affordable housing. And I want to walk you
through this, because as far as I can tell, we are losing
something like 10,000 affordable housing units per year just
with one of these loopholes involving something called the
Qualified Contract.
Low-Income Housing Tax Credit properties are supposed to
remain affordable for 30 years. However, this loophole allows
LIHTC operators to sell their properties after 15 years to
private developers who are going to go out and rent the units
at higher prices. And as I say, thousands of units apparently
are already being lost per year, and projections are that it is
going to go up.
I have proposed legislation to close that loophole. I would
like your thoughts on why that is important.
Mr. Roberts. It is critically important, Chair Wyden,
because it is so hard to build and rehabilitate homes. To be
losing them through what has really become a loophole, is just
taking us back in the wrong direction.
The problem is that that formula under the Qualified
Contract provision was written in 1989 when the Low-Income
Housing Tax Credit was very young and immature, and the real
estate markets were very different. And it no longer serves its
purpose and now has become an unintended exit ramp.
This is not something that the original investors have been
involved in, but sometimes we see new investors come in, after
the close of the 15-year compliance period, for the purpose of
making----
The Chairman. My time is up, but I think what Mr. Roberts
is highlighting is that a lot of these programs, and
essentially the infrastructure of the rules, were written
decades ago. And you heard me mention algorithms being used to
outbid Americans who just want to own a home.
When you were talking about 1989, nobody was thinking about
algorithms. So, I very much appreciate the input.
Senator Crapo?
Senator Crapo. Thank you, Mr. Chairman.
Senator Portman, do you want me to----
Senator Portman. Thank you. I appreciate----
Senator Crapo. I will yield about 30 seconds of my time.
Senator Portman. I will take 30 seconds.
The Chairman. In the parlance of the Senate, you can yield.
Senator Portman. I apologize. I have to go to this meeting
with Mrs. Zelensky. I am just going to say I really appreciate
all the comments that were made today about the need for us to
rehabilitate existing housing. And single-family homes are left
out of the process right now. It is a piece of the puzzle we
need to fix. So that is why I think the Neighborhood Homes
Investment Act is so important.
Cleveland has 3,000 of these homes that are vacant, not
being used. If they could be fixed up, it would really help
toward this effort that everybody has acknowledged today, which
is that increasingly the dream of owning a home is becoming out
of reach for so many Americans. So I just want to acknowledge
the work, Mr. Roberts, you have done, and others on the panel.
We appreciate your help on this, with Senator Cardin. And I
thank my colleague for his willingness to yield.
Senator Crapo. Thank you, Senator Portman.
Let me go to you first, Mr. Konter. The Net Investment
Income Tax serves as a surtax on small businesses and, under
recent proposals, would subject active business income to the
surtax. And I think you agree, that would result in higher
rental housing costs.
Can you explain how expanding the NIIT to include active
investment income would result in higher rents?
Mr. Konter. Sure. The consequences are especially acute for
renters because it is just another cost associated with
operation of an apartment complex. So previously, that active
income was not taxed. Now it will be. And that will be passed
along as part of the cost and will put upward pressure on rents
to cover it.
There is no magic wand in how much rents are charged. They
are absolutely directly related to revenue versus expenses.
Senator Crapo. Thank you.
And, Ms. Wade, you have alluded to this already, but what
do you think the possibility of persistently high inflation
means for affordable housing? And how would higher long-term
inflation affect housing development and utilizing Federal tax
credits?
Ms. Wade. Well, Senator, that is a great question, and
thank you. Persistently high inflation will mean persistently
high rent increases. It is no surprise that if you think of
inflation as a tax on everyone and everything, it impacts rent
prices as well. And as Mr. Roberts stated in his testimony,
higher rent prices also factor into CPI calculations.
In fact, inflation is also very important in considering
the efficacy of Low-Income Housing Tax Credits. Persistently
high inflation will mean that these tax credits are less
effective, and it will decrease their value as well.
Senator Crapo. Thank you very much.
And, Dr. Ohanian, you discussed today with us as well the
impact of regulatory and zoning policies, however well-
intentioned, on the ability for us to deal with the affordable
housing needs in the country.
Could you discuss any studies you are aware of that have
analyzed the effects of these State and local deregulatory
efforts to determine which land use and supply-promoting
strategies are the most effective?
Dr. Ohanian. Yes, Senator; great question. Regulatory
burdens are expanding housing costs substantially. When we look
at zoning regulations, what we find is the States with the most
severe zoning restrictions, such as my State of California,
have the highest home prices. They have the highest
construction costs. Construction costs rise as development is
delayed due to lots of litigations and lawsuits that are often
based on ``not in my back yard'' types of arguments.
We look at States and locations with much laxer zoning
regulations--such as Texas, Kansas, States in the Midwest--and
they have much lower construction costs, much lower housing
costs.
So there have been a number of peer-reviewed studies. They
all come to the same conclusion, which is that land use
regulations substantially drive up home prices, construction
costs, and depress American welfare. And there is a lot of
progress that could be made.
Senate bill 1416 is an important step in that direction by
requiring agencies to compile data and report on how they are
managing their land, and being held somewhat accountable for
how they are dealing with the need to build more housing in
very high-demand areas.
Senator Crapo. All right; thank you very much.
Thank you, Mr. Chairman.
The Chairman. Thank you, Senator Crapo.
Next is Senator Carper.
Senator Carper. Thanks, Mr. Chairman.
I want to back up just a little bit. Every now and then in
this room we talk about the ``least of these'' in our society
and what we are doing to help the least of these. ``When I was
hungry, did you feed me? When I was naked, did you clothe me?
When I was thirsty, did you give me a drink? When I was sick
and in prison, did you visit me? When I was a stranger in your
land, did you welcome me?''
Matthew 25 says nothing about, ``When I did not have a
place to live, when I was living out of my car, when I was
living under a bridge, did you do anything about it?''
Well, we have an obligation, I think a moral obligation, to
do something about it. It is not all on the Federal Government.
It is not all on this committee, as you know. It is a shared
responsibility with State and Federal and local governments,
nonprofits, and businesses as well. It is a shared
responsibility.
We welcome you here today with that spirit in mind. We
thank you for joining us to talk about housing affordability.
It is on top of mind with my constituents in Delaware, and I am
sure it is in the other 49 States too. In recent decades--I
have come to this hearing as a recovering Governor of the State
of Delaware for 8 years. And when I was Governor, as it was
when I stepped down as Governor, Delaware had the highest home-
ownership rate of any State in the country, something we are
very, very proud of.
But in recent decades, rapid growth in retail prices and
the lack of housing supply made it difficult for a lot of
people in the State to find affordable housing options, as we
all know. And it is a problem as our constituents continue to
feel the effects of the COVID-19 pandemic, and as they face
price increases in other parts of the economy.
I would note that the price of gasoline, thank God, is
beginning to come down. At a lot of convenience stores up and
down the East Coast, a bunch of them in Delaware, looking at
the price of gas, I saw yesterday $4.36, which is down almost a
half-dollar in the last couple of weeks, and hopefully it will
go a lot lower.
But I have been working with Senator Chris Coons, my
wingman from Delaware, and Congresswoman Lisa Blunt Rochester
in securing $78 million from the American Rescue Plan to help
to attack the housing crisis in the First State.
We leveraged private dollars to support development and
rehabilitation of affordable housing units throughout our
State, in coordination with our nonprofits, including Habitat
for Humanity, an outfit called Cinnaire, another one called
NCALL, and many organizations that are dedicated to addressing
this same problem.
One issue that deserves our focus is lack of affordable
housing for our senior citizens. As our population ages, we
must meet the specific needs of our seniors, and the low-income
and fixed incomes who require additional support services.
My question is a good question for Ms. Bell, and a question
for Mr. Roberts. The others of you get away scot-free on this
question.
How can we ensure that tax incentives and other resources
meet the unique and growing housing needs of our seniors? Let
me say that again. How can we ensure that tax incentives and
other resources meet the unique and growing housing needs of
our seniors? Ms. Bell?
Ms. Bell. Well, thank you for that question, Senator. I
think you are raising a couple of really important points that
really elevate the unique situation that we are in related to
supply and demand--and specifically how the issue of supply and
demand is causing other issues around lack of access, lack of
affordability.
I think the reality right now in this moment--as we think
about tax incentives and we think about all of the options for
incentives--is there are a couple of things that are worth
elevating, which are, one, being able to lower the threshold
when we think about Private Activity Bonds, knowing that there
is a real restraint that a lot of communities are feeling
around that.
When we think about the Low-Income Housing Tax Credit, we
know what works. We have seen successes with that. We also
know--when we think about the lack of affordable housing issues
that so many Americans are facing, particularly our aging
population--that we have to build affordable housing of all
shapes and sizes that we can, and be able to have transit-
oriented housing as we think about the needs of our seniors.
We have some very real policy options in front of us today
that we think will reduce red tape, increase access to
affordable housing in a really formative way, and be able to
build on what has worked and where we have seen the most
progress across the country for diverse populations, including
our aging population.
Senator Carper. Mr. Roberts, the same question; thank you.
Mr. Roberts. Thank you, Senator. I would just mention also
that Cinnaire and NCALL are two of our members. And Habitat, of
course, is a big supporter of Neighborhood Homes.
Directly to your question, one of the beauties of the
Housing Credit is it gives States the authority to direct those
resources to the greatest needs, including elderly housing. We
have seen tremendous Low-Income Housing Tax Credit properties
that provide a lot of services to the elderly in conjunction
with the housing, including assisted living, which is extremely
hard for low-income elderly people to find.
Senator Carper. Thanks.
Mr. Chairman, my time has expired. Can I just take 15
seconds and ask a question for the record? I just want to say
to Ms. Bell, which you can submit for the record, so you do not
have to answer it now but in writing, yes? Here it is: what
resources are most helpful in setting low-income families up
for success when buying a home for the first time? And how can
we expand access to these tools? I ask you that for the record.
Thank you all for being here.
The Chairman. Thank you, Senator Carper. And we are very
proud of Ms. Bell as well. So I think you are going to get a
good answer, and thank you.
Senator Cardin?
Senator Cardin. Thank you, Mr. Chairman. First, let me
answer Senator Carper's question in part by mentioning the
Neighborhood Homes Investment Act. You would be disappointed if
I didn't.
And, Mr. Chairman, I want to thank you for the kind
comments that you made. I was not in the committee room at the
time, because the Senate Foreign Relations Committee is holding
a hearing on food insecurity. So, we not only have housing
insecurity, we have food insecurity around the world, but also
here in the United States.
I want to thank you very much for holding this hearing. I
want to talk a little bit about the Neighborhood Homes
Investment Act. It is bipartisan, and I thank Senator Portman
for his comments and for his cosponsorship on this, and
certainly Senator Wyden and Senator Crapo for your help,
supported by the White House. So we have not only bipartisan
support, but we have support from both branches of government.
But I want to acknowledge the work that Mr. Roberts and his
organization, the National Association of Affordable Housing
Lenders, have done in regards to developing this legislation.
We developed it as a need to deal with affordable housing.
COVID-19 has underscored this need even more. Inflation has
made it even more urgent that we do something in this regard.
We are talking about the appraisal gap for communities that
need investments. They need affordable housing, but the cost of
building or renovating exceeds the value, and therefore it
cannot be done under regular commercial circumstances. This
leads to the decline of neighborhoods, as well as to making
worse the wealth gap in America.
So, Mr. Roberts, can you just elaborate as to how the
current market--which is anything but predictable--and
investors' willingness to go into communities, how the
Neighborhood Homes Investment Act would help us deal with that
challenge?
Mr. Roberts. Yes. Thank you so much for your leadership on
this, Senator Cardin. Neighborhood Homes would provide States
with an allocated amount of tax credits. They would set their
own strategies and priorities, and run a competition among
applicants to deploy those credits.
Once an applicant wins an award, they would go and raise
private capital and build or rehabilitate homes in distressed
communities. Once those homes are sold and owner-occupied, the
tax credits would flow and the developers, of course, are out
of the picture. There is also a provision to enable existing
homeowners whose homes need substantial rehabilitation to
participate as well on a very simplified basis.
Senator Cardin. Thank you.
Ms. Bell, if you could, respond on how this particular
credit would help as it relates to neighborhoods that have been
traditionally neglected, and try to deal with the wealth gap we
have in America.
Ms. Bell. Absolutely. Well, I appreciate that question. And
as I know this committee is fully aware--and I just appreciate
your leadership in this particular area--as we think about
pathways to home ownership, as we think about pathways to
housing and the impacts of that across the country, we have
continued to see the racial wealth gap that has continued to
persist in a lot of communities.
And so, as we think about Mortgage Revenue Bonds, as we
think about other resources on the tax-credit side that we have
to increase the pipeline of affordable housing, this bill helps
us reduce administrative red tape that exists.
There is also being able to further leverage the tax
incentives that we have to make sure that the spur of
affordable housing that is happening is available and
accessible to particularly our Black, Indigenous, and People of
Color communities. And then also from a policy perspective,
Senator, being able to align those policies in a way that is
bringing practical alignment in addition to the spurring of
resources in this particular area.
Senator Cardin. Thank you.
Mr. Chairman, I would just conclude by saying that the news
today is a decline in the housing markets. We are seeing the
concerns because of rising interest rates, because of rising
costs, so the urgency of dealing with these issues is even
greater today than it was when these bills were first
introduced. And thank you very much for holding this hearing.
The Chairman. Thank you, Senator Cardin. And thank you for
your years of good work on these kinds of issues, and I look
forward to partnering with you in the days ahead.
Senator Cortez Masto has been a very strong advocate for
affordable housing. We welcome her, and I can just tell my
colleagues that I have talked with her about these housing
issues, and she very much shares the idea that we have to
increase supply. We understand if we do not increase supply,
what happens in this kind of market is, it is constricted and
prices just go up. So a big part of this is increasing supply,
and I welcome my colleague.
Senator Cortez Masto. Thank you. Thank you, Mr. Chairman.
And thank you for holding this hearing. And to the panelists,
every single one of you, thank you, because this is exactly
what I have been hearing in Nevada around our challenges when
it comes to affordable housing.
And we all know--it runs in my State from homelessness, to
low-income, to workforce housing; it is all of the above. And
so, I have been working with so many in my State to figure out,
what is it that we need to do to address affordable housing?
And so, there is some great legislation that I support
here, that I cosponsor, that we need to get done. And I am
hopeful that, in this committee, we are able to actually do
something.
But one piece of legislation that I introduced--and, Ms.
Bell, I am going to start with you because I cannot thank you
enough for mentioning it in your opening--is the Affordable
Housing Bond Enhancement Act, S. 4445. And what it does is, it
improves the Mortgage Revenue Bonds and Mortgage Credit
Certificate programs.
You have talked a little bit about that. Can you do me a
favor? Can you explain how the Mortgage Revenue Bonds help low-
and moderate-income families, help them buy homes and sustain
those homes?
Ms. Bell. Absolutely. And thank you for your leadership on
this, Senator Cortez Masto. So essentially, the Affordable
Housing Bond Enhancement Act would allow State housing finance
agencies to better utilize our bond resources to serve more
home buyers.
So, in using the Mortgage Revenue Bonds, State housing
finance agencies have been able to help over 3 million
borrowers. And the Mortgage Credit Certificate programs have
been able to help more than 360,000 families become homeowners.
That is significant. And also, within this particular bill, it
would also be able to help us optimize programs so that they
work even better for low- and
moderate-income families as well.
At this particular time--and we have talked a little bit
about it already at this committee--when we have rising
interest rates and a loss of affordable homes, the reality is
that the dream of home ownership is still moving further and
further away. And even in my own family that has been a
reality.
One of the other facets of the bill, Senator, that I think
is really important to elevate, that I was happy to see in
this, is an increase to the Mortgage Revenue Bond improvement
loan limit. So this increases it to $50,000. As it currently
stands, it is at $15,000, which I believe has not been updated
since the early 1980s. So we are talking about home
improvements, necessary improvements.
Particularly--and we talked about it earlier--as we talk
about our aging community and think about improvements and
modifications they need to make their home not only livable,
this is also about quality of life.
Senator Cortez Masto. Thank you. Thank you for the support.
And let me just say, I appreciate the support of the National
Council of State Housing Agencies, the National Association of
Realtors, the Mortgage Bankers Association, the National
Association of Home Builders, and other organizations, for
their support of this piece of legislation. I do think it is an
all-of-the-above approach. How do we make it pencil out for the
home builders? How do we help the home buyers? How do we give
them choices? Manufacturing homes--and believe me, this is an
area that I have focused on as well, more choices for home
owners, as we address all of these issues.
One other area--let me just touch on it very briefly
because I know I am going to run out of time, but I do believe
that the State and local fiscal relief funds that were provided
in the American Rescue Plan really provide the ability to make
a historic investment in desperately needed housing in
communities across our country.
So let me just say this: I would love to hear, maybe Ms.
Wade, your thoughts on the LIFELINE Act, because this is an
opportunity to take funds that are already there and leverage
them to support low-income housing.
Ms. Wade. Absolutely. And I do think that it would be a
very important use of this funding. It would significantly
increase the ability of States and local jurisdictions to
produce more affordable housing.
I believe Congress has already stated that a lot of these
COVID relief funds at the State and local level should be used
for affordable housing. So, pairing that better with a program
like the Low-Income Housing Tax Credit would certainly be a
huge step forward in that direction.
Senator Cortez Masto. Yes. And listen, our Governor and our
housing leaders support the legislative fix to use, really,
$500 million that we set aside from our Home Means Nevada
initiative to do just this.
We could use it to build more of a supply for low-income
housing in Nevada. And everybody is ready to do it. So this is
an opportunity for us to get it right. This is why I support
the LIFELINE Act--and then for the reasons that you have all
been talking about, the Low-Income Housing Tax Credit.
This is the number one thing I also hear as a fix, with its
potential for increasing our housing supply and addressing our
needs in Nevada and across the country.
Thank you all again. Thank you for the good work that you
do.
The Chairman. I thank my colleague. I do not want anyone to
think I am going to wage a filibuster as we wait for more
colleagues, but I appreciate my colleague from Nevada making
the point with respect to the LIFELINE legislation, which I
touched on in my opening statement as well.
This is a chance to squeeze more housing value out of
existing dollars. And the fact is that Senator Leahy, Senator
Collins, myself, my colleague from Nevada, we have got plenty
of bipartisan support for it. I am very pleased about it, and
just given that U.S. home prices hit a new record of $416,000
in June as sales continued to slide, I do not think we really
need much of a wake-up call, but that certainly drives it home.
What I am struck by--and I would like to give other
panelists a chance to talk about it--is my question to Mr.
Roberts involving some of these examples of loopholes in laws
that are particularly hurting our ability to offer affordable
housing.
And Mr. Roberts said, ``Hey, this stems from a law that was
written in 1989.'' So we are talking about laws in this area
that, if not from the Dark Ages, are certainly pretty ancient.
I would be interested in your thoughts about whether there
are other examples of laws where you think that the
bureaucratic barnacles are just getting so thick that it also
is hampering the ability to offer affordable housing. I think
some of this relates to Mr. Konter's point involving outdated
rules at the local level. And I really appreciate Ms. Bell's
leadership working with local communities as well. She has
given us almost a little dissertation in the principles of
supply and demand, and we thank her for it.
But I also want to make sure that folks understand that, in
our part of the country, we have worked very hard to try--as
you have suggested and Ms. Wade touched on as well--to figure
out how in the future we will not have people working over
here, and living over here, and going back and forth in
outdated transportation systems.
But are there other laws that we ought to be aware of? And
in fact, here is what we are going to do. Since we have had the
good fortune of having Senator Young come, I can give him a
chance to catch his breath briefly. He has been doing very good
work on semiconductor legislation, which we are glad to partner
on with him, and he has been part of our little bipartisan
coalition here on the Finance Committee for housing.
So, while you contemplate whether there are other outdated
laws along the lines of that loophole that I asked Mr. Roberts
about, let's hear from a strong advocate for housing, Senator
Young.
Senator Young. Well, thank you, Mr. Chairman, for holding
this important hearing on affordable housing. I thank every one
of our witnesses, because I have to tell you, as I travel
across the State of Indiana, I hear from every community about
the importance of affordable housing, and about the challenges
they are experiencing right now.
This shortage is of course being exacerbated by the current
inflation challenges more broadly impacting the country. And
throughout my time in Congress I have done my best to remain
focused on efforts to address the housing shortage. I have been
proud to work, in particular, with my Finance Committee
colleague, Senator Cantwell, on the Affordable Housing Credit
Improvement Act. This bill, as I think our witnesses know, will
help strengthen the Low-Income Housing Tax Credit program, also
known as LIHTC, which remains the most successful affordable
housing program in the United States, a public-private
partnership supported in a bipartisan fashion over the years.
If we want to address our Nation's housing affordability
crisis, I think it is crucial that we pass the legislation to
improve the affordable housing program, the LIHTC program, by
passing the Affordable Housing Credit Improvement Act as soon
as possible.
So, I ask our witnesses today--this should be an easy one--
by a show of hands, who supports this Affordable Housing Credit
Improvement Act?
[A show of hands.]
Senator Young. Well, thank you. Let the record show that
all five of five witnesses support the Affordable Housing
Credit Improvement Act.
The Chairman. The record will show it. And I am also going
to dare anybody to say that they did not, but it is a very
important piece of legislation that Senator Young and Senator
Cantwell have led, and I appreciate it.
Senator Young. Thank you, Mr. Chairman. Let the record also
show, none of the witnesses is under duress or so forth.
[Laughter.]
Okay; thank you. So, let us dive into why this bill, just
for a moment, and the LIHTC program, has such far-reaching
support.
Mr. Roberts, can you kindly explain what it is that makes
the Low-Income Housing Tax Credit so effective in addressing
the affordable housing crisis?
Mr. Roberts. Well, thank you, Senator, and thank you for
your leadership on the Low-Income Housing Tax Credit
Improvement Act, as well as the Neighborhood Homes Investment
Act. They share a common DNA. And what makes these credits work
so well is a combination of factors.
First is private-market discipline. The credits only flow
after the development is completed and public benefits are
flowing. So, without giving money away and hoping for a good
result, we are paying only for success.
Senator Young. Paying for success, which is another thing I
have been focused on during my time in Congress. My
constituents insist upon it.
Mr. Roberts. Yes. And by the way, thank you for your
leadership on applying this pay-for-success principle
throughout the Federal system, which has tremendous promise.
In addition, since it is a very competitive market, credits
are limited. The States allocate them only for the highest-
priority activities, and then investors have to compete to
invest in those properties. And if for any reason compliance is
not followed through, those credits are recaptured. So there is
tremendous discipline.
Second, State administration. Ms. Bell and her colleagues
have done an amazing job in stewarding these resources. We have
tremendous confidence in them as stewards, and that is why
Neighborhood Homes would rely on them.
And Housing Credits and Neighborhood Homes are both
targeted and flexible. They are targeted to the greatest need,
and they are flexible in how they are applied, and there are
tremendous economic and community benefits spinning off.
Senator Young. Thanks so much for that.
One of the things I find unifying about the housing
affordability crisis--and I like to focus on unifying issues.
The chairman was kind to mention the innovation or China
competition bill that we were able to advance last night on the
floor of the U.S. Senate. One reason I was working on that was,
during this time of tribalized and parlous politics, we can
rally around solving difficult challenges together, across
political aisles, across political philosophies. And this
housing affordability crisis is striking in how it impacts
various demographic groups, geographic areas. It does not
really seem to discriminate a lot. The brunt of this crisis
falls on a diverse population, and it is so important. We
support programs and ideas that meet the needs of these varied
communities.
So, Ms. Wade, just very briefly can you please talk about
how the LIHTC program helps a range of people in need?
Ms. Wade. Senator, thank you for the question. And also
thank you for all that you have done to support affordable
housing. You are absolutely right that the problem of the lack
of supply of affordable housing hits everyone, unfortunately.
And one of the things that we see is that the LIHTC program
has been very effective at bringing people directly off the
streets into housing. It is one of the only programs that has
done so, with the support of the Federal Government. We see a
range of types of individuals and families living in LIHTC-
supported housing. That includes veterans. So 10 percent of our
homeless population is made up of veterans. That includes
people recovering from opioid addiction. That includes seniors,
people with disabilities. I mean, it really does run the gamut
of some of our Nation's most vulnerable.
Senator Young. Thank you so much. I do see I am out of
time. I see a couple of other leaders as it relates to these
issues have entered the committee room. So I will look forward
to continuing discussions about this bill and about other
housing legislative priorities in my questions for the record,
Mr. Chairman.
The Chairman. Senator Young, before you take off and go
back to prosecute our cause for the semiconductor industry here
in the United States, I would like to note that what you and
Senator Cantwell have done with respect to the LIHTC model has
led people to say this is a solid approach for the housing
policy of the future. And the home builders, represented by Mr.
Konter, are responding to the legislation that I proposed, the
Middle-Income Housing Tax Credit, the LIHTC kind of approach,
so that a firefighter and a nurse will have a chance to start
climbing the ladder of upward mobility. So, good work to
Senator Cantwell and yourself on this, and you will continue to
have my support in the days ahead.
Senator Hassan?
Senator Hassan. Well, thank you, Mr. Chair, for the
hearing. And thank you to our witnesses for being here today,
and for the work that you do.
In New Hampshire, I hear from families and small businesses
alike about the burden of rising housing costs, and what that
has done to their ability to live and work in the State; also
what it has done to their ability to recruit people to come
work in the State, among other things. So, I am developing a
package of housing legislation that I plan to introduce soon to
help bring down these costs. My bill would incentivize
investments in State affordable housing trust funds.
Ms. Bell, can you just please speak about what these trust
funds are and why they are so important?
Ms. Bell. Yes. Thank you for that, Senator. And I just want
to acknowledge and uplift your leadership in this.
So, Oregon is one of 39 States that has a State housing
trust fund. These funds, typically though not always, have a
designated revenue source and can be particularly helpful in
providing additional housing resources for State needs. In the
State of Oregon, our trust fund is funded by a State general
fund and lottery funds. And certainly, as you continue to
pursue work on this bill, we are eager to work with you in this
area.
Senator Hassan. Well, I appreciate that very much. My bill
would also support the construction of new workforce housing,
creating a new competitive grant program at HUD.
Mr. Konter, can you expand about how building more housing
will help lower costs for home buyers, and how Federal support
can help build more houses?
Mr. Konter. Absolutely. The crux of the program is very
simple. We are just not building enough houses. The more houses
we build, the less pressure we have from rising costs, because
we are supplying the market.
Senator Hassan. I appreciate that very much. I would also
note that the more housing we have, and the more people who are
housed, the more other issues that we all work on together we
can address.
Mr. Roberts, I have also previously introduced bipartisan
legislation with Senator Blunt, the Middle-Class Mortgage
Insurance Premium Act, to provide tax cuts for middle-class
home buyers who use mortgage insurance.
How does mortgage insurance make home ownership more
accessible? And how can we continue to cut costs for families?
Mr. Roberts. Private mortgage insurance is very important
so that home buyers who do not have 20-percent down payment
funds can get into the market. And we often see them come in at
a 5-
percent, even 3-percent down payment. That is much more
attainable for first-time buyers. And so, cutting the cost of
that mortgage insurance is very important to making sure they
can afford the monthly payments as well.
Senator Hassan. Thank you.
Ms. Bell, one more question. In response to the COVID-19
crisis, Congress provided States with financial support to
assist with their response to and recovery from the crisis.
While New Hampshire and other States have committed to
using a portion of these funds to support housing, it is
difficult to pair these funds with another critical Federal
housing tool, the Low-
Income Housing Tax Credit. That is why I cosponsored the
bipartisan LIFELINE Act, to ensure that States have the
flexibility to utilize both COVID-19 response funds and the
Low-Income Housing Tax Credit.
Ms. Bell, how can increased flexibility for States to use
these funds support housing efforts all across the country?
Ms. Bell. Yes, thank you for the question, Senator. So
about 31 States are devoting over $9 billion in coronavirus
State and local fiscal recovery funds towards affordable
housing activities. And of course, this total does not include
what local jurisdictions may also invest in affordable housing
activities.
And although the State of Oregon is using these funds for
other affordable housing activities, about 24 States have
indicated that they intend to use at least a portion of these
resources as gap fillers, fulfilling financing gaps, which is
absolutely the right thing to do. But it does not come without
difficulty, certainly. And so, within the American Rescue Plan
Act statute, there is--unintentionally, there is language in
there that makes it difficult to use these funds for long-term
loans, which is exactly what you need for affordable housing.
This is where the LIFELINE Act comes in. It would
essentially fix the problem by allowing State and local
governments to utilize these resources for long-term loans,
which of course supports what we are talking about today:
financing more affordable housing.
Senator Hassan. Well, thank you for that. And I look
forward to working with all of you as we continue to try to
combat this challenge.
The Chairman. Thank you, Senator Hassan.
Next is Senator Thune, and then we want to hear from
Senator Cantwell, who has been doing extraordinary work on
these issues for a long, long time.
Senator Thune?
Senator Thune. Thank you, Mr. Chairman. And welcome to all
of our witnesses this morning.
Mr. Konter, as you know, we are here to talk about the role
of tax incentives in affordable housing. I would like to start
out by asking you about tax-related disincentives to affordable
housing. Specifically, I am talking about tariffs--which are de
facto taxes--on softwood lumber imports from Canada. Softwood
lumber is a critical input to home construction, and the
current 17.9-percent tariff rate on these imports increases
U.S. home-building costs, harms affordable housing, and fails
to increase supply.
Earlier this week, Senator Menendez and I sent a letter to
the Department of Commerce and to USTR urging the Biden
administration to prioritize lumber trade to reduce housing
costs.
So, Mr. Konter, do you agree that reducing tariffs on
softwood lumber would help make home construction and home
ownership more affordable?
Mr. Konter. Thank you for the question, Senator, and thank
you and Senator Menendez for your leadership on this issue.
Yes, I do believe reducing tariffs on the imports of Canadian
softwood lumber would make home construction and home ownership
more affordable.
Lumber represents one of the most significant material
inputs to the construction of the home. Trade measures that act
as a tax on these inputs are necessarily going to increase the
cost of the final product. Conversely, anything that you can do
to remove these trade barriers is going to reduce the cost of
the final product. And, if I could, also Senator Wyden earlier
asked, ``What kind of regulations are outdated?'' Our trade
policies go back to the Smoot-Hawley Act.
So, if you think that maybe, if they are not working, if we
cannot get agreements, and the structure built into the review
process of that trade program does not have the effect of us
being able to act quickly on modifications to trade policies,
then maybe we need to look at the overall picture of how we
create our trade policy.
Senator Thune. Thank you. And I was going to follow up with
a question about what we could do in a more general sense, and
how a renewed U.S.-Canada softwood lumber agreement could
benefit affordable housing. But I think you kind of addressed
that in your last answer.
I would just say, hopefully, that the administration takes
timely action on these issues. These are practical, bipartisan
ways to help with affordable housing and the U.S. housing
community at large.
Let me just speak, if I might, for a minute to South
Dakota. Housing availability, affordability are a huge issue
for South Dakotans. I hear about these issues all the time from
constituents, especially in communities like Rapid City, which
is quickly expanding. And with construction costs and supply
prices significantly inflated, this is making it more and more
difficult to start and complete new housing projects. And
according to the National Association of Realtors, the average
cost of housing in the western States from 2013 to 2021
increased by more than $80,000.
So, if I might, Ms. Wade, you touched on this in your
written testimony, but could you share your insights into the
U.S. housing deficits in terms of data, and how it is impacting
families and livelihoods across the country?
Ms. Wade. Yes, Senator, that is a great question. By one
estimate--and by the way, I have seen this estimate doubled--we
have a shortage of 3.8 million homes in the U.S., which is
staggering. I think it is almost hard to grasp.
There are a lot of things that have to come together to
address this urgent need, both at the Federal level--so the
legislation this committee is discussing, things that you have
worked on, Senator--and at the State and local level, as well
as in the private sector. I think the Low-Income Housing Tax
Credit brings together all of those various components, and is
one way to effectively increase the supply of affordable
housing. It also takes a lot of reform at the local level when
it comes to things like zoning, when it comes to things like
permitting delays and other policies at the local level, and
all of this kind of has to be viewed holistically as part of
the housing ecosystem in order to truly solve this problem.
Senator Thune. Well, and I would, just to follow up--my
time is expiring here. But I just want to say with respect to
that, one of the things we have heard in the South Dakota
housing development authority is just that people who
participate in these multiple Federal housing programs
simultaneously--like the Low-Income Housing Tax Credit program,
the combination of programs at HUD--the rules governing these
programs are not uniform. And they can create challenges for
State housing authorities, and also disincentivize property
managers to participate in some of these programs.
So I hope that that is one of the things, Mr. Chairman,
too, that we can contemplate trying to work on with these
programs, to ensure that they are functional and workable, and
do not impose these heavy burdens, compliance requirements that
make it very difficult for those out there who are tasked with
trying to create more affordable housing options, so they are
not buried in a mountain of Federal paperwork.
So, thank you, Mr. Chairman.
The Chairman. We are definitely going to be following up
with respect to the rules and regulations.
Next is Senator Bennet.
Senator Bennet. Thank you, Mr. Chairman; I appreciate it.
And thank you for having this hearing.
In Colorado, 14 years ago I guess, I was the Superintendent
of the Denver Public Schools, and it was very uncommon to meet
a teacher who did not live in Denver if they worked in the
Denver Public Schools. Today, it is impossible for a teacher to
afford to live not only in Denver, but in suburban Denver.
I had the Colorado Teacher of the Year come visit me a
month or so ago. She is from Glenwood Springs, which is a rural
community on the western slope of Colorado. And in passing--she
was not complaining, but she just made the observation that 70
to 80 percent of her colleagues in the middle school and the
high school where she teaches have to have two or three jobs
just to live in Glenwood Springs.
So this is a real failure on the part of our society, I
think, to be able to create workforce housing in our State. It
is getting to the point where we are losing businesses, losing
medical practices, because people simply cannot afford to live
in the State of Colorado anymore. Housing costs are far
outpacing incomes in every single Colorado community.
In metro Denver, the average rent increased more than 14
percent last year, and the median home price in Denver, CO
recently topped $600,000, which is up 20 percent from the
previous year. But in Durango--which is on the western slope of
Colorado in the southwestern, rural part of our State--the
median price for an in-town home hit $650,000 last year, a 30-
percent increase from the previous year.
Employers across Colorado, especially in rural areas, tell
me they cannot hire because of the shortage of housing. In
2021, last year, I convened a diverse bipartisan group of 30
leaders from across the State to develop solutions to the
housing crisis. These are experts in housing who were looking
at it from all different vantage points. Their top
recommendation will not surprise anybody on this panel. It is
to do everything in our power to increase housing supply,
including expanding existing programs that work.
We need to do more to modernize our government's response
at every level, give communities greater flexibility, and
embrace innovation and promote housing stability, as my
Eviction Crisis Act with Senator Portman would do.
The Low-Income Housing Tax Credit is our most effective
existing program to build new affordable housing. Ms. Bell, I
am actually coming to a question for you, but that is why I
strongly support Senator Cantwell's and Young's Affordable
Housing Credit Improvement Act to expand LIHTC. I am also
pushing for swift implementation of one improvement Congress
already has passed to expand LIHTC-developed housing to more
families.
Back in 2018, Congress created the average income test that
enabled LIHTC to serve households earning up to 80 percent of
median family income. In May, Senator Young and I led a
bipartisan, bicameral group of colleagues calling on IRS and
Treasury to expedite release of a final workable rule on the
average income test.
Ms. Bell, how would finalizing the average income test rule
expand affordable housing to more families in this country?
Ms. Bell. Thank you for the question, Senator. I know that
we have a collective solidarity and alignment in the
experiences of folks in the State that you serve around
affordable housing.
So, the average income test which Congress enacted for the
Housing Credit in 2018 was actually an important new tool that
would make Housing Credit properties more economically diverse.
And this is done by allowing owners to serve households earning
up to 80 percent of the area median income, while at the same
time still making sure that units are underwritten to be
affordable for some of our individuals and families with the
lowest incomes.
And so, the average income test does this by using rental
income that is charged by the higher-income, but still lower-
income households, to essentially offset the lower rents
charged to households who may be very low-, or in some cases
extremely low-income.
The proposed rule implementing the average income test
historically was simply unworkable. And I think some of the
interest has chilled on that. But there are some very
meaningful, positive steps forward within the average income
test, and we are certainly grateful to you and the other
Senators who have signed on to urge Treasury and IRS to really
focus on this particular area.
Senator Bennet. And I hope this committee will keep
pushing.
Mr. Chairman, I had another question, but I am conscious of
my colleagues. So, Ms. Wade, I will submit a question on
homelessness for the record, and I will yield.
The Chairman. I thank my colleague. We have been working
together on these issues for a long time, we westerners.
Senator Brown is next, and I believe we can get in Senator
Warner and Senator Cantwell. Senator Brown is on the Banking
Committee, which works very closely with us.
Senator Brown. Thank you to the witnesses today for joining
us. As chair of the committee to which Chair Wyden referred,
housing affordability is not only a priority--I think for
certainly everybody on this side of the aisle, but perhaps
beyond that--but a moral imperative. Too many people are paying
too much to keep a roof over their head. A quarter of renters--
and I think most of you know these statistics--a quarter of
renters pay more than half their income in rent.
Home ownership is increasingly out of reach for far too
many families. I am glad for what Senator Wyden and Senator
Crapo are doing in scheduling this hearing so that we can work
on this.
So I partnered with Senator Wyden to introduce the Renters
Tax Credit Act. This bill is intended to complement LIHTC and
make sure that extremely low-income renters do not have to pay
more than 30 percent of their income towards housing. You know
what happens in families like that. Everything is upside down
when they are evicted.
So my first question is for Mr. Roberts. In Cleveland, we
have a lot of homes that could provide good, affordable home-
ownership opportunities. These homes, many of them, need
repairs. Some of you have heard me say in this committee, as I
say in the other committee, that the ZIP code my wife and I
live in had more foreclosures in 2007 than any ZIP code in
America--a ZIP code in Cleveland.
So, when homeowners cannot make these repairs themselves,
the houses sit empty, or they are snapped up by out-of-State
investors exploiting the tax code to turn a profit. And the
problems with that are evident.
So, Mr. Roberts, how could the Neighborhood Homes
Investment Act--a bill I have worked on with Senator Cardin,
and I know he referred to it--help address the shortfall of
affordable single-family homes and keep homes in the hands of
lower-income and aspiring homeowners?
Mr. Roberts. Well, thank you so much, Senator, for your
leadership on Neighborhood Homes and the Low-Income Housing Tax
Credits, and everything you do in the Banking Committee. It has
been really remarkable to see the comprehensiveness of your
strategy.
Neighborhood Homes can fill the gap between what it costs
to build or rehab a home in a struggling neighborhood and what
the local market there can support. And without that help, it
is just not feasible for private developers, or even existing
homeowners, to improve their homes and, by extension, the
neighborhoods. The entire neighborhood suffers when these homes
are deteriorated, because most of the land use in most of these
neighborhoods is single-family homes. So we cannot really fix
up those neighborhoods without addressing this problem. And
Neighborhood Homes would allow States to deploy credits in just
the right amount to cover that gap.
Senator Brown. Thank you.
Mr. Konter, I want to talk to you about your industry,
about the Home Builders. We hear from people around the country
what zoning regulations have done on the ability to build new
homes across the county.
Comment on that, and then comment on what--if we were to
provide funding to support communities and update zoning
regulations, would that help increase the supply of housing?
Mr. Konter. Thank you, Senator. There is a great deal of
NIMBYism. In fact, some of your colleagues have supported the
YIMBY Act, which is ``Yes In My Back Yard.'' And because of
that, there tend to be zoning regulations that are put in
place, whether intentional or disparate, and the result is that
they raise the cost of housing, and therefore we cannot build
affordable housing through those zoning requirements.
So, it is a great problem. Our members face it constantly--
things such as a design standard being added to zoning, which
has really nothing to do with zoning but increases the cost of
housing. So zoning is a tremendous problem.
Senator Brown. So my question, though, was--and I
understand that, and I agree with you, and I think that is
pretty much believed across the board. Would funding to support
communities to update their zoning regulations have an impact?
Is there a way of doing that? Are you proposing ways of making
that happen?
Mr. Konter. Yes. Funding to the local associations, to
local municipalities that reform their zoning regulations so
that they will allow more affordable housing to be built, and
as long as the property is zoned for single family, or
multifamily, restrict any further regulations. That would help
add to housing stock.
Senator Brown. Dr. Ohanian, do you agree with that, sir?
Dr. Ohanian. Yes, I do, Senator. There is a massive body of
peer-reviewed research that studied zoning regulations and how
those increased the cost of housing and depressed construction.
And yes, my own research has looked at that as well. And my
coauthors and I find that affordability was substantially
increased, and inflation-adjusted GDP would rise in the U.S. as
a consequence of rolling back zoning regulations and land use
regulations back to what they were in the 1990s or the early
2000s.
Senator Brown. That's recently. Thank you.
And not a question, but, Ms. Bell, your senior Senator has
been a really good partner in these housing issues between the
committee that I chair and this committee, and I thank him for
that.
The Chairman. What an inflationary comment, and I thank my
colleague. We love working together.
Okay, we have a vote on, but we are going to be able to get
in both of our Senators with a long interest in housing,
Senator Warner, and then it is so appropriate that Senator
Cantwell will wrap it up, given her leadership all these years.
Senator Warner?
Senator Warner. Well, thank you, Mr. Chairman. And I do
thank my friend, the chairman of the Banking Committee, which I
am on. That was a gratuitous plug for you in terms of the
senior Senator from Oregon. And I want to thank both of you,
and Senator Cantwell.
This is an area where we all have approaches--and this
hearing is so important. I am going to skip the part about the
gaps that all of us have indicated. I want to indicate--I know
Senator Cantwell has been great on the Low-Income Housing Tax
Credit, the home investment tax credit, the New Markets Tax
Credit, but I want to very quickly get to two items.
One is something Senator Brown actually worked with me on
when we thought more of the President's agenda would get
through, something I thought was very creative. We worked
closely with the Civil Rights Committee on something called the
LIFT Act, which would have created for first-generation, first-
time home buyers--which unfortunately in this country are
still, by default, 60 percent people of color. If they could
qualify for a traditional 30-year mortgage, we would provide
literally a 20-year mortgage so that it would be a wealth
accumulation at twice the rate, because I think the racial
wealth gap in this country is an extraordinarily challenging
issue, and unfortunately, home ownership is a huge, huge
component part of that. And I do hope that program, the LIFT
Act, combined with my support as well for down-payment
assistance, is a good one-two combination.
What I am going to take my time on--Mr. Roberts, I want to
start with you, and if somebody else wants to weigh in as well.
And I am going to get to another area that I have been working
on--and the chairman has been very supportive, as well as the
ranking member--which is additional support for CDFIs and MDIs:
Community Development Financial Institutions and Minority
Depository Institutions, MDIs. We do not have nearly enough of
them anymore. We were able to get $12 billion in grants, and $9
billion in tier 1 equity into those institutions--really, I
think, an interesting initiative.
But it is still not going to be enough. So, in a bipartisan
way, we recently put together a CDFI tax credit that would give
a tax credit to those private-sector entities--and I think in
terms of many of the companies that said in the aftermath of
the murder of George Floyd they wanted to do something on
racial equity, and we have done a pretty crummy job of making
sure they actually put their money where their promises were.
But what this would say is, you put in long-term, more than
10-year patient money, and we are going to give you a tax
credit. We will give you a larger one at 20 years. I think this
is, again, no single silver bullet, but a very, very effective
tool to take what has historically been a relatively narrow
niche of the financial sector, the CDFIs, and try to expand
their capacity.
Mr. Roberts, since you were kind enough to work in my
office on putting this CDFI tax credit together, I would love
to get your comments and suggestions on why you think it is a
good idea.
Mr. Roberts. We are tremendously excited by this proposal,
Senator Warner, and I want to thank you, as well as Senators
Wicker and Hyde-Smith, for all of your leadership on this, and
Senator Van Hollen, my Senator and neighbor.
This can make a huge difference. The CDFIs do the hardest
work in community development finance. They are designed to
fill the gaps that other private-sector financial services
providers cannot fill on their own. But they are great in
partnership together. And what your tax credit proposal would
do would be to build those partnerships between capital
providers and the CDFIs that are on the ground to do it. The
CDFIs need long-term capital, because community development
requires it. It is the hardest kind of capital to get, but it
has to be available at a cost that make sense.
And your tax credit would lower the cost of that capital to
enable CDFIs to really greatly expand their impact.
Senator Warner. I appreciate the work, and hopefully we can
move on this. And I will use my last 55 seconds before I yield
to Senator Cantwell to also make a slight pitch to the
committee members and others on another small initiative in
this space, section 113 reform that would take the Riegle Act
of 1994 and basically, with a very small amount of money,
literally in the millions, start experimenting on whether we
could actually securitize some of the CDFI debt, which again
would be another tool to make sure we spread this capacity
more.
In the spirit of Senator Bennet, I will yield--actually, he
yielded back when he was already in the red. I will yield back
while I am still in the yellow. Thank you, Mr. Chairman.
The Chairman. I thank my colleague. And I have been
supportive of community development efforts, and I am going to
continue to be.
How fitting to have Senator Cantwell wrap this up after her
years of leading our committee and being out on the floor
leading America to make sure that we have semiconductors in the
United States.
Senator Warner. Make sure you give credit for her big win
yesterday.
The Chairman. A huge win.
Senator Cantwell?
Senator Cantwell. Thank you, Mr. Chairman. And thank you
for holding this hearing on incentives for affordable housing.
And I thank you for your leadership on the legislation that you
introduced on middle-income housing. Clearly the 2009 downturn
pushed a whole lot of people into different categories, and the
consequences of that are still being felt. And so, I definitely
appreciate your past help and support on the Low-Income Housing
Tax Credit and your legislation, and I certainly want to remind
people that Senator Hatch, when he was with us, was a great
leader on this. I always loved that Utah did a Housing First
Initiative, probably one of the first Housing First
Initiatives, part of the veterans community there, and showed
great success in driving down the cost. If you house people
first, you are driving down the cost of that population that we
would otherwise be seeing impacts from.
I certainly want to thank my colleague, Senator Young, for
his leadership with us on trying to increase the Low-Income
Housing Tax Credit by 50 percent.
I guess people do not realize we got a little bump a few
years ago, and that expired at the end of last year. So we are
actually going to go down in the amount of money that we are
putting towards the tax credit. Ninety percent of the
affordable housing that gets built gets built with the tax
credit.
So it really is a governor, if we do not increase it, on
solving the problem. I feel like we just--I do not know why we
cannot get this out there. I just do not understand why. I feel
like painting a big ``supply'' message across, maybe one of the
avenues out here. ``It is just supply.'' Or ``it's supply,
stupid,'' or you know--I do not know what you don't get about
it. It is really just about supply.
And it is so frustrating, because there are so many people
who have written reports. I could probably get a stack this
high [indicating] of reports saying it is a supply problem.
So, I would just like to hear from the witnesses why. Why
is it that we are not breaking through on the supply message?
When you talk about it, it is pretty easy on the demographics.
You know, you have elderly people living longer, and that
increases the demand. You have returning veterans from the war.
That increases demand. You have workplace issues like we do in
Seattle. That increases the demand. We had a bunch of people
fall out of middle-income into low-income. That increased the
demand.
I do not get why we cannot just admit that we have a supply
problem, and do something about it. So, anybody have an idea
why we cannot--why we are not getting this across the goal
line?
Ms. Wade. Well, Senator, I just want to--and I think you
bring up some excellent points. I sit on a board at the
Bipartisan Policy Center. They recently conducted a poll that
had a very specific question: do you support increasing the
Housing Tax Credit?
And it was overwhelmingly bipartisan. It was somewhere like
70 percent of all Americans support it who were surveyed; 55
percent of Republicans. So it is a bipartisan issue. I think it
is one where, you are right, the data overwhelmingly states
that it is a problem with housing supply. It is directly tied
to affordability. And you know, there are a variety of
challenges.
I think the LIHTC is an important step forward, though, in
increasing the supply. Everything that you have done in your
leadership will be a huge step forward.
Senator Cantwell. Anybody else want to talk about this?
Dr. Ohanian. Senator, as an economist, what strikes me as
somewhat tragic is that we have had a housing crisis almost for
100 years. The average price of a Midtown Manhattan home in
1929 at today's dollars was $1.2 million.
Our housing is expensive to build. There are some
efficiency-
enhancing reforms we can implement. We can also implement
zoning reforms that will make it easier and less costly to
build in areas of high demand.
And one thing that we have seen evolve over the years is
that a growing number of Americans are really focusing on a
relatively small number of locations to move to, including
Seattle, including the West Coast, including some parts of the
Southwest. And sadly, in some of those areas--for example in my
home State of California--we make building very, very
expensive.
In my testimony I mention that, in one project in San
Francisco, it is costing $1.1 million just to renovate an
existing small apartment unit--per unit. And when you look at
those types of costs, you've got to scratch your head and say,
``There's got to be a better way.''
And I think as technologies advance and there are
opportunities to increase the use of manufactured homes and
change some regulatory requirements--the height requirement of
a chassis--I think that we have reason to be optimistic that we
can make the right choices. And your committee here is very
much focused on that, and I am optimistic that you can do that,
and the future is very bright from that standpoint.
Senator Cantwell. Well, I think we have an inflation
problem, and part of it is housing. And if you think about,
again back to--I like your details, but I think the details are
almost irrelevant--they are not totally irrelevant if we do not
get across the supply issue, if we do not get people to
understand that it is a supply issue. Now yes, can you make it
more efficient and affordable? Yes, let's do that. But somehow
all that discussion stops people from really understanding that
it is a supply crisis.
And again, if 90 percent of the affordable homes are going
to be built with the tax credit, then unless we increase the
tax credit, we are not going to get out of this. No matter how
many people in Seattle pledge to spend millions of dollars on a
project, we are not going to get out of this.
And so, I do think it is--I don't know. I have a suspicion
that the derivative market crash has more to do with this. I
think it had a chilling effect for several years, when we
should have realized what the crisis was going to do. My
colleagues Senator Bennet and Senator Brown talked about it a
little bit. You know, the crisis made everybody freak out about
housing in general, because people commoditized, or
securitized, I should say, some way to make, they thought, more
housing supply. And literally it was a house of cards that
collapsed.
And then people were blaming all sorts of people. And then
we did nothing. But at that very moment, we also pushed more
people into that demand market, because they literally fell
out. They fell out of the economy. They literally fell out of
the economy. And we did not do anything to meet demand.
So, it used to be in this Nation that in the 1970s, or
1980s, or even 1990s you would hear ``housing; let's build
housing.'' Where did that cheer go?
Dr. Ohanian. Well, it very much is a supply issue. And to
get back to the idea of cost, the more we can reduce costs,
just economic costs, the more we can expand supply. One study
in California showed that if California LIHTC construction
costs were not even at the average of other evaluated locations
by a GAO study, but were close to that average, California
could have built 12,000 more units under LIHTC funding.
So I think, until we recognize that our construction costs
are remarkably high, it is going to be hard to expand. It is
going to be hard to expand supply unless we are really going to
push on the subsidy throttle and really push a lot more dollars
into producing what is an expensive commodity, and a commodity
that----
Senator Cantwell. Well, listen, I met with some people in
Seattle who were very charged with this mission. I asked them
and they said, ``I think it is going to cost us $15 billion to
get out of this problem.''
I said, ``$15 billion? Like over 10 years?'' And they said,
``No, probably over 5.''
So, quantifying how problematic this really is, I am all
for new ideas on how to drive down costs. But, Mr. Konter, I am
going to give you the last word, if there is anything you
wanted to add. I saw you had your hand up.
Mr. Konter. Well, thank you, Senator. I think your
instincts are probably correct. After the crash, we under-built
by about 400,000 houses a year over a 10-year period. There was
delayed entry-level market interest, because millennials had
household formations that were much later in life, and they all
hit at the same time.
And if you look at the demographics between boomers and
millennials, it is significant. So that all hit at the same
time when we were building up a deficit just to meet what
household formation would be in the future.
So I think you are dead-on with what you said. And there
was a change in the public sector's view of housing, and I
agree we have not had a true housing policy in this country
since the 1980s, but the aspiration for single-family home
ownership never went away. And that is where all of those
things collided, and that is why we have a problem with one
group not understanding exactly the significance of the crisis.
Senator Cantwell. I know we have to run to vote, Mr.
Chairman, but we should not forget how important home ownership
is as economic stability for families. And so I hope we can
rectify this. I appreciate this hearing, and I appreciate your
middle-income tax policy too. And the chairman and I come from
a part of the country, the Northwest, that is very plagued, not
that some of you--the Texans and the Californians and others--
have not been too, but we have got to step up to this and get
some solutions.
Thank you.
The Chairman. Senator Cantwell, just one comment. As usual,
you are spot-on with respect to this being all about supply. It
is always going to be about supply.
I would also like everybody to note Senator Cantwell's
comment with respect to how some of the high-flyers used the
derivative market back in 2009, and that contributed to some of
the market crash problems.
And, Senator Cantwell, before you came, I talked about
private equity and powerful interests now apparently using
algorithms to out-bid Americans who just want to own a home.
So we have some equity issues to pursue, and we are going
to do that in a way that is consistent, as Mr. Konter and I
have been talking about, with strengthening the private-public
partnership in order to build more housing supply.
Lots to do. Special thanks to Ms. Bell for coming such a
long way for this and giving us your expertise.
And with that, the Finance Committee is adjourned.
[Whereupon, at 12:06 p.m., the hearing was concluded.]
A P P E N D I X
Additional Material Submitted for the Record
----------
Prepared Statement of Andrea Bell, Director,
Oregon Housing and Community Services
Mr. Chairman, Ranking Member Crapo, and members of the committee,
thank you for this opportunity to testify on the vital role tax
incentives--specifically the Low-Income Housing Tax Credit (Housing
Credit) and tax-exempt private activity Housing Bonds--play in our
Nation's affordable housing delivery system. These programs are by far
the most important tools we have to finance affordable rental housing
and help low- and moderate-income families become home buyers.
I am Andrea Bell, Director of Oregon Housing and Community Services
(OHCS), which is the State of Oregon's Housing Finance Agency (HFA).
HFAs are State-chartered, mission-driven agencies that address the full
spectrum of affordable housing need, from homelessness to home
ownership. For more than 50 years, HFAs have played a central role in
the Nation's affordable housing system, delivering more than $500
billion in financing to make possible the purchase, development, and
rehabilitation of more than 7.5 million affordable homes.
OHCS administers the Housing Credit and Housing Bond programs, as
well as other Federal housing programs from the Department of Housing
and Urban Development and State-level resources for affordable housing.
During the COVID-19 pandemic, OHCS and many other HFAs also stood up
Federal emergency assistance programs, such as Emergency Rental
Assistance and the Homeowner Assistance Fund. HFAs were able to do this
because we are nimble and high-capacity organizations that have a
strong track record of meeting multifaceted housing challenges.
I want to begin by thanking you, Mr. Chairman, for being a
steadfast champion of the Housing Credit and Housing Bonds for many
years and for continuously elevating the housing needs of Oregonians.
In particular, we appreciate your vision for solving the affordable
housing crisis, as outlined in the Decent, Safe, Affordable Housing for
All (DASH) Act. I also want to thank you, Senator Crapo, for always
being a supporter of State HFAs, and in particular for your support of
tax-exempt Housing Bonds. Lastly, I want to acknowledge Senators Maria
Cantwell (D-WA) and Todd Young (R-IL) for their leadership as the
sponsors of the Affordable Housing Credit Improvement Act, S. 1136,
passage of which is the most important thing Congress could do to
address the imbalance between supply and demand for affordable rental
housing.
the central role of the housing credit and multifamily housing bonds
While HFAs administer various Federal and State affordable housing
programs, the Housing Credit and Housing Bonds are by far our most
essential production tools. Few people who are not deeply entrenched in
affordable housing policy understand that the Federal Government's most
important housing supply programs are authorized under the tax code and
not part of the annual appropriations process.
The Housing Credit is a highly successful public-private
partnership that draws on State HFAs' sophisticated underwriting, asset
management, and oversight capacity, as well as private-sector
experience and investment. It is the most efficient means of increasing
rental housing supply, while transferring risk to private-sector
investors rather than taxpayers. Since the Credit's establishment in
the Tax Reform Act of 1986, it has financed more than 3.6 million
affordable rental homes for low-income families, seniors, veterans, and
those with special needs.\1\
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\1\ State HFA Factbook: 2020 NCSHA Annual Survey Results, National
Council of State Housing Agencies.
In recent years, more than half of Housing Credit homes have been
financed with the help of multifamily Housing Bonds. In Oregon,
multifamily Housing Bonds play an even more outsized role, as nearly 70
percent of all units we have financed in the State over the last 5
years are bond-financed. The Housing Credit and multifamily Housing
Bonds are inextricably linked because of the role bonds play in
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triggering the 4-percent Credit.
While the Housing Credit program generally serves low-income
working households earning 60 percent of area median income (AMI) or
less, with congressional direction to serve the lowest income
households possible, in practice the program reaches families with
incomes much lower than its top-most statutory limits. In fact, 53
percent of households living in Housing Credit apartments are extremely
low-income, meaning they earn 30 percent or less of AMI, and another 31
percent are very low-income, earning between 30 and 50 percent of
AMI.\2\
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\2\ Tenants in LIHTC Units as of December 31, 2019, U.S. Department
of Housing and Urban Development, Office of Policy Development and
Research.
There is a fundamental market failure when it comes to affordable
housing supply. It simply costs too much to build housing to rent it at
rates low-income people can afford absent a Federal incentive such as
the Credit. Developers will tell you that it is economically infeasible
for them to build rental housing without the equity derived from the
Credit unless they charge rents that are well out of the reach of low-
income families.
affordable rental housing need in the post-pandemic economy
America has been in the midst of a housing crisis for a long time,
but never has the need been more acute than it is today. In particular,
and especially since the Great Recession when many developers left the
industry, our Nation has drastically underproduced both rental and for-
sale housing. We are currently seeing the repercussions of the extreme
mismatch between supply and demand.
Meanwhile, in the 2-year period from early 2020 to early 2022, the
number of households that rent grew by 1.1 million to 44.2 million.\3\
With rising interest rates and escalating home prices, would-be
homeowners are stuck renting at the same time millennials, many of whom
put off household formation, are now entering the rental market.
---------------------------------------------------------------------------
\3\ The State of the Nation's Housing 2022, Joint Center for
Housing Studies of Harvard University, June 2022.
The sheer number of new renters, without corresponding housing
production, has driven historically low vacancy rates and skyrocketing
rents, with rents in most major markets spiking by double digits
between 2021 and 2022.\4\
---------------------------------------------------------------------------
\4\ Ibid.
While these market dynamics create hardships for renters across the
income spectrum, low-income households are by far the most vulnerable.
There is currently a shortage of more than 7 million affordable rental
homes for extremely low-income renters, with only 37 affordable and
available units for every 100 extremely low-
income renter households nationwide. Moreover, more than 70 percent of
extremely low-income renters spent more than half their income on
housing in 2021.\5\ Sadly, Oregon is even less affordable than the
national average.
---------------------------------------------------------------------------
\5\ The Gap: A Shortage of Affordable Homes, The National Low
Income Housing Coalition, April 2022.
The housing market in Oregon clearly demonstrates the challenges
renters face due to basic supply-and-demand economics. Since the Great
Recession, Oregon has underproduced at least 140,000 homes. More than
584,000 homes are needed to meet our State's population growth over the
next 20 years. Even more telling, nearly half of those homes must be
built affordable to low-income Oregonians. The data is staggering:
Oregon must increase housing production twofold to address supply
shortfalls and threefold to address affordable housing supply needs.\6\
Without action to increase or improve affordable housing production
resources, Oregon and other States will continue to see rates of
homelessness rise.
---------------------------------------------------------------------------
\6\ Building on New Ground: Meeting Oregon's Housing Need, Oregon
Housing and Community Services and ECONorthwest, February 2021.
---------------------------------------------------------------------------
barriers to affordable housing production
Unfortunately, the economic fallout of the COVID-19 pandemic has
made it even harder to produce affordable rental housing. The costs of
many commodities necessary for construction have gone up drastically,
while supply chain disruptions create development delays that further
increase costs, and developers struggle to find skilled workers and
subcontractors.
According to the National Association of Home Builders, since
Spring 2020, prices have gone up for lumber by 75 percent, steel by 107
percent, gypsum and drywall by 32 percent, ready-mix concrete by 11
percent, interior paint by 33 percent, exterior paint by 48 percent,
aluminum by 61 percent, and copper by 57 percent.\7\
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\7\ Eye on Housing blog post: ``Rapidly Rising Building Materials
and Freight Prices Push Construction Costs Higher,'' National
Association of Home Builders, June 2022.
Despite the vast and growing need and the escalating costs of
production, the Housing Credit has actually suffered a cut to
resources. A hard-won increase in Housing Credit resources, which
Senator Cantwell was instrumental in achieving in 2018, expired at the
end of 2021. That means State HFAs have fewer credits to provide to
developers this year, at a time when their costs have gone up so
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substantially and demand is unprecedented.
Costs are rising so quickly that projects in the pipeline must be
re-underwritten, sometime several times, before completion to address
financing gaps. This has caused tremendous problems as States and their
developer partners try to find creative ways of filling these
unexpected, gaping holes in project financing.
In some cases, developers of projects that were initially provided
credits in prior years are coming back to the HFA asking for a
subsequent allocation of credits from the State's 2022 authority. But
by backfilling older deals, it means the State will have far less
credit authority with which to fund new proposals.
Unfortunately, sometimes the gaps are too large or additional
resources are not available, forcing many quality developments to scale
back unit production.
Another reason cost increases are particularly problematic is that
bond-financed projects that see significant cost increases risk missing
the threshold requirement for maximizing Housing Credit resources. A
bond-financed property must have at least 50 percent of its costs
financed with tax-exempt multifamily bonds to access a sufficient
amount of Housing Credit authority as an equity source. We typically
provide some cushion to those deals to account for potential cost
increases. However, with prices going up as quickly as they are, some
projects risk failing this threshold test, which is devastating, even
if the developer is fortunate enough to be able to assemble other
financing sources to fill the gap. This is particularly problematic in
States like Oregon where bond cap is in very high demand and we often
do not have excess bond cap to provide a project if its costs go up too
much.
congressional action to address the rental housing crisis
The Federal Government has delayed far too long in taking the steps
our Nation needs to address the housing crisis. We are now seeing the
repercussions of that delay in rapidly escalating rents, and it is our
most vulnerable residents who pay the price.
Many States, including Oregon, have already stepped in with
significant investments in affordable housing. I am proud that our
State has nearly tripled affordable housing investments biennium over
biennium, investing in proven and promising practices to support the
stabilization of families making low wages. But States cannot solve
this problem without the help of the Federal Government.
The good news is, we know what works and we have the right tools in
hand. By far, the most impactful thing Congress could do to meet the
need is to pass Senator Cantwell and Senator Young's Affordable Housing
Credit Improvement Act (AHCIA). Half of this committee has already
cosponsored the bill, and I urge all who have not yet done so to do it
now.
The AHCIA is comprehensive legislation that would expand and
strengthen the Housing Credit. While it includes many policy changes--
some of which are no-cost, common-sense, good governance improvements
based on over 3 decades of program administration--I'd like to focus on
how the bill would expand the Housing Credit, as these are the
provisions that add supply.
The AHCIA would make a significant increase in Housing Credit
allocation authority for what we call the 9-percent Housing Credit. The
9-percent credit is the component of the program that provides the more
substantial subsidy to developments. These credits are highly
competitive, and States often use them to finance the most challenging
and needed properties for the highest-risk populations. For example,
last week in Oregon, we celebrated the opening of River Bend Place in
rural Ontario, a new development funded with the 9-percent credit.
Fifty-six new doors are open, and 16 homes will have wrap-around
services to help permanently house Oregonians experiencing chronic
homelessness.
The other major provision in this legislation that would
substantially increase supply is the reduction of the bond financing
threshold, sometimes called the 50-
percent test. For Oregon, this is probably the most impactful action
Congress could take to increase supply as we continue to leverage
historic State resources and locally funded housing bonds approved by
Metro voters. As I mentioned previously, developments that are funded
with tax-exempt multifamily Housing Bonds can generate what we call 4-
percent Housing Credits. The 4-percent credit provides less subsidy
than the 9-percent credit, but is an essential tool for financing
affordable housing. In fact, in 2020, nearly 60 percent of Housing
Credit homes nationwide were financed with 4-percent credits.
To maximize the 4-percent credit equity available to an individual
deal, multifamily bonds must be used to cover at least 50 percent of
the cost of the development. That means States need to make a
significant investment of their finite Private Activity Bond (PAB)
resources in individual developments in order to unlock the 4-percent
credits. More and more States are like Oregon, which has far more
demand for PAB cap than we have available. According to research by
Novogradac and Tiber Hudson, 22 States were oversubscribed for PAB cap
as of May 2022.
Moreover, covering at least 50 percent of a project's total cost
with multifamily bonds makes no sense from a financing perspective.
Bonds provide debt, but these projects cannot support that much debt
over the long run. What happens in practice is that we provide bonds
sufficient to meet the 50 percent test just to trigger the 4-percent
credits. Then, the developer must refinance the project, paying off the
bond debt, to put in place permanent financing with a much lower debt
level that the project can reasonably support. This practice is
inefficient, adds cost, and prevents States from spreading bond
resources to more quality affordable housing projects.
The AHCIA would lower the bond financing threshold to 25 percent,
which is much more in line with the amount of debt these projects could
support. According to an estimate by Novogradac that considered the
time-limited reduction in the bond financing threshold included in the
Finance Committee's initial proposal for the Build Back Better Act,
Oregon would be able to finance 11,200 more homes over a 10-year period
if Congress made this change. It is this type of common-sense reform to
Housing Credits that will allow Oregon and other States to dramatically
scale production to address supply challenges.
The AHCIA also includes other provisions that would increase
production by providing basis boosts for properties in rural areas,
those benefiting Tribal populations, and those housing extremely low-
income households, as well as expanding the number of areas where basis
boosts are allowed because the area qualifies as a Qualified Census
Tract or Difficult Development Area. The AHCIA also gives States
discretion to provide a 30-percent boost to 4-percent credit properties
as needed for financial feasibility.
Another step Congress should take to address the immediate housing
cost challenges we face is passing the bipartisan LIHTC Financing
Enabling Long-term Investment in Neighborhood Excellence (LIFELINE)
Act, S. 4181, introduced by Senators Patrick Leahy (D-VT) and Susan
Collins (R-ME).
Approximately half of States and countless local governments have
turned to the Coronavirus State and Local Fiscal Recovery Fund (FRF) as
a source of funds that could be used to fill financing gaps in Housing
Credit developments, but there are significant challenges to using FRF
money effectively for long-term loans to Housing Credit developments
due to unintended statutory barriers. The LIFELINE Act would fix the
problem by allowing these funds, which Congress has already allocated
to States and local governments, to be used for loans with maturities
of at least 30 years.
While FRF is not a tax incentive, the Finance Committee has
jurisdiction over these funds, and I strongly encourage all committee
members to join Chairman Wyden as cosponsors of this bill and to press
for its enactment.
the housing crisis is impacting home-ownership opportunities too
Our Nation's critical affordable housing shortage is not limited to
rental housing. According to a recent analysis by Freddie Mac, the
United States would need to construct nearly 3.8 million for-ownership
homes to meet demand.\8\ Insufficient supply has substantially
increased sale prices of single-family homes, pricing many working
families out of the market. Moreover, recent dramatic increases in
mortgage interest rates have exacerbated affordability challenges. It
now costs a home buyer 50 percent more to buy a home than it would have
to purchase the same home a year ago,\9\ putting home ownership out of
reach for many households.
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\8\ One of the Most Important Challenges Our Industry Will Face:
The Significant Shortage of Starter Homes, Sam Kater, Freddie Mac,
April 2021.
\9\ The Cost of Buying a Home Is Up 50% From a Year Ago--But Here's
Where You Could Get a Break, Clare Trapasso, Realtor.com, May 16, 2022.
Another significant challenge facing low- and moderate-income
households seeking to become homeowners is the lack of starter homes on
the market. For some time, builders have reported that building smaller
homes is cost-prohibitive, therefore most new construction is of larger
luxury homes because that's the only way for developers to make the
economy of scale work. The average sale price for a new home in May was
$511,400, up 15 percent from just a year ago.\10\ Only 9 percent of new
homes sold that month were priced under $300,000, compared to around 30
percent in January 2021.\11\ Moreover, development costs for single-
family homes are also subject to the same market dynamics as
multifamily production, including significant inflation of common
construction materials, supply chain delays, and workforce disruptions.
---------------------------------------------------------------------------
\10\ Monthly New Residential Sales, May 2002, U.S. Census Bureau,
June 24, 2022.
\11\ Ibid.
These market developments have made it harder to address the
longstanding home-ownership gap between White households and households
of color. In 2020, 72.1 percent of White households owned their home,
compared to 61.7 percent of Asian American households, 51.1 percent of
Hispanic American households, and 43.3 percent of African American
households.\12\
---------------------------------------------------------------------------
\12\ 2022 Snapshot of Race and Home Buying in America, National
Association of Realtors, February 2022.
A recent study found that, in each of the Nation's 50 largest metro
areas, African American residents own a disproportionately small share
of homes compared with their population.\13\ One of the biggest factors
historically preventing minority families from purchasing a home is a
lack of accumulated wealth compared to White households, a legacy of
our Nation's discriminatory redline policies. The current surge in
pricing has worsened these disparities by making it even harder for
minority households to amass the necessary savings to pay for the
upfront costs of purchasing a home. While State HFA down payment
assistance programs offer an affordable and sustainable option for such
borrowers, we need a more comprehensive solution that helps increase
supply and improve other home-ownership tools.
---------------------------------------------------------------------------
\13\ Black Americans Own Disproportionately Small Share of Homes in
50 Largest U.S. Metros, Jacob Channel, Lending Tree, April 5, 2022.
A healthy and affordable home purchase market is crucial for
economic growth. Home ownership is many working families' primary means
of building generational wealth. Further, an active home purchase
market would open up more rental opportunities for those wishing to
rent as new home buyers leave their apartments.
congressional action to address the needs of homeowners
While addressing these issues will take concerted and multifaceted
action, there are two legislative proposals the Finance Committee can
take up in this Congress to expand the supply of affordable homes and
improve access to home ownership for low- and moderate-income home
buyers. These are the Affordable Housing Bond Enhancement Act, S. 4445,
and the Neighborhood Homes Investment Act, S. 98.
I want to thank committee member Senator Catherine Cortez Masto (D-
NV) for introducing the Affordable Housing Bond Enhancement Act (AHBEA)
last month. This important bill would enact simple and impactful
improvements to two essential tax incentives that help first-time low-
and moderate-income home buyers: the Mortgage Revenue Bond (MRB) and
Mortgage Credit Certificate (MCC) programs.
MRBs historically have been HFAs' primary tool for financing low-
interest mortgages for low- and moderate-income home buyers. Investors
are willing to accept a lower rate of return for Housing Bonds than
they would get on other investments because the interest on the bonds
is exempt from Federal income tax. The lower rate is then passed on to
lower the interest rate paid by lower-income home buyers.
In total, MRBs have helped more than 3.3 million working households
become home buyers. The median income of MRB loan borrowers in 2020 was
two-thirds of the national median income. OHCS utilized MRBs to help
more than 430 Oregon families across 29 counties achieve the dream of
home ownership in calendar year 2021, supporting more than $116 million
in loans for low- and moderate-income home buyers.
In addition, HFAs can use their MRB authority to issue Mortgage
Credit Certificates, which provide a nonrefundable Federal income tax
credit for part of the mortgage interest qualified home buyers pay each
year. State HFAs have used MCCs to provide critical tax relief to more
than 365,000 families.
AHBEA would improve MRBs and MCCs by, among other changes:
Increasing the MRB home improvement loan limit;
Allowing MRBs to be used for refinancing loans;
Providing HFAs additional flexibility in how they utilize
housing bond authority;
Simplifying how a borrower's MCC benefit is calculated;
Reducing the time period for the MRB and MCC recapture tax
from 9 years to 5;
Extending the amount of time HFAs can use converted MCC
authority from 2 years to 4; and
Allowing HFAs to reconvert MCC authority back into MRBs 2
years after the conversion, rather than 1.
This legislation is a cost-effective way to improve the MRB and MCC
programs. I urge all committee members to cosponsor this legislation.
Lastly, I'd like to express our support for the Neighborhood Homes
Investment Act (NHIA), introduced by committee members Senators Ben
Cardin (D-MD) and Rob Portman (R-OH). In many census tracts and rural
areas, developers cannot sell homes for what it costs to construct or
substantially rehabilitate them, known as the ``value gap.'' This is a
problem for which we currently do not have a solution. We need a new
tool in our arsenal.
The NHIA would establish a new tax credit, the Neighborhood Homes
Credit, modeled after the highly successful Housing Credit. It would
incentivize developers to construct new or substantially rehabilitate
housing by closing the value gap, up to 35 percent of eligible
development costs. It is estimated that the equity raised by the
Neighborhood Homes Credit would finance the building and substantial
rehabilitation of 500,000 affordable homes for low- and moderate-income
homeowners over the next 10 years.
Thank you, Chairman Wyden, for including the Neighborhood Homes
Credit in your DASH Act and working with OHCS to allow the credit to
more effectively be used to assist homeowners impacted by natural
disasters.
I encourage the committee to take up and advance both of these
bills as quickly as possible.
The housing crisis will not get better unless Congress acts.
Enactment of the four bills I've addressed in this testimony--The
Affordable Housing Credit Improvement Act, the LIFELINE Act, the
Affordable Housing Bond Enhancement Act, and the Neighborhood Homes
Investment Act--would truly address the affordable housing crisis for
both renters and homeowners. OHCS and all HFAs, through our national
association, the National Council of State Housing Agencies, urge the
committee to act on these bills and Congress as a whole to enact them
this year.
Thank you for your commendable efforts to support affordable
housing. I am honored to have had this opportunity to testify before
the committee.
______
Questions Submitted for the Record to Andrea Bell
Question Submitted by Hon. Michael F. Bennet
Question. The American Rescue Plan Act, passed last year, is
providing huge opportunities for States and local communities to
address their affordable housing challenges. Colorado is dedicating
more than $500 million of its ARPA State and Local Fiscal Recovery
Funds to housing. The program provides gap financing for affordable
housing developments, and supports an innovative manufactured housing
program, to help groups of mobile home owners purchase the communities
in which they live.
Unfortunately, States and localities face limitations to using
these funds for new development under the Low-Income Housing Tax
Credit. When Federal funds are used to fill gaps in LIHTC-funded
construction, it is almost always as long-term loans--yet under current
law, Fiscal Recovery Funds must be spent on a shorter timeline, by
2026.
The bipartisan LIFELINE Act would solve this problem by allowing
States and localities to loan Fiscal Recovery Funds for LIHTC projects.
How would passing the LIFELINE Act affect the development of new
affordable units in the coming years?
Answer. State Housing Finance Agencies were thrilled when Treasury
recently announced updates to its Coronavirus State and Local Fiscal
Recovery Fund (FRF) guidance that would mirror the LIFELINE Act's
statutory modifications, allowing State and local governments to
finance affordable housing, including Housing Credit developments, with
loans made with FRF resources. This change to Treasury guidance would
not have happened if not for the support in Congress for the LIFELINE
Act; and we are grateful to you and the other Senators who cosponsored
this critical legislation.
The change to Treasury's guidance will unlock what is likely to be
billions of dollars that States and local governments can use to
finance affordable rental housing for low-income families, seniors,
people with disabilities, veterans, and more. The National Council of
State Housing Agencies expects that thousands of developments in the
pipeline that had been stalled because of the financing gap will be
able to access FRF, allowing them to close on their financing and begin
construction. Moreover, FRF will allow projects that would not have
previously been financially feasible to be built, increasing supply in
areas that desperately need it.
______
Questions Submitted by Hon. Robert P. Casey, Jr.
Question. As chairman of the Aging Committee, I champion policies
that ensure older adults and people with disabilities are fully
integrated into society. People with disabilities are productive
members of society and have goals and ambitions like any hardworking
American. We know people with disabilities have varying mobility needs.
Some can drive or get around by car, but for many others, living in a
walkable neighborhood with transit access is crucial for them to
participate fully in society.
From your experience on the ground, do you believe it's important
to connect our housing stock for people with disabilities with access
to transit? How could Federal policy better support and incentivize
States and localities that do this?
Answer. Running simple errands such as driving to the grocery store
or going to an appointment, and visiting friends is something many of
us take for granted. Strengthening critical housing investment is one
the primary avenues for strengthening an integrated built environment.
for State Housing Credit allocating agencies are often able to impact
project siting by providing incentives to developers through the
Qualified Allocation Plan (QAP) scoring process for locating properties
in areas with access to certain amenities, which may include public
transportation. In addition to proximity to transit, QAPs often also
incentivize proximity to employment, resident services, or community
amenities, such as grocery stores, pharmacies, libraries, health care,
and schools.
Oregon's Statewide Housing Plan calls for Oregon Housing and
Community Services to take advantage of opportunities to provide
affordable housing in transportation-efficient locations to reduce
travel time and housing and transportation cost burden for residents of
OHCS-funded properties, including transit-oriented development and
areas near affordable transportation. That policy direction becomes
action in Oregon's QAP, which includes scoring criteria that provides a
competitive advantage to developments that are near transit stops, or,
in more rural communities, have access to other means of transportation
beyond their own car. This helps to prioritize developments that ensure
access needs for Oregonians with disabilities and encourage a less car-
dependent community. The QAP also provides a competitive advantage to
organizations that serve residents that are less likely to access
publicly funded housing, which includes organizations that serve people
with disabilities. Lastly, OHCS maintains development standards that
require both Federal accessibility standards and State defined
visitability standards.
______
Questions Submitted by Hon. Chuck Grassley
Question. In 2018, the GAO released a report at my prompting. Among
its recommendations were to improve data collection for the LIHTC
program. Over a series of reports on the issue, they noted the
program's complexity and identified the need for more transparency.
The primary recommendation in this 2018 report was for Congress to
``consider designating a Federal agency to maintain and analyze LIHTC
cost data.'' To date, this recommendation has not been implemented.
What can State agencies do to collect and make this information
public in the absence of congressional action?
Answer. Since the publication of the GAO report series on the
Housing Credit, IRS has taken some significant steps to improve its
data collection. Specifically, it has implemented a new database that
collects all data provided to the Service in the forms submitted by
State agencies and taxpayers. This new database allows IRS to better
see trends and track the usage of Housing Credits.
Other data about the Housing Credit program is available through
HUD's two data collection projects--the Housing Credit ``Placed in
Service'' database, which provides information on Housing Credit
developments, and the Housing Credit tenant data collection effort,
which provides information on the households who live in Housing Credit
properties.
In addition, the National Council of State Housing Agencies each
year publishes its Factbook, which provides the results of its annual
survey of State HFAs, including an entire chapter about the Housing
Credit with data on all aspects of State administration of the program.
NCSHA shares copies of the Factbook with IRS and the Joint Committee on
Taxation and makes the Factbook available for purchase for the general
public. NCSHA would be happy to provide Senator Grassley's office with
a copy of the most recent Factbook, should that be useful to you.
Question. Another GAO report on the LIHTC I requested was released
on July 15, 2015. While the program is currently administered at the
Federal level by the Internal Revenue Service, this report recommended
giving the Department of Housing and Urban Development a joint
oversight role.
I have been a strong advocate of oversight as long as I have been
in Congress. It is impossible to conduct meaningful oversight without
consistent and available data on how programs preform, however I also
understand the need to limit unnecessary paperwork for those
participating in Federal programs.
What impact would giving HUD a partnering oversight role have on
the LIHTC program?
Answer. When Congress enacted the Housing Credit program, it turned
away from Washington-driven highly bureaucratic housing programs of the
past by establishing a State-based structure in which IRS and Treasury
partner with State Housing Finance Agencies on oversight and program
administration. Nearly 40 years later, it is clear that Congress had
great foresight in this program design, which has been integral to the
Housing Credit's long track record of success.
As envisioned by Congress, State HFAs play a key role in program
oversight. In fact, GAO's 2016 report on State administration of the
Housing Credit showed how States not only fulfill congressionally
required monitoring requirements of the program, but in many cases go
above and beyond those requirements. One example noted in the GAO's
report is of States conducting physical inspections and file reviews
more frequently than the law requires and implementing policies to
encourage compliance during the extended use period when investors are
no longer at risk of credit recapture.
Introducing HUD as a coadministrator of the Housing Credit would
unnecessarily create a new level of bureaucratic red tape that could
reduce program effectiveness, slow down the production process, and
cause uncertainty for private-sector investors and developers who are
so integral to the Credit's success. HUD has little expertise in or
experience with the Housing Credit, suffers from its own severe
resource constraints, and has received negative evaluations from the
GAO and others on its own program oversight.
As GAO pointed out in its 2015 report, involving HUD in the
oversight of the Credit would require additional resources for HUD--not
only to undertake new programmatic responsibilities, but also to simply
train staff, who currently have limited knowledge of and experience
with the Credit program. GAO also noted in that report that the level
of resources that would be needed for HUD to perform adequate oversight
is not known. Given that this would be an entirely new program for HUD
to administer, those resources would likely be substantial and
considerably more than would be necessary to invest further in Treasury
and IRS's existing oversight structure.
If Congress determines that additional Federal oversight of the
Housing Credit program is needed, I suggest that the best course of
action would be to provide additional resources to Treasury and IRS for
program oversight.
Question. It is no secret that housing costs have been increasing
well before the current wave of inflation. While LIHTC has an impact on
bringing more affordable units onto the market, the varied housing
prices across the country indicate that local policies, such as zoning,
have possibly the greatest role in determining housing costs.
In addition, there are a wide variety of regulations at the Federal
level, including HUD regulations, that increase the price of new homes
and buildings.
As Professor Ohanian noted in his testimony, there are currently a
number of regulations that prevent affordable housing from being
constructed. In addition to the LIHTC, what other options would be
available to increase housing supply? How would these other options
compare to the LIHTC in cost effectiveness? What factors at the State
or local level are inhibiting the creation of affordable housing?
Answer. One of the most critical responsibilities of State HFAs is
to ensure that the Housing Credit dollar amount each property receives
does not exceed the amount the agency deems necessary for financial
feasibility and that the property development and operating costs are
reasonable. As such, HFAs have adopted numerous cost-containment
procedures and limits, which they balance against other policy
objectives that might result in higher costs--for example, serving the
lowest-income households, using durable materials that reduce long-term
upkeep needs, locating projects in higher opportunity areas, and
instituting energy efficiency measures.
While HFAs do what they can to contain costs, the primary factors
that drive development costs of all apartment projects, including
Housing Credit properties--costs of land, labor, and materials--are
driven by market forces, that are unfortunately beyond the control of
HFAs and affordable housing developers. Local regulations that increase
costs, such as zoning fees and lengthy approval periods, are also
beyond State agency control.
While local regulations certainly vary across the Nation, and can
impact the variation of development costs, they are not the only reason
why development costs in certain areas are higher than in others. For
example, land costs vary widely. Developers seeking to build in higher
opportunity areas will face steeper competition for sites from market-
rate developers than those building in other areas.
The most critical question is whether affordable housing is somehow
more expensive than comparable market-rate housing in the same area. It
is difficult to ascertain the answer to this question because data on
market-rate construction is not readily available. In Oregon, Oregon
Housing and Community Services (OHCS) report to the State Legislature
on construction costs through our annual Key Performance Measures, and
usually finds that OHCS funded developments are typically in line with
national data that includes market rate costs. OHCS also contracted to
have a study conducted on development costs in 2018, and one of the
numerous findings was an analysis showing that costs between market
rate and affordable developments were negligible.
Regarding your question about alternative strategies for increasing
housing supply, it is hard to imagine a program that would be more
effective than the Housing Credit. The Federal Government has certainly
attempted to build housing in the past through grant programs, such as
section 8, and government ownership, such as Public Housing. But the
Housing Credit, with its market-based, public-private partnership
structure has proven to be a far more effective means of producing
affordable rental housing than those earlier programs.
______
Questions Submitted by Hon. Sheldon Whitehouse
Question. We have an affordable housing crisis in this country, and
Rhode Island hasn't been spared. According to HousingWorksRI, there are
currently no communities in Rhode Island where families earning the
State's median income of $67,167 or less can afford to buy a home, and
there's only one community--Burrillville--where Rhode Islanders can
affordably rent.
The root of this problem is a supply shortage that pre-dated the
pandemic. Since 2020, COVID significantly increased the cost and
difficulty of developing housing by disrupting supply chains and
increasing the cost of building materials. As a result, construction
costs in Rhode Island are up more than 18 percent over the past 2
years, and many affordable developments are facing financing gaps.
Nationally, 29 States have appropriated nearly $9 billion in State
Fiscal Recovery Funds for affordable housing, and Rhode Island is one
of them. The State recently dedicated $250 million in Fiscal Recovery
Funds to affordable housing and homelessness programs, with $100
million targeted specifically to housing production.
These Fiscal Recovery Fund investments would be able to make an
even greater impact in Rhode Island and nationwide if they were able to
leverage Low-Income Housing Tax Credit (LIHTC) financing.
Unfortunately, it is my understanding that Treasury's rules seriously
limit the effectiveness of combining Fiscal Recovery Funds with LIHTC
Credits.
That's why I partnered with Senators Leahy and Collins to introduce
the bipartisan LIFELINE Act, which would allow State and local
governments to use Fiscal Recovery Funds to make long-term loans to
LIHTC developments with long-term deed restrictions.
Do Treasury's current rules regarding the American Rescue Plan's
Coronavirus State and Local Fiscal Recovery Fund pose a problem to
using these resources to help plug funding gaps in LIHTC-financed
developments?
Would the bipartisan LIFELINE Act address this problem?
Are there time constraints to acting on the LIFELINE Act that
Congress should consider?
Answer. On July 27th, the week after the Senate Finance Committee
held its hearing, Treasury released updated guidance allowing State and
local governments to finance affordable housing development using loans
made with Coronavirus State and Local Fiscal Recovery Fund (FRF)
resources, mirroring the LIFELINE Act. Oregon Housing and Community
Services and all our State Housing Finance Agency colleagues were
thrilled with this change in direction by the Treasury Department,
which would not have happened if not for the support in Congress for
the LIFELINE Act. We are grateful to you and the other Senators who
cosponsored this critical legislation.
The change to Treasury's guidance will unlock what is likely to be
billions of dollars that States and local governments can use to
finance affordable rental housing for low-income families, seniors,
people with disabilities, veterans, and more. The National Council of
State Housing Agencies expects that thousands of developments in the
pipeline that had been stalled because of the financing gap will be
able to access FRF, allowing them to close on their financing and begin
construction. Moreover, FRF will allow projects that would not have
previously been financially feasible to be built, increasing supply in
areas that desperately need it.
Question. The 2018 Consolidated Appropriations Act increased the
number of Low-Income Housing Tax Credits (LIHTC) available to States
each year by 12.5 percent for Fiscal Years 2018 through 2021. For Rhode
Island, that boost enabled the LIHTC program to produce or preserve
nearly 2,000 affordable homes in this time period--but it expired at
the end of last year.
At a time when we need housing investments more than ever to
increase the supply of affordable housing and offset pandemic related
cost increases, LIHTC allocations have actually dropped 12.5 percent.
This means that Rhode Island lost access to roughly $3.5 million in tax
credit equity that could have been put towards the development and
preservation of affordable apartments.
What impact is the reduction in LIHTC allocations having on the
production and preservation of rental housing?
Answer. The cut to Housing Credit authority in 2022 came at the
worst possible time. With development costs increasing at historic
levels and demand far exceeding supply, we need more Housing Credit
resources, not less. Sadly, because of increased costs, some State
Housing Credit agencies are being forced to use 2022 and 2023 credit
authority to backfill projects initially provided credits in 2020 and
2021 in order to fill financing gaps. This will leave little credit
authority left to finance additional developments in 2022 and 2023.
Oregon Housing and Community Services uses State funds to leverage
Housing Credit and other Federal resources. Without this important
component of project financing, the agency estimates hundreds less
affordable homes will be funded in the next 2 years. OHCS has unlocked
the full potential of the 4-percent credit by utilizing State resources
as gap filler and continue to maximize the 9-percent credit resulting
in historic development over the past 3 years. But it is not enough,
and reductions to the 9-percent and hitting PAB caps in the 4-percent
combined with inflationary pressures will likely result in fewer
development as our housing crisis only intensifies This may have the
perverse effect of desensitizing State investment in housing without
the needed Federal funds to make a development pencil.
I strongly encourage Congress to not only restore the 12.5-percent
cut in credit authority, but to further expand Housing Credit
resources, both through a cap increase and by lowering the threshold
necessary for bond-financed properties to trigger 4-percent Housing
Credits. It is essential that Congress act quickly, given skyrocketing
rents resulting from the supply-demand imbalance.
Question. I am also a cosponsor of the bipartisan Affordable
Housing Credit Improvement Act (S. 1136), introduced last year by
Senators Maria Cantwell (D-WA), Todd Young (R-IN), Ron Wyden (D-OR),
and Rob Portman (R-OH). This bipartisan bill expands the Low-Income
Housing Tax Credit (LIHTC) program and would finance over 2 million
additional affordable homes across the Nation over the next decade--
including over 5,000 apartments in Rhode Island.
How would the Affordable Housing Credit Improvement Act make the
LIHTC program even more effective at financing housing production and
preservation?
Answer. Passing the Affordable Housing Credit Improvement Act
(AHCIA) is the most important thing Congress could do to increase the
supply of affordable rental housing and make the Housing Credit an even
more effective program than it already is.
The AHCIA has universal support within the affordable housing
community--including the support of tenant advocates, nonprofits, for-
profit developers, State Housing Finance Agencies, and private sector
investors. It also has wide bipartisan support in both chambers of
Congress. But we need Congress to act to advance the legislation.
The AHCIA would make a substantial investment in affordable
housing, both by increasing the Housing Credit cap on 9-percent credit
authority and by lowering the so-called 50-percent test, unlocking 4-
percent credits for more bond-financed developments. In Oregon,
reducing the 50-percent test would immediately address private activity
bond constraints on the credit. The AHCIA would also make Housing
Credit development more feasible in hard to serve areas of the country,
including rural areas and Tribal lands, and allow more units to be
produced that would be affordable to extremely low-income households
without the need for a housing voucher.
Additionally, the bill includes a host of common sense, no-cost
improvements to the program that would simplify administration and
improve efficacy based on lessons learned over nearly 4 decades. In
particular, many of these modifications would make preservation of
affordable housing more feasible.
I and all affordable housing advocates are grateful for your
support of this legislation.
______
Questions Submitted by Hon. Todd Young
Question. Thank you for the support you expressed during the
hearing for Senator Cantwell's and my Affordable Housing Credit
Improvement Act (S. 1136). I wanted to take this opportunity to solicit
your thoughts in greater detail regarding my bill and the Low-Income
Housing Tax Credit (LIHTC) generally.
Why do you support the Affordable Housing Credit Improvement Act
and how do you believe it will impact the populations you serve?
Answer. Oregon Housing and Community Services and all State Housing
Finance Agencies are so grateful for your leadership in sponsoring the
Affordable Housing Credit Improvement Act (AHCIA). Passage of this
legislation is the most important thing Congress could do to increase
the supply of affordable rental housing, which is so desperately
needed.
The AHCIA would make a substantial investment in affordable
housing, both by increasing the Housing Credit cap on 9-percent credit
authority and by lowering the so-called 50-percent test, unlocking 4-
percent credits for more bond-financed developments. In Oregon,
lowering the 50-percent test is probably the most impactful action
Congress could take to increase supply, as we have far more demand for
private activity bond (PAB) resources than we have PAB authority
available. According to an estimate by Novogradac of the provision as
included in the initial Build Back Better proposal, Oregon alone would
be able to finance 11,200 more homes over a 10-year period if Congress
made this change.
The AHCIA would also make Housing Credit development more feasible
in hard-to-serve areas of the country, including rural areas and Tribal
lands, and allow more units to be produced that would be affordable to
extremely low-income households without the need for a housing voucher.
Additionally, the bill includes a host of common-sense, no-cost
improvements to the program that would simplify administration and
improve efficacy based on lessons learned over nearly 4 decades. In
particular, many of these modifications would make preservation of
affordable housing more feasible.
While Oregon and all State HFAs are eager to see the passage of
AHCIA, Oregon and many other States could immediately benefit from the
reduction of the 50-
percent test on bond-funded developments. This provision of AHCIA
should move forward this Congress to immediately unlock development
potential across the Nation and allow more Americans to go home to a
safe, stable, and affordable home.
Question. Can you please share what it is that makes the Low-Income
Housing Tax Credit so effective in addressing the affordable housing
crisis?
Answer. The Housing Credit is our Nation's most successful tool for
the production and preservation of affordable rental housing,
responsible for nearly all of the affordable housing built and
preserved since the program was authorized in the Tax Reform Act of
1986. It has financed over 3.6 million affordable homes since then,
providing approximately 8 million low-income families, seniors,
veterans, and people with disabilities homes that they can afford.
The Housing Credit's success is due to Congress's wise decision to
structure the program as a public-private partnership under State-level
administration. The program is a pay-for-success model, in which credit
against a private investor's tax liability can only be taken after
properties are successfully completed and occupied by eligible tenants.
Further, should a property become noncompliant, investors risk credit
recapture. Under this system, private-sector investors--not taxpayers--
bear the financial risk.
Unlike many other tax expenditures, which subsidize activity that
would occur at some level without a tax benefit, virtually no
affordable rental housing development would occur without the Housing
Credit. State affordable housing investments are often best utilized as
gap resources to support the 4-percent LIHTC program. This Federal/
State partnership is key to affordable housing development, but
additional Federal resources are necessary to continue to incentivize
State and local investment.
Other programs, including the successful New Markets Tax Credit,
have been designed using the Housing Credit structure as a model due to
its long track record of success.
The Affordable Housing Credit Improvement Act, which you have
sponsored with Senator Cantwell, would make the program even more
effective.
Question. What are some of the positive externalities you believe
the Affordable Housing Credit Improvement Act would have on communities
in Oregon and across the country?
Answer. The Affordable Housing Credit Improvement Act (AHCIA) would
undoubtedly have a major positive impact on communities across the
Nation. It would provide State agencies more Housing Credit resources
so that they could finance projects in all geographies within their
States, including rural, suburban, and urban areas.
The Housing Credit has far-reaching economic benefits for local
communities. Since its creation, the Housing Credit has generated
approximately $643 billion in wages and business income and $233
billion in tax revenues, supporting approximately 5.68 million jobs
nationwide.
But by far, the most important impact of the Housing Credit is the
impact it has on the people who live in Housing Credit properties. With
affordable housing, families can stabilize their finances, people with
disabilities or mental health challenges can access services, children
can focus on school, and seniors with fixed incomes can feel
comfortable knowing that they can afford to stay in their homes.
Question. Why is it important and necessary that we pass the
Affordable Housing Credit Improvement Act this year?
Answer. Never has the need for affordable housing been greater than
it is now. Our Nation is facing an ever-worsening housing crisis With
rents skyrocketing and vacancy rates at historic lows due to an extreme
imbalance between supply and demand, low-income households are being
forced to choose which bills to pay and many are at risk of
homelessness.
Furthermore, these unprecedented rents are a key driver of overall
inflation. But unlike other drivers of inflation, which can be
addressed through Federal monetary policy, housing costs will not
recede unless we are able to increase supply. As Senator Cantwell said
during the hearing, ``supply, supply, supply.'' States cannot solve
homelessness and create stabile communities without a more robust
supply of affordable housing.
In particular, since the Great Recession, when many developers left
the industry, our Nation has drastically underproduced both rental and
for-sale housing. We are seeing the repercussion of this
underproduction now.
Unless Congress acts by passing the AHCIA, the situation will only
get worse. We cannot afford to continue to underproduce affordable
housing.
______
Prepared Statement of Hon. Mike Crapo,
a U.S. Senator From Idaho
Last week we learned that consumer price inflation spiked to 9.1
percent, the highest in more than 40 years. The shelter component of
the consumer price index was up 5.6 percent in June relative to a year
earlier, and rents were up by nearly 6 percent. To continue battling
inflation, which was fueled by last year's partisan American Rescue
Plan, the Federal Reserve must aggressively raise interest rates, and
may raise rates later this month by as much as a full percent.
Inflation must be contained, or we run a risk of the Fed having to
repeat what it did in late 1980 to combat runaway inflation. Painfully
then, overnight interest rates were driven to nearly 20 percent, which
crushed economic activity, including housing markets, and helped lead
to a deep and long recession. With higher interest rates set by the
Fed, higher mortgage rates follow, making it all the more challenging
for Americans to buy homes.
Housing affordability is a critical issue in Idaho and all across
the country. Nationwide, there is a shortage of about 7 million
affordable rental homes available to lower-income Americans, and the
gap between demand and supply increases each year. To provide more
affordable housing, there are existing tools in the tax toolbox that
provide incentives for builders to create more affordable homes.
The Low-Income Housing Tax Credit--or LIHTC--for example, is
responsible for generating a majority of all affordable rental housing
created in the U.S. today and generally enjoys bipartisan support in
Congress.
In Idaho, there are currently 284 LIHTC projects located across the
State, providing 12,000-plus units. These projects vary in size and are
split roughly between urban and rural, with about 72 percent targeted
toward families and 28 percent for seniors and the elderly. One such
project is the Valor Pointe Apartments in Boise, which targets
chronically homeless veterans.
Several members of this committee have been active in working to
improve existing affordable housing credits and to create new
incentives. Senators Young and Cantwell, as well as several other
members, introduced the Affordable Housing Credit Improvement Act,
which would expand and strengthen LIHTC for developing and preserving
affordable housing. Senators Portman and Cardin introduced the
Neighborhood Homes Investment Act, which would create a Federal tax
credit that covers the cost difference between building or renovating a
home in urban and rural areas.
Numerous other Finance Committee members are also interested in
finding affordable housing solutions. Thank you all for your hard work.
While LIHTC and other credits are part of the solution to developing
affordable housing, we must address other drivers that are increasing
housing costs generally.
Foremost in the current economy is the need to reduce inflation.
Unfortunately, it has been allowed to run rampant, and necessary
Federal Reserve actions will raise the cost of housing. Builders are
also feeling inflation's effect through more expensive building
materials. And, painfully high fuel prices continue to put even more
pressure on builders' budgets, making it is even more expensive to get
materials to construction sites.
Additionally, several economic factors have led to a shortage of
affordable housing.
One way to alleviate the shortage would be to look into more
manufactured housing. During his time at HUD, former Secretary Carson
created the Office of Innovation to evaluate new ways to provide
housing, and in doing so highlighted the improved efficiency and
suitability of manufactured homes.
Zoning laws and regulatory barriers, which are often uncoordinated,
unnecessary, or overly cumbersome, also present challenges to
affordable housing by creating excessive costs that restrain
development of affordable housing. Many of the markets with the most
severe shortages in affordable housing have the most restrictive State
and local barriers to development.
We must work to reduce regulatory barriers, which requires outside-
the-box approaches, as well as teamwork from local, State, and Federal
Governments, and the private sector. This includes initiatives like
Opportunity Zones that were part of the Tax Cuts and Jobs Act, an area
where Senator Scott has done a great deal of good work.
Data released as of March 24, 2022, by the Opportunity Zone Fund
Directory shows that $49.18 billion has been committed in anticipated
investments and 60 percent of those funds target investments in
affordable housing and community development.
Homes are more than just physical structures. Homes are a
foundation for wealth building, family stability and community
cohesiveness. It is critical that we make the American dream of home
ownership as attainable for as many people as possible, which will
continue to foster the economic success of the Nation.
I look forward to discussing ways to ensure affordability and
accessibility of home ownership with today's witnesses.
______
Prepared Statement of Jerry Konter, Founder and President, Konter Qual-
ity Homes; and Chairman of the Board, National Association of Home
Builders
On behalf of the more than 140,000 members of the National
Association of Home Builders (NAHB), I am Jerry Konter, NAHB's 2022
chairman of the board and founder and president of Konter Quality
Homes, based in Savannah, GA. Over my career, my company has built more
than 2,200 single-family and 700 multifamily homes.
The Internal Revenue Code currently provides numerous housing-
related rules and incentives covering both owner-occupied and rental
units. There are key tax provisions geared toward rental housing, which
help facilitate the production of new rental housing. These include the
Low-Income Housing Tax Credit (LIHTC); accelerated depreciation;
section 142 multifamily rental bonds; and carried interest.
There are also several owner-occupied housing tax incentives that
help make owning a home affordable and accessible to millions of
Americans. These include the mortgage interest deduction (MID); the
deduction for local property taxes; the principal residence capital
gains exclusion; and mortgage revenue bonds.
NAHB has spent years researching the housing tax incentives to
determine how they benefit builders, remodelers, home buyers, home
owners, and renters. Many assumptions are made about various housing
policies. NAHB has sought to move away from assumptions to a fact-based
approach as we evaluate these tax incentives to ensure these long-
standing tax incentives are effective. My testimony explores the
lessons learned from that research.
Many of these incentives continue to serve the public interest and
remain highly effective, including LIHTC, which should be further
expanded to reflect the need for more affordable rental housing as well
as increases in development costs.
On the other hand, some housing tax incentives have failed to keep
up with changes to the tax code. What was once an effective tax
incentive may no longer be serving its original purpose--we would put
forward the mortgage interest deduction as an example of a housing
incentive that should be updated to reflect today's tax code and better
serve the segment of prospective home owners that face unprecedented
affordability challenges.
The housing affordability crisis is driven by one fact: over the
past decade, we have failed to produce enough housing to keep up with
demand. If we are going to solve our housing affordability crisis, we
must drive down the cost to build as well as the cost to own or rent.
Well-structured housing tax incentives can help us achieve this goal.
With the specter of a recession looming over the economy,
production-focused incentives have the potential to help housing
recovery quickly and help reduce inflationary pressures.
Indeed, shelter-based inflation, which makes up 40 percent of the
CPI, increased in June at the fastest pace since 1986.\1\ While the
Federal Reserve is increasing interest rates via tighter monetary
policy to fight inflation, its policy tools are poorly situated for
addressing the housing element of the inflation challenge. Higher
interest rates increase the cost of buying a home (thus increasing
demand for rental housing and generating higher rents), while also
increasing the cost of financing single-family and multifamily
construction, thereby restricting housing supply. Only efficient,
timely and targeted finance and tax policy can address the root causes
of underbuilding in the U.S., thereby tackling the shelter-based source
of inflation.
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\1\ https://eyeonhousing.org/2022/07/june-inflation-reading-the-
highest-since-1981/.
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Given this economic backdrop, NAHB specifically recommends:
Expanding resources for the Low-Income Housing Tax Credit by
enacting the Affordable Housing Credit Improvement Act (S. 1136). LIHTC
is the most effective tool to boost production of affordable rental
housing. We appreciate the leadership of Senator Cantwell, Chairman
Wyden, Senator Young, and Senator Portman, along with the many members
of this committee who have cosponsored this legislation.
Enacting the Middle-Income Housing Tax Credit as proposed by
Chairman Wyden as part of the Decent, Affordable, Safe Housing for All
(DASH) Act. LIHTC typically helps finance projects serving residents
earning up to 60 percent of the Area Median Income. MIHTC would pick up
where LIHTC stops by helping to finance the construction of affordable
rental projects serving residents earning 60 percent to 100 percent of
AMI.
Revisiting the home-ownership tax incentives. The mortgage
interest deduction has been a cornerstone of the tax code since the
code's inception, but recent tax data suggests the MID is no longer an
effective means to promote home ownership. NAHB supports converting the
MID into a targeted and ongoing home-ownership tax credit which could
be claimed against mortgage interest and property taxes paid. This
testimony includes detailed policy recommendations on how to structure
a credit that is targeted, increases progressivity in the tax code, and
promotes housing opportunity by providing a tax incentive more
accessible to minority and first-generation home buyers.
Responding to inflation by indexing the home-ownership tax
incentives. The existing mortgage interest deduction limit on
acquisition debt has never been indexed to inflation. The capital gains
exclusion also has not been adjusted for inflation. This is slowly
eroding the value of these incentives, and Congress should move to
begin indexing these limits to inflation immediately.
Reconsidering the current limits on the SALT deduction. For
high-cost as well as high-tax States, the $10,000 deduction limit
effectively increases the ongoing costs of owning a home by denying
homeowners a full deduction of their property and other State and local
taxes. Under the principle that taxes paid to State and local
governments should not be double-taxed as income by the Federal
Government, NAHB supports eliminating the SALT deduction cap.
balance between rental policies and owner-occupied policies
Questions are frequently raised whether there is a balanced policy
between rental and owner-occupied housing. There exists justifiable
reasons to support both forms of housing with policy--be it to ensure
the availability of high quality, affordable rental housing or to
support home ownership and unleash the well-documented positive
externalities that benefit entire communities. However, there is, in
some circles, an assumption that renters are getting the short end of
the stick.
NAHB has looked at the tax and spending policies that affect both
rental and owner-occupied housing: the mortgage interest deduction; the
real estate tax deduction; capital gains exclusion; mortgage revenue
bonds; section 108 relief; and HOME, CDGB, USDA, and other
appropriations. According to numbers published by the Joint Committee
on Taxation (JCT) for 2020 and the Congressional Research Service (CRS)
for Fiscal Year 2018, Federal owner-occupied housing support totaled
$86.8 billion.
NAHB also looked at policies supporting rental housing: Low-Income
Housing Tax Credit; accelerated depreciation on rental housing; bonds;
like-kind exchanges; the historic credit; tenant-based and project-
based section 8; public housing funding; and other appropriations such
as HOME, CDBG, and USDA. According to numbers published by the Joint
Committee on Taxation (JCT) and the Congressional Research Service
(CRS) for Fiscal Year 2018, rental housing support totaled $84.9
billion.
To determine if the appropriate policy balance has been struck, it
is necessary to look at the U.S. population share living in each type
of housing. Based on the numbers above, 49.2 percent of the policy
support goes towards owner-occupied housing; 64.4 percent of the U.S.
population lives in owner-occupied housing, according to the 2020
American Community Survey. In comparison, 50.8 percent of the policy
support is targeted to rental housing; 35.6 percent of the U.S.
population lives in rental housing.
Based on the population living in each type of housing, the data
indicates that policy support between rental and owner-occupied housing
is currently tilted toward rental housing. NAHB is forecasting declines
for the home-ownership rate in the quarters ahead. As such, this
current State of policy balanced needs addressing given the current
economic environment.
affordable housing development requires policy support
To understand what is needed to address the affordable housing
crisis, policymakers need to understand the challenges facing the
development community.
Where there is growing housing demand, the Nation's home builders
want to supply inventory to meet that demand. But there is no magic
wand to erase basic development costs. Fees, regulatory compliance,
modern building and energy codes, building materials, land and labor
costs determine whether a project is financially viable. And if we want
to provide affordable rental housing for lower-income households, it is
financially impossible to do so without a subsidy.
There is a persistent misperception that developers only seek to
build higher-end projects. The reality is developers face a pricing
floor driven by basic development costs that they cannot control. NAHB
estimates that 69 percent of American households cannot afford the
median-priced new home.\2\ That is alarming.
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\2\ https://www.nahb.org/news-and-economics/housing-economics/
housings-economic-impact/households-priced-out-by-higher-house-prices-
and-interest-rates.
Home builders are not ignoring 70 percent of the marketplace--
development costs simply make it impossible to produce more affordable
offerings. Building material prices collectively are up 19.2 percent
year-over-year and 35.6 percent since the start of the pandemic.\3\
Since the spring of 2020, lumber prices are up 75 percent; steel mill
prices are up 107 percent; gypsum/drywall is up 32 percent; ready-mix
concrete is up 11 percent; interior paint is up 33 percent and exterior
paint is up 48 percent; aluminum is up 61 percent; and copper is up 57
percent.
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\3\ https://www.nahb.org/blog/2022/05/building-materials-up-more-
than-19-percent-year-over-year.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
It comes as no surprise that the median price of a newly built,
single-family home increased 19.7 percent year over year. This country
was already facing a housing affordability crisis, but the inflationary
effects of the building material price increases are squeezing home
buyers even more. A year ago, 23 percent of new home sales were priced
below $300,000. In May, it was only 10 percent.\4\ We have now seen
housing affordability fall to a decade-plus low.\5\
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\4\ https://eyeonhousing.org/2022/06/new-home-sales-increase-in-
may-before-feds-june-rate-rise/.
\5\ https://www.nahb.org/news-and-economics/press-releases/2022/05/
new-home-sales-down-on-rising-interest-rates-declining-affordability.
Solving this challenge will only be possible if Federal, State, and
local governments work together to remove barriers to new construction
and create effective incentives to promote affordable housing
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opportunities.
While tax incentives can help create an affordable and accessible
housing marketplace, which includes access to both rental housing as
well as owner-occupied housing, Congress must consider all the policy
decisions that have brought us to where we are today. Within NAHB, we
often refer to the ``five Ls'' as shorthand for the headwinds facing
the industry: labor, lending, local regulatory restrictions, lots, and
lumber. In the past 18 months, the headwinds have begun to turn into
gale force blasts.
We also need to recognize the important role affordable housing
plays in our communities. Breaking the cycle of poverty starts with
access to stable and affordable housing. There are meaningful social
effects. Even after 40 years in this business, I still enjoy nothing
more than handing over the keys to a customer buying their first home.
As a multifamily developer, I also understand how affordable rental
housing creates stability for my tenants and their families.
The housing affordability crisis affects our economy as well. It
costs us jobs, productivity, and economic growth. I challenge everyone
in this room to ask the owners of the small businesses you frequent
about labor shortages. Housing affordability is critical in areas of
the country experiencing robust economic growth. As the number of open,
unfilled jobs grows, the operation of the housing market plays a key
role in allowing individuals to relocate to areas where jobs need to be
filled. And if we don't address this issue, where do our employers find
their workers? How do we grow the economy?
And for our fellow citizens who want to realize the American dream,
if they cannot afford to live where the economic opportunities are, we
are just creating an economic divide based on housing ``haves'' and
``have nots.''
owner-occupied tax policies
The Benefits of Home Oownership
Home ownership offers a wide range of benefits to individuals and
households.\6\ These include increased wealth accumulation, improved
labor market outcomes, better mental and physical health, increased
financial and physical health for seniors, reduced rates of divorce,
and improved school performance and development of children. These
beneficial financial and social outcomes are due to the stability
offered by home ownership, as well as the incentives created by the
process and responsibilities of becoming and remaining a homeowner.
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\6\ R.D. Dietz and D.R. Haurin, ``The social and private micro-
level consequences of homeownership,'' Journal of Urban Economics 54
(2003) 401-50.
An important motivating factor in the pursuit of home ownership is
the investment opportunity it offers for many families. Equity in a
home constitutes a substantial proportion of a typical American
family's wealth. According to the 2019 Federal Reserve Survey of
Consumer Finances (SCF), the median family net worth of a homeowner was
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$255,000; for renters, it was $6,300.
Home ownership also provides advantages for seniors. A significant
proportion of a household's wealth is in the form of equity of owner-
occupied housing, and this wealth provides significant advantages in
retirement. Mayer and Simons (1994) indicate that equity in the home
and the use of a reverse mortgage could increase liquidity for senior
households by as much as 200 percent.\7\
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\7\ C.J. Mayer, K.V. Simons, ``Reverse mortgages and the liquidity
of housing wealth,'' AREUEA Journal 22 (1994) 235-55.
These data illustrate the importance of housing wealth and suggest
caution with respect to policies that would reduce these wealth
holdings, based on decisions made over a lifetime, via direct policy
changes (such as weakening the section 121 gain exclusion for principal
residences) or indirect changes (such as price declines induced by
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weakening the mortgage interest deduction).
Overall, economists, sociologists, and other social scientists have
found significant, positive home ownership-related impacts on a large
set of outcomes associated with households and communities.\8\ For
these and other positive impacts, home ownership has and should
continue to have a favorable place in the tax code.
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\8\ Two comprehensive literature reviews detailing the impacts of
home ownership are: W.M. Rohe, G. McCarthy, S. Van Zandt, ``The social
benefits and costs of homeownership: A critical assessment of the
research,'' Research Institute for Housing America, Working Paper No.
00-01 (2000). R. Dietz and D. Haurin, ``The social and private micro-
level consequences of homeownership,'' Journal of Urban Economics 54
(2003) 401-50.
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mortgage interest deduction
Brief History of the Mortgage Interest Deduction
When Congress created the modern income tax code in 1913, Congress
recognized the importance of allowing for the deduction of interest
paid on debt incurred in the generation of income. In this early code,
taxpayers were permitted to deduct a wide array of interest types from
business and personal debts, including mortgage interest. The mortgage
interest deduction came into its own after World War II, when home
ownership became more accessible and a rite of passage for the middle
class. Deductions for mortgage interest grew in absolute numbers, home-
ownership rates increased during this period, and today two-thirds of
American households own a home.\9\
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\9\ https://eyeonhousing.org/2022/04/homeownership-rate-stable-at-
65-4/
In reforming the tax code in 1986, Congress disallowed the
deduction of interest payments for certain types of debt but maintained
the popular deduction for mortgage interest. In doing so, ``. . .
Congress nevertheless determined that encouraging home ownership is an
important policy goal, achieved in part by providing a deduction for
residential mortgage interest.''\10\ Aside from some adjustments in
1987, the mortgage interest deduction remained unchanged until 2017.
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\10\ ``General Explanation of the Tax Reform Act of 1986,'' Joint
Committee Print, prepared by the Staff of the Joint Committee on
Taxation, May 4, 1987. Pp. 263-264.
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The $1 Million Cap and Limits to the Mortgage Interest Deduction
Starting with the first tax code in 1913, there was no limit on the
amount of home mortgage interest that could be deducted. However, the
Tax Reform Act of 1986 imposed limits on the deduction. This law
limited the deduction to interest allocable to debt used to purchase,
construct, or improve (acquisition debt) a designated primary residence
and one other residence.
The Omnibus Budget Reconciliation Act of 1987 further limited the
deduction to interest allocable to up to $1 million in acquisition
debt. This limit is not adjusted for inflation. Factoring in the effect
of inflation, the value of the cap has eroded by more than half since
1987; in 2022 dollars, the original cap would be equal to just over
$2.5 million.\11\
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\11\ Bureau of Labor Statistics CPI Inflation Calculator.
$1,000,000 in 1987 equates to $2,528,309 in 2022, http://www.bls.gov/
data/inflation_calculator.htm.
The acquisition debt cap was further reduced under the Tax Cuts and
Jobs Act (TCJA). TCJA reduced the acquisition cap to $750,000 and
eliminated the separate $100,000 deduction for home equity loan debt.
Homeowners may continue to deduct home equity debt if it is used to
substantially improve an eligible home and the total amount of mortgage
and home equity debt does not exceed $750,000.\12\
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\12\ https://www.irs.gov/newsroom/interest-on-home-equity-loans-
often-still-deductible-under-new-law.
Under current law, the acquisition debt limit will be restored to
$1 million and the separate deduction for home equity loans will return
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after December 31, 2025.
Absent an inflation adjustment, and with rising home prices, NAHB
anticipates a growing number of home owners with a mortgage will begin
to bump up against the cap, especially if Congress elects to extend the
current $750,000 threshold. The median new home sale price was $449,000
in May, a 15 percent increase since last May. And even prior to the
current high pace of price increases, a growing share of housing units
were valued between $500,000 and $1 million.
------------------------------------------------------------------------
2015 2020
------------------------------------------------------------------------
Total Owner-occupied Units 74,712,091 78,801,376
Less than $300K 63.6% 63.5%
$300K-$500K 15.8% 20.5%
$500K-$1M 8.4% 12.3%
>$1M 2.2% 3.7%
Number of Homes Valued at $500K+ 7,919,482 12,608,220
Increase 4,688,739
------------------------------------------------------------------------
NAHB strongly believes that the acquisition debt cap must be
indexed for inflation to ensure that home buyers in high-cost areas
have the same opportunities as those in more affordable areas.
The Tax Code Has Evolved, but the Mortgage Interest Deduction Has Not:
Rethinking How Home Ownership Is Incentivized
The mortgage interest deduction proved to be an effective tool to
reduce the ongoing costs of home ownership--and make home ownership
more accessible and affordable--for over 100 years. But the MID remains
firmly rooted in an increasingly outdated section of the tax code:
itemized deductions. The changes brought by TCJA, namely doubling the
standard deduction, significantly reduced the number of taxpayers who
itemize. Perhaps more important to the ongoing policy debate, of the
remaining itemizers, today's itemizing taxpayers tend to be more
wealthy than non-itemizers.
Prior to TCJA, typically 70 percent of homeowners with a mortgage
claimed the MID. And according to distributional tax expenditure
estimates from the Joint Committee on Taxation (JCT), 86 percent of
mortgage interest deduction beneficiaries earned less than $200,000 in
economic income. The MID was also a progressive element in the tax
code. Sixty-five percent of the net tax benefits were collected by
homeowners with economic income of less than $200,000, yet these same
taxpayers paid only about 40 percent of all income taxes.\13\
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\13\ Estimates of Federal Tax Expenditures for Fiscal Years 2012-
2017, https://www.jct.gov/publications.html?func=startdown&id=4504.
This is no longer the case today. Recent IRS data indicate that
only 26.7 percent of homeowners with a mortgage now claim the MID.\14\
This is consistent with the overall decline in itemizing taxpayers. In
2017, 32 percent of taxpayers itemized deductions; according to the
Joint Committee on Taxation, approximately 12 percent of taxpayers will
itemize in 2022. And that same IRS data suggests that the key target
population of the MID--first-time home buyers and younger families
looking to move up--have likely shifted away from claiming the MID and
instead claim the standard deduction.
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\14\ In 2020, there were 48,974,364 owner-occupied units with a
mortgage and 13,067,000 MID claimants.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
The IRS data reveal this shift when comparing taxpayers
claiming the MID in 2017 and 2022.\15\ The number of taxpayers claiming
the MID with income below 200,000 dramatically fell, while those
earning more than $200,000 continued to benefit.
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\15\ 2022 data is based on the Joint Committee on Taxation's July
11, 2022, report, JCX-15-22.
And using IRS data to examine the total amount of MID claims in
2017 and 2018, two effects of the increased standard deduction are
evident. First, total deductions were reduced by nearly half. This is a
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sizeable retreat in home-ownership support through the tax code.
Second, the negative income distribution effects are laid bare. In
2017, 80 percent of the MID amount deducted was deducted by taxpayers
earning less than $200k. In 2018, that fell to 58 percent.
This wealth disparity is particularly acute when viewed within the
context of minority home-ownership rates. In the first quarter of 2022,
the home-ownership rate was 65.2 percent among all U.S. households. But
the range is large among races. Among White households, the rate was
73.8 percent while it was 59.4 percent, 49.1 percent, and 43.1 percent
for Asian, Hispanic, and African-American households, respectively.\16\
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\16\ https://fredblog.stlouisfed.org/2022/04/the-latest-on-
homeownership-race-and-region/?utm
_source=series_page&utm_medium=related_content&utm_term=related_resource
s&utm_campaign
=fredblog.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Although the lifecycle patterns of home ownership by race and
ethnicity are similar, with home ownership becoming more likely with
age, the share of households owning a home differs significantly based
on race and ethnicity. Of White households under the age of 35, 46
percent owned a home; only 17 percent of African American households
owned a home.\17\
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\17\ https://www.federalreserve.gov/econres/notes/feds-notes/
disparities-in-wealth-by-race-and-ethnicity-in-the-2019-survey-of-
consumer-finances-20200928.htm.
To some degree, this gap can be linked to generational wealth
transfers, with White families more likely to receive financial support
from parents. In looking at this effect, a 2020 paper on disparities in
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wealth and ethnicity observes this dynamic of family wealth:
The relationship between housing and family wealth is complex.
On the one hand, the ability to purchase a home is a reflection
of wealth a family already has (or their parents' wealth, as
noted earlier), as significant funds are generally required for
a down payment and closing costs. On the other hand, home
ownership has also been found to yield strong financial returns
on average and to be a key channel through which families build
wealth.\18\
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\18\ https://www.federalreserve.gov/econres/notes/feds-notes/
disparities-in-wealth-by-race-and-ethnicity-in-the-2019-survey-of-
consumer-finances-20200928.htm.
The financial challenges of accumulating a down payment and
adequate savings for closing costs is one reason why minority home-
ownership rates lag.
Family Size Matters
The lifecycle aspects of home ownership also produce another
interaction with housing tax preferences. It is often claimed that the
mortgage interest deduction encourages homeowners to purchase a larger
home. This presents a rather narrow view.
Homeowners with a larger family need a larger home and will
therefore have a large mortgage interest deduction. The need for a
larger home created the larger mortgage interest deduction, not the
other way around. And NAHB analysis of SOI data confirms this.\19\
Taxpayers with two exemptions--a proxy for size--who claimed the MID
had an average tax benefit of $1,500. Taxpayers with four exemptions
had an average benefit of approximately $1,950. In fact, the benefit
increased correspondingly from one exemption to five-plus exemptions,
which is intuitive with the notion that larger families require larger
homes.\20\
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\19\ Who Benefits from the Housing Tax Deductions?, http://
www.nahb.org/generic.aspx?
sectionID=734&genericContentID=150471&channelID=311.
\20\ The data also show that income rises with the number
exemptions for those claiming the MID. For taxpayers with AGI less than
$50,000 who claim the MID, the mean number of exemptions was 2.01 in
2004. It was 2.57 for those with AGI $50,000 to $75,000, 2.89 for those
with $75,000 to $100,000 in AGI, and 2.98 for those between AGI
$100,000 and $200,000 and 3.03 for those above these AGI levels.
Moreover, the cost of living, particularly for housing, varies
greatly from city to city, so what may appear to be a large deduction
for a given home in one area, may in fact reflect a modest home in a
high-cost area. Indeed, the MID and the real estate tax deductions
reflect one of the few elements in the tax code that account for
differences in cost of living.
And Age Matters
Along with the lifecycle associated with family size, we also see a
direct correlation between the age of the homeowner and their resulting
benefit from the housing tax incentives. Unlike other itemized
deductions, the total benefits of housing-
related deductions, such as the mortgage interest deduction, generally
decline with age. After all, it is younger households who typically
have new mortgages, less equity, and growing families.
Using IRS data, NAHB has examined the age characteristics of
taxpayers claiming the mortgage interest deduction. The chart below
plots the average mortgage interest deduction \21\ by age cohort.
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\21\ This reflects claims prior to TCJA and includes the deduction
for home equity loans.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
This is consistent with the deduction for mortgage interest
peaking soon after the taxpayer moves from renting to homeowning and
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then declines as home owners pay down their existing mortgage debt.
NAHB believes that any policy change that makes it harder to buy a
home or delays the purchase of the home until an older age, will have
significant long-term impacts on household wealth accumulation and the
makeup of the middle class. Delayed investment in home ownership may
translate into lower assets at retirement or a later retirement.
Traditionally, the MID offered large benefits, as a share of
household income, for younger homeowners. With fewer taxpayers
itemizing and claiming the MID, the lack of a meaningful home-ownership
tax incentive means shutting out younger, aspiring middle-class
Americans from home ownership, which could have far-reaching social and
economic outcomes.
Creating a More Equitable and Effective Home-Ownership Tax Incentive
Efficacy of home-ownership tax incentives should be measured by
whether they benefit lower- and middle-income first-time buyers as well
as younger buyers looking to move up the ladder. The home-ownership tax
incentives should equally benefit minority households whose home-
ownership rates have consistently trailed white households.
As the data above indicates, shifts away from itemization have
resulted in fewer itemizing taxpayers, but those taxpayers who continue
to itemize tend to have higher incomes. As a consequence, the MID is
now missing the mark. NAHB believes that the trend toward less
itemization, and a higher standard deduction, which results in a
simpler, more progressive tax code, is likely to stay.
Prior to House passage of the Tax Cuts and Jobs Act, NAHB proposed
a new approach to incentivizing home ownership. We believe the most
effective way to promote and enable home ownership is to eliminate the
mortgage interest deduction and replace it with a simplified and
targeted tax credit.
Specifically, NAHB supports a 15-percent tax credit claimed against
mortgage interest paid on up to $750,000 of acquisition debt plus State
and local real estate taxes paid would offer a more effective and
progressive tax incentive. To ensure the credit targets those who need
financial assistance, but also reflecting the regional variations in
home prices throughout the country, we believe the credit should be
phased out for single filers with incomes above $250,000 and joint
filers with income above $500,000.
Unlike current law, NAHB strongly believes the acquisition debt
limit, along with the income phase-outs, must be adjusted for
inflation. We also support retaining the present treatment of second
homes.
NAHB believes a credit structured along these lines can be enacted
on a revenue-neutral basis starting with the 2026 tax year.
A credit designed in this manner brings additional benefits to home
buyers: fairness along with predictability via simplicity. With every
deduction, the tax benefit varies with the taxpayer's marginal tax
rate. As a result, taxpayers with higher income receive a larger tax
benefit, which is often raised as a criticism of the existing MID. A
credit ensures parity amongst eligible taxpayers.
A credit also has the upside of being easy to calculate, which
would allow home buyers to predict their tax benefits. Under the
current system, home buyers must first determine that they will itemize
and then calculate the additional value of the itemized deductions in
excess of the standard deduction they would have otherwise claimed in
order to determine the value received from the MID.
For many home buyers, they simply know they will get some tax
benefit under the MID, or perhaps have a rough sense of the dollar
value. With a credit, this process is greatly simplified, and it will
allow prospective home buyers to easily determine what their ongoing
ownership costs will be.
A targeted, ongoing, easy-to-claim credit based on mortgage
interest and property taxes paid would direct the home-ownership tax
incentives to those who most need it: middle-class and lower-income
Americans from all backgrounds.
second homes and the mortgage interest deduction
Tax Rules for the Second Home
Homeowners may deduct interest payments on up to two homes in a
given tax year: a primary residence and one other residence. The amount
that may be deducted is limited to the combined cap of $750,000 in
acquisition debt. A second home is one that is not rented \22\ and is
not the homeowner's primary residence. In addition, a second home can
also be a home under construction for which the homeowner has an
outstanding construction loan.
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\22\ Interest on debt used to acquire rental units may also in
general be deducted under the tax code, but not under the mortgage
interest deduction; it is a general business expense.
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When Is a Second Home Not a Second Home?
In practice, the second home deduction is important for many
households who in fact do not think of themselves as owning two homes.
For example, the second home deduction facilitates claiming the
mortgage interest deduction during a period of home-ownership
transition, such as when a family relocates and will own two separate
principal residences in a given tax year--even if both homes are not
owned concurrently. Without the second home MID, this family would only
be able to claim an interest deduction on a portion of their total
mortgage interest payment. This would not only act as a tax on moving,
but it could distort consumer behavior by discouraging relocation or
leading to home owners moving only at the start or end of a tax year in
order to minimize the tax implications.
Further, the second home rules allow up to 24 months of
construction loan interest on a newly constructed home to be claimed
while the family resides in their existing principal residence.\23\
This rule provides parity for custom home building where the eventual
homeowner finances the cost of construction. While both of these issues
are technical and easily fixed as part of a transition, NAHB raises
them for consideration because no reform proposal that eliminates the
second home deduction has ever considered the implications on home
owners who move or take on a construction loan.
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\23\ Treasury Regulations 1.163.
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The Geographic Distribution of Second Homes
When most Americans think of second homes, thoughts typically go to
expensive beach homes. However, such homes are more likely to be owned
by higher-income families who own the home free and clear of a
mortgage--or rent out the home, in which case the owner does not claim
the mortgage interest deduction. The face of the typical second
homeowner is more varied than most realize.
Using Census data, NAHB estimated the stock and share of such tax
definition-based second homes and the results contrast with the
stereotyped view of the second home mortgage interest deduction
favoring beach homes. Nearly every State has areas with significant
numbers of second homes; 49 States have a county where at least 10
percent of the housing stock consists of second homes.\24\ As the next
map shows, second homes are found throughout the country.
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\24\ Connecticut is the only State that did not have at least one
county where 10 percent of the housing stock was a second home.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
An examination of the geographic location of second homes also
shows that many second homes are in areas of the country that are
generally affordable. Half of the Nation's second homes can be found in
eight States: Florida, California, New York, Texas, Michigan, North
Carolina, Arizona, and Pennsylvania. An in-depth analysis of the county
level data shows that the concentration of second homes expands beyond
beachfront locations. Fifteen States have at least one county with at
least half their housing stock as second homes. This includes six
counties in Michigan; five in Colorado; four in Wisconsin; three in
Minnesota; two in Alaska, Utah, California, and Massachusetts; and one
county in New York, Idaho, Missouri, Maryland, New Jersey, and
Texas.\25\
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\25\ https://eyeonhousing.org/2022/05/the-nations-stock-of-second-
homes/.
Clearly, the issue concerning second homes and the mortgage
interest deduction is more complicated than many expect. Repeal of the
second home mortgage interest deduction rules would impact large
sections of the country and nearly every State. There would be negative
economic consequences throughout the Nation in terms of lost home
sales, home construction, as well as price impacts. And those price
declines would of course be more significantly realized in those areas
of the country for which second home ownership is more common. As home
values directly correlate with property taxes, repealing the second
home mortgage interest deduction would not just touch the homeowner,
but the broader community, as local governments would face additional
revenue shortfalls. This is particularly important as many impacted
communities lack a diverse tax base, and second home owners are the
ideal taxpayers, often paying a higher property tax rate while not
placing heavy demands on local government services.
state and local real estate deduction
Brief History of the State and Local Real Estate Tax Deduction
The deductibility of State and local real estate taxes has been
part of the tax code since the U.S. income tax code was enacted in
1913. This deduction aligns with a general principle of fair taxation:
taxes paid to a local or State government should not be taxed as income
by the Federal Government. If the goal of an income tax regime is to
tax changes in wealth, income which is ultimately paid out as a tax
does not represent a change in wealth.
Housing is taxed in many ways unlike other investments,
particularly via property taxes. While other investments are taxed when
sold and the tax is based on their gain in value, housing is the only
investment which is taxed annually on the value of that investment,
irrespective of any increase in value. This tax burden faced by home
owners is often lost in the Federal debate since these revenues are not
collected at the Federal level. It is not, however, lost on the
homeowner paying property taxes.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
For 2021, total property tax collections by State and local
governments summed to $1.86 trillion. NAHB estimates that one-third of
these collections were due to housing for a total of $672.5
billion.\26\ Data from the Census Bureau indicates that the average
homeowner pays property tax at an effective tax rate of 1.03 percent of
the market value.\27\
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\26\ https://eyeonhousing.org/2022/07/property-taxes-make-up-more-
than-one-third-of-state-and-local-tax-revenue/.
\27\ U.S. Census Bureau's 2019 American Community Survey 2019 and
NAHB calculations.
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Limits on Property Tax Deduction Penalize Families and High-Cost
Regions
Prior to 2018, taxpayers not subject to the Alternative Minimum Tax
\28\ faced no limit on the amount of State and local taxes (SALT),
including real estate taxes, that could be deducted from their Federal
taxes. Beginning in 2018, itemizing taxpayers are limited to a maximum
$10,000 deduction for all State and local tax deductions. The $10,000
cap is set to expire after December 31, 2025.
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\28\ The State and local tax deduction is disallowed when
calculating tax liability under the Alternative Minimum Tax.
Unfortunately, this cap has had negative effects on housing
affordability in States with high housing costs. Although the cap is
often correctly viewed through the lens of high-tax versus low-tax
States, an interesting counter-factual is offered by comparing Alabama
and Hawaii. Both States have exceptionally low real estate tax rates,
with Alabama at 0.37 percent and Hawaii with the lowest rate of any
State at 0.31 percent. But due to differences in home values, the
average property tax bill in Alabama is $713, compared to $2,295 in
Hawaii.\29\
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\29\ https://eyeonhousing.org/2021/10/property-taxes-by-state-
2019/.
Regional differences in housing costs present a challenge to
crafting balanced housing policy. NAHB believes the current SALT limit
fails to strike a balance between high-cost and low-cost regions. Worth
noting is the $10,000 limit is identical for singles and couples,
imposing a sizeable marriage penalty. As demonstrated earlier in this
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testimony, home size--and value--correlates with family size.
NAHB believes Congress must revisit the current limits on the SALT
deduction. For high-cost as well as high-tax States, the $10,000
deduction limit effectively increases the ongoing costs of owning a
home by denying homeowners a full deduction of their property and other
State and local taxes. Under the principle that taxes paid to State and
local governments should not be taxed as income by the Federal
Government, NAHB supports the elimination of the SALT deduction cap.
home equity deduction
Prior to 2018, home owners we able to deduct interest allocable to
up to $100,000 of home equity loan debt. This deduction was separate
from the mortgage interest deduction. Under the Tax Cuts and Jobs Act,
this separate deduction was temporarily eliminated. Under current law,
the deduction is reinstated after December 31, 2025.
Home equity loans are defined as mortgages that are either used for
purchase, construction, or improvement purposes or as a means to access
equity. The type of use of the home equity loan is important in the
rules for the Alternative Minimum Tax. In general, deductions for
mortgage interest may be claimed against AMT taxable income. However,
interest on home equity loans not used for home improvement purposes
may not be claimed against AMT tax liability.
Homeowners may continue to deduct home equity debt if it is used to
substantially improve an eligible home and the total amount of mortgage
and home equity debt does not exceed $750,000.\30\ However, with
inflationary pressures--building material prices are up 19 percent year
over year--and the lowering of the MID acquisition debt cap, alongside
a lack of inflation adjustment, is placing pressure on homeowners
seeking to improve their properties. Absent enactment of a credit to
replace the MID, NAHB urges Congress to restore the separate $100,000
home equity deduction immediately, or otherwise increase the
acquisition debt cap for the MID to better enable home owners to make
substantial improvements to their home.
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\30\ https://www.irs.gov/newsroom/interest-on-home-equity-loans-
often-still-deductible-under-new-law.
According to the 2009 American Housing Survey, half of all home
equity loans are used for remodeling purposes. Remodeling is, of
course, another form of housing investment which creates jobs and
improves the Nation's housing stock, particularly with respect to
energy efficiency. Disallowing a deduction for interest for home
remodeling provides a disincentive for home owners to improve the
Nation's existing housing stock and hurts job creation in the
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remodeling industry.
There is no data that indicates what the remaining half of home
equity loans are used for, but anecdotal evidence suggests that those
purposes include college expenses, health emergencies and some
consumption purposes.
Remodeling and home improvement are important economic activities
for a Nation with an aging housing stock. A 2019 data analysis of
remodeling expenditures by ZIP code aligns in many cases with areas of
the country with older housing stock.\31\ Remodeling also plays a key
role as the home owners age. From survey data NAHB conducted in 2018,
interest in remodeling to enable aging-in-place is growing and a
growing share of remodelers are focusing on this market.\32\ Remodeling
also has positive economic effects. Every $100,000 in remodeling
expenditures creates 0.89 full-time equivalent jobs and generates
$42,383 in taxes according to NAHB estimates.\33\
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\31\ https://eyeonhousing.org/2019/05/just-released-nahb-
remodeling-by-zip-code-estimates-for-2019/.
\32\ https://eyeonhousing.org/2019/05/remodeling-to-age-in-place-
remains-strong-still-mostly-for-older-homeowners/.
\33\ https://www.nahb.org/news-and-economics/housing-economics/
housings-economic-impact/impact-of-home-building-and-remodeling-on-the-
us-economy.
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capital gains exclusion
Brief History of the Capital Gains Exclusion
Prior to 1997, capital gain due to sale of a principal residence
was governed by a complicated set of rollover and exclusion rules.
The Revenue Act of 1951 allowed a taxpayer to ``roll over'' the
capital gains received from the sale of a principal residence if,
within 1 year, the taxpayer used the gain to acquire a new residence of
equal or greater value. The rollover period was later extended to 18
months under the Tax Reduction Act of 1975 and to 24 months in the
Economic Recovery Tax Act of 1981. Thus, no capital gains taxes were
generated until a homeowner purchased a principal residence of smaller
value than their previously owned residence or ceased to be an owner of
a principal residence.
The Revenue Act of 1964 introduced the first exclusion of capital
gains arising from the sale of a principal residence. Under this law,
taxpayers 65 years or older could exclude up to $20,000 in capital
gains if they owned the house for at least 8 years and lived in the
home for at least 5. The Tax Reform Act of 1976 later increased this
exclusion to $35,000.
The Revenue Act of 1978 made a series of additional changes to the
tax treatment of capital gains on the sale of principal residence. It
lowered the minimum eligible age for the gains exclusion from 65 to 55
and increased the exclusion amount to $100,000. It also allowed a
taxpayer to elect a one-time capital gains exclusion on the sale of a
principal residence as long as the taxpayer lived in the home for 3 of
the last 5 years. The Economic Recovery Tax Act of 1981 increased the
$100,000 exclusion to $125,000.
Simplification Arrives: The Changes of 1997
The Taxpayer Relief Act of 1997 vastly simplified the complicated
rollover and gains exclusion rules by repealing them and starting over.
In their place, Congress allowed a taxpayer to exclude up to $250,000
($500,000 if married filing a joint return) of gain realized on the
sale or exchange of a principal residence. The exclusion could be
claimed no more than once every 2 years. To be eligible for the
exclusion, a taxpayer must have owned the residence and occupied it as
a principal residence for at least 2 of the 5 years prior to the sale
or exchange.
These changes represented a significant improvement over what was,
according to the Joint Committee on Taxation, ``among the most complex
tasks faced by a typical taxpayer.''\34\ As Joint Tax noted, despite
the fact that most homeowners never paid tax on the sale of their
principal residence due to the previous rollover and exclusion roll
rule, it was necessary to keep detailed records of both purchase and
sales transactions, but also remodeling expenditures in order to
accurately calculate the tax basis of their home. Adding complexity to
this recordkeeping requirement was separating expenditures for repair
and improvement that added basis to the home and those that did not.
Finally, the deferral of gain based on purchasing a more expensive home
as a homeowner moved through their lifecycle was also inefficient in
that it may have deterred some home owners from moving from high-cost
to low-cost areas.
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\34\ ``General Explanation of Tax Legislation Enacted in 1997,''
Joint Committee on Taxation, December 17, 1997, JCS-23-97).
Congress has adopted one subsequent change that was included in the
Housing and Economic Recovery Act of 2008 (HERA) to prevent speculators
from abusing the capital gains exclusion. The 1997 reforms established
the ``two-of-five'' test that defined a principal residence as one
where a homeowner had used the home as a primary residence for 2 years
of the 5-year window prior to sale. This created a scenario whereby an
owner of a residence could hold the property for a long period of time,
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reside in it for 2 years, and then claim the gain exclusion.
While this taxpayer may have owned the residence, they were most
likely using it as a rental property for the majority of the years of
ownership. This ``gaming'' of the system was inconsistent with the
spirit of the law, which had a focus on principal residence ownership.
NAHB supported the fix Congress passed to prevent a taxpayer from
excluding the gain earned during periods of nonqualified use. The HERA
change effectively shut down the ability of speculators to use the gain
exclusion while protecting the 1997 enacted reduced recordkeeping and
calculation requirements.
Impacts From Eliminating the Gains Exclusion
Removing or otherwise weakening the gain exclusion for the sale of
a principal residence would have two strongly negative effects for
existing homeowners. First, it would lay a direct and unexpected tax
bill on homeowners who expected to use housing equity as a source of
retirement wealth. Second, weakening the gain exclusion would reduce
demand for housing by increasing the lifetime tax burden on principal
residences. A reduction in demand would push housing prices down,
thereby inflicting a windfall loss on existing homeowners. Of course,
since a significant share of homeowner wealth is due to housing equity,
eliminating the gains exclusion would have far-reaching consequences.
It is also worthwhile to note the limitations on claiming a tax
loss from the sale of a principal residence. In general, a loss
incurred on the sale of a personal residence is a nondeductible
personal loss for income tax purposes. This rule is different than
losses for the sale or exchange of a financial investment for which the
loss can be deducted against capital gains income.
Overall, it is also important to remember that there are various--
and sometimes differing--tax benefits and burdens that are levied on
investments, both housing and financial. Analysts debating Federal tax
policy often ignore the State and local government tax burden placed on
housing via property tax. Such tax on property value differs from
income tax in that the tax is levied on the value of the asset rather
than a flow of net income. While housing receives some unique benefits
in the tax code, like the capital gains exclusion, housing also faces a
tax burden unlike other investments.
With a minimum 2-year ownership period, the requirement that the
home be used as a principal residence, and the closing of the second
home loophole in 2008, the gains exclusion is targeted in a manner
where real estate speculators or investors seeking a tax shelter will
find no benefit. This is a tax benefit aimed exclusively at long-term
owners of a principal residence. As a home is typically the largest
source of household wealth, the home has become a retirement vehicle
for many Americans. In some ways, the capital gains exclusion functions
much like a Roth IRA, where the retirement gains are also completely
excluded from the taxpayer's income.
While NAHB strongly supports retaining the gains exclusion, we also
note this is another tax provision that is not indexed for inflation.
Since the simplified gains exclusion was enacted in 1997, the lack of
an inflation adjustment has eroded the value of this tax benefit
significantly. In 2022 dollars, the original $250,000 limit would be
equal to approximately $435,000.\35\ Recent gains for home prices mean
that a growing number of homeowners may lose the tax simplification
that this provision is intended to provide. Indeed, over the last
decade, Case-Shiller home price data indicates a gain of 117 percent
for home values. Accordingly, NAHB encourages Congress to index the
gains exclusion to inflation moving forward.
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\35\ Bureau of Labor Statistics CPI Inflation Calculator. $250,000
in January 1998 equates to $434,944 in January 2022, http://
www.bls.gov/data/inflation_calculator.htm.
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completed contract rules
Brief History of the Rules
Under current law, a long-term contract is defined as a building,
installation, construction, or manufacturing contract that is not
completed by the end of the taxable year in which it is entered.
Prior to the changes made in the Tax Reform Act of 1986, taxpayers
could generally elect to account for income and expenses attributable
to long-term contracts under the percentage of completion method or the
completed contract method. Under the completed contract method, the
gross contract price is included in income in the taxable year in which
the contract is completed. Under the percentage of completion method,
income is taxed according to the percentage of the contract completed
during each taxable year.
Certain other limitations and rules applied, and there were
additional rules for ``extended period'' long-term contracts--contracts
not expected to be completed within 24 months. An exception to these
``extended period'' rules was provided for contracts for the
construction of real property if the contract was expected to be
completed within 3 years, or if the contractor's average gross receipts
for the previous 3 years did not exceed $25 million.\36\
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\36\ ``General Explanation of the Tax Reform Act of 1986,''
published by the Joint Committee on Taxation (JCS-10-87), pp. 524-526.
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Changes in the Tax Reform Act of 1986
Congress believed that the completed contract method permitted an
``unwarranted deferral of the income from those contracts.''\37\
Specifically, the Joint Committee on Taxation reported to Congress that
certain large defense contractors had negative tax rates due to net
operating loss carry forwards generated through use of the completed
contract method. In response, the Tax Reform Act of 1986 adopted a
modified percentage of completion method that would apply to all long-
term contracts.
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\37\ Ibid, pg. 527.
The Act did include a modest exception for small construction
contracts. Contracts for the construction or improvement of real
property, if the contract is expected to be completed within 2 years,
could be accounted for under the previous completed contract rules.
However, the exemption was limited to taxpayers whose average gross
receipts in the previous 3 tax years fell below $10 million.
Unintended Impacts on New Home Construction and the Home Construction
Contract Exemption
Congress' intent in changing the completed contract rules was aimed
largely at defense contractors who were deferring income taxes on
projects that had a multiyear contract, such as during the lengthy
construction period for an aircraft carrier. Defense contractors
generally received substantial progress payments from the government
and taxing these types of contracts under the percentage of completion
method is appropriate. In enacting the Tax Reform Act of 1986, Congress
also attempted to ensure that residential construction was largely
unaffected by these changes, as seen by the inclusion of the exception
for small construction contracts. At the time, home builders largely
believed these changes did not impact them because their agreements
with their customers were viewed as sales contracts, not construction
contracts.
However, in 1988, the IRS released Advance Notice 88-66, which
would have adversely affected the operations of home builders. NAHB
realized at this time that the protections Congress included through
the exemption for small construction contracts fell short. Prior to
this notice, residential real estate developers took the position that
the typical agreements of sale entered for the sale of a new home were
not ``construction contracts'' subject to the accounting rules under
section 460.
Home sales agreements differed considerably from a typical
construction contract, particularly when compared to the contracts of a
defense contractor. A home sales agreement involves a developer
agreeing to sell the home to the buyer in the future, with the
developer retaining title to the property and bearing all economic
risks until closing, with no progress payments, and typically only
backed by a small deposit. Builders normally do not realize any profit
until closing, which occurs after the home is constructed.
The IRS was proposing to tax home builders on income they had not
yet received. Due to the length of home construction, it is common for
a new home to straddle 2 tax years. Although home builders viewed these
agreements as contracts of sale rather than as construction contracts
as defined by section 460, the IRS Advance Notice revealed that the
government viewed these sales contracts as long-term construction
contracts subject to the new accounting rules. This change would mean
that home builders would need to significantly alter their business
model.
Although buyers put down a deposit, the deposit is generally kept
in an escrow account and cannot be used to cover construction costs or
tax payments. Moreover, unlike with defense contracts, progress
payments are not typical because most homes are financed by a mortgage
at closing. If these homes were subjected to the new accounting rules,
most builders are very small businesses, so they would be forced to
finance the tax payments through a construction loan, which would
increase the cost of home construction for the buyer.
The proposed changes would have caused significant cash-flow
problems for home builders and imposed a larger barrier for smaller
homebuilders who lack the financial means to cover the tax payments. In
response, Congress included relief in the conference report for the
Technical and Miscellaneous Revenue Act of 1988 by clarifying in
section 460(e) that ``home construction contracts'' were not subject to
the percentage of completion accounting methods. The conference report
describes a home construction contract as one where ``80 percent or
more of the estimated total costs to be incurred under the contract are
reasonably expected to be attributable to the building, construction,
reconstruction, or rehabilitation of, or improvements to real property
directly related to and located on the site of, dwelling units in a
building with four or fewer dwelling units.''\38\
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\38\ H.R. Conf. Rep. No. 100-1104, pg. 118.
NAHB believes that section 460(e) is consistent with both
Congress's intent in 1986 to shield the residential construction
industry but also with the unique contractual agreements used for home
construction. This is a case where a broad definition of
``construction'' resulted in unintended consequences that were
potentially harmful to home builders and buyers alike. NAHB believes
that it did not make sense to apply an accounting method to home
builders that was really targeted to address other tax problems, and
that same rationale continues to support maintaining section 460(e).
multifamily rental tax policies
The LIHTC Is a Success Story, but Need Exceeds Resources
The Low-Income Housing Tax Credit (LIHTC) was created during the
Reagan administration as part of the Tax Reform Act of 1986 as a more
effective mechanism to produce affordable rental housing. It is the
most successful affordable rental housing production program in U.S.
history. Since its inception, the LIHTC has produced and financed more
than 3.5 million affordable apartments. As LIHTC properties must
generally remain affordable for 30 years or longer, they provide long-
term rent stability for low-income households around the country. But
the demand for affordable housing is acute and exceeds the availability
of financing through the LIHTC program.
The LIHTC is a unique private-public partnership. The benefits of
this structure are evident in the quality of the projects. Its public-
private partnership model is one that frankly should be replicated in
other government programs. When a builder starts a LIHTC project, the
investors and builder assume all the risk. If the project fails, the
taxpayer is protected, as the IRS can and will reclaim the tax credits.
Since the investors cannot claim the credits until after the project is
placed in service, it is the rare public program where the taxpayer
gets what they are paying for, or the taxpayer does not pay.
A key component to the LIHTC's success is the flexibility the State
agencies have to target specific types of affordable housing
developments. For example, a State with a large population of seniors
may offer a developer bonus points on an application for focusing on
senior housing. Other targeted projects include assisted living; family
housing; homeless; and housing for the disabled. This flexibility
allows each State to determine what types of affordable housing are
best suited to the demographics of their State, rather than applying a
single, national standard. Ultimately, however, a lot of needs are not
being met as demand simply outstrips the availability of credits.
According to the National Council of State Housing Agencies
(NCSHA), State housing finance agencies generally receive more than
$2.5 in requests for every $1 in LIHTCs available. In 2020, State
agencies received applications for $2,782,533,692 in credits. Total
allocations were $1,120,921,542.
But this does not tell the whole story. The application process is
expensive, and experienced developers will not submit applications for
viable projects when there are inadequate resources to support it. So
there is a shadow demand for credits not reflected in the above data.
Nationally, demand varies somewhat from year to year but generally
remains high. It is useful to compare the 2020 national numbers against
2008. 2008 was the height of the financial crisis, and multifamily
development was at a low point. Many traditional LIHTC project
investors were not investing, which made putting together deals much
more challenging. Nationally, there were applications for
$1,873,311,018 in credits. Credits allocated were $939,924,853.\39\
Even in one of the most challenging times for real estate development,
demand was still double the amount of available credits. We can see
over several years and in different economic environments, demand for
tax credits remained steady at double or more of the available credits.
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\39\ State HFA Factbook: 2008 NCSHA Annual Survey Results, pg. 92.
LIHTC development remains stable because the need for affordable
housing is significant. Consistent demand for credits also reflects the
advantage of creating this credit in the tax code. Investors have
confidence in the predictability of the tax code, which allows LIHTC
developments to continue even during economic downturns. The LIHTC
enables a fairly constant supply of affordable housing, as well as a
financing mechanism that ensures long-term operation of affordable
housing. In fact, LIHTC tax credit projects outperform the rest of the
multifamily housing sector in one key measure: the annualized
foreclosure rate. This rate is less than one-tenth of a percent \40\
and a third of the rate for other multifamily properties. The success
of these projects partially reflects the ever-present threat that the
government can recapture tax credits if the project fails.
---------------------------------------------------------------------------
\40\ ``The Low-Income Housing Tax Credit: Assessment of Program
Performance and Comparison to Other Federal Affordable Rental Housing
Subsidies,'' by Novogradac and Company, LLP, 2011, pg. 4, http://
www.novoco.com/products/special_reports/Novogradac_HAG_study_2011.
pdf.
To start meeting the growing and significant demand for affordable
rental housing, we must increase resources supporting production, which
is why we support the Affordable Housing Credit Improvement Act (H.R.
2573). Among other key provisions, H.R. 2573 takes a significant and
needed step to boost supply by increasing LIHTC allocations by 50
percent. Estimates suggest enacting H.R. 2573 would result in up to
2,015,000 additional LIHTC units.\41\
---------------------------------------------------------------------------
\41\ https://static1.squarespace.com/static/
566ee654bfe8736211c559eb/t/607763314b628a205aa
010a4/1618436913622/ACTION-NATIONAL-2021.pdf.
Failure to take action now will only deepen the crisis. Rental
housing demand remains solid, and more housing is needed to help
address growing affordability challenges. Absent new supply, this
demand will increase rents and worsen existing affordability issues.
net investment income tax--adding taxes to rising rents
The Net Investment Income Tax (NIIT) is a 3.8-percent surtax on
income such as capital gains, interest, rental and royalty income, and
dividends. When the NIIT was enacted as part of the Affordable Care
Act, Congress explicitly limited its applicability to passive
investment income.
Proposals in Build Back Better, and recently reported to be under
consideration in the Senate, would expand the NIIT to include active
investment income. This would have negative consequences, particularly
for renters.
Multifamily property owners are facing the same financial stresses
as any homeowner. Operating costs are rising. Higher interest rates
increase development and rehabilitation costs. Rising real estate
values often translate into higher tax appraisals resulting in higher
property tax bills. Some multifamily property owners are reporting
significant increases in insurance rates as insurers adjust to reflect
the increased cost of construction, should there be a major event
requiring reconstruction. Along with ongoing demand for rental housing,
these inflationary pressures are translating into higher rents.
Expanding the NIIT to include active investments has the same
financial effect on property owners as increasing operating costs. If
Congress moves forward with this proposal, property owners will have no
choice by to pass on some, if not all, of the additional tax burden to
their tenants.
With home prices and rents rising even faster than inflation,
rising interest rates, and a growing scarcity of both entry-level
owner-occupied housing as well as affordable rental units, Americans
are being squeezed hard. Rent inflation increased in June at the
fastest pace since 1986.
To solve our housing affordability crisis, Congress should be
removing barriers, not enacting new ones. NAHB strongly recommends
against expanding the NIIT to include active investment income.
Carried Interest
The taxation of a capital gain due to a carried interest is an
important issue for the real estate industry and particularly for the
multifamily housing sector, both market-rate rental and Low-Income
Housing Tax Credit. Under present law, a capital gain classified as a
carried interest is taxed like any other capital gain. Carried interest
has come under attack for how it is used by the hedge fund industry,
but broad attacks on carried interest ignore the key role it plays in
real estate development.
The use of partnerships and other pass-through entities is common
in the home building industry and the construction sector generally. In
a common arrangement, a builder/developer performs the role of the
general partner and outside investors act as limited partners, who
provide much of the initial equity financing. Typically, the general
partner receives a developer's fee (and possibly subsequent fees for
owning and operating the property) and the limited partners receive a
specified rate of return on their investment. Any residual profits are
split between the multifamily builder/developer/property owner and the
investors as defined by the partnership agreement. Of course, the
particulars differ depending on the nature of the project, the types of
developers, and the role of outside investors.
In many cases, the developer's share of the residual profit, if it
is realized (uncertain at the time of the deal), is classified as a
``carried interest,'' which is an allocation of profit that as a share
of total profit exceeds the share of the developer's initial equity
investment in the project.\42\ The carry can be ordinary income or
capital gain, but the current policy debate is limited to a carried
interest that is due to a capital gain at the partnership level.
Carried interest that is paid as ordinary income is unaffected by the
proposals being debated in Congress. Capital gain typically arises in
such arrangements through the sale of a tangible, depreciable asset
that is held for more than 1 year. For example, this situation would
include a building that was constructed, owned and operated for a
period of time and then sold to other investors.
---------------------------------------------------------------------------
\42\ Note that technically this definition describes both promoted
and carried interests. A ``promote'' is often used to refer to any
share of profit allocation greater than the initial equity stake, and a
``carry'' is a type of promote for which there is little or no equity
stake. However, in the current debate, the term ``carried interest''
now captures all of these scenarios.
Table 1 illustrates this in more detail for a hypothetical
partnership with $100 million in initial equity financing ($95 million
from outside interests, and $5 million from the home builder), a 10-
percent preferred return for the limited partners, and a 50-percent-50-
percent division of residual profit. Under this example, the
multifamily developer's capital gain income is a carried interest
(portion in excess of 5 percent--the initial equity stake) and would be
---------------------------------------------------------------------------
subject to additional tax under existing proposals.
Table 1: Illustration of Partnership Income Distributions and Tax Consequences
----------------------------------------------------------------------------------------------------------------
Partnership Home Builder: Outside Finance:
Level General Partner Share Limited Partners Share
----------------------------------------------------------------------------------------------------------------
Equity Invested $100.00 $5.00 5.00% $96.00 95.00%
================================================================================================================
Capital Gains Income First $9.50 $0.00 0.00% $9.50 100.00%
Distribution
Residual Capital Gains $10.50 $5.25 50.00% $5.25 50.00%
Total Return $20.00 $5.25 26.25% $14.75 73.75%
================================================================================================================
Carried Interest Test under H.R. 26.25% > 5% 73.75% > 95%
4213
Carried Interest Yes No
================================================================================================================
Tax Rate under Present Law 15% 15%
Taxes Paid under Present Law $0.7875 $2.2125
================================================================================================================
Tax Rate under Proposal 35% 15%
Taxes Paid under Proposal $1.6375 $2.2125
================================================================================================================
Difference in Taxes Paid $0.8500 $0.0000
----------------------------------------------------------------------------------------------------------------
Assumptions:
Dollar amounts in millions.
Project yields 20 percent return over time period.
All income is capital gains at partnership level.
LPs receive first 10 percent return.
Residual gains beyond first 10 percent are split 50 percent each to GP and LPs.
Partners face ordinary income tax rate of 35 percent.
Putting aside the tax issues, the carried interest in the above
multifamily development example serves two important economic purposes.
First, it provides an incentive for the multifamily developer and
property owner to control costs and operate the property efficiently in
order to generate a profit for the outside investors. This incentive
makes the investment more attractive for investors, helping to attract
investment for multifamily projects, particularly those in higher risk
environments, such as economically distressed areas.
Second, the carried interest transfers business risks associated
with the development project to the multifamily builder and owner, who
may be more familiar with market conditions and in better position to
manage the risks. These risks include changes in administrative
expenses, local regulations, and of course local market conditions.
Further, a multifamily developer may assume additional risk by making
additional guarantees to the outside investors. For example, the
developer can guarantee the completion of the project, or the servicing
of debt used to finance the project. Carried interest allows
multifamily builders to be compensated for making these guarantees and
assuming the risks. Hence, partnerships with carried interest
mechanisms are excellent financial arrangements for allowing
multifamily developers and outside investors to share business risks
efficiently.
Increasing the tax on carried interest for the real estate sector
also results in a transfer of tax revenue from State and local
governments to the Federal Government by reducing the value of
multifamily investments, thereby lowering property tax collections at
the local level.\43\ Based on proposals considered by Congress in 2010
which would tax carried interest as ordinary income, NAHB estimated
that the total amount of property taxes lost to State and local
governments for the real estate sector would be approximately $1.2
billion per year.\44\ Given that the Federal revenue estimate for the
carried interest proposal, at that time, was $24.6 billion, this $12
billion 10-year estimate demonstrates that the proposal generates a
significant transfer of tax revenues from State and local governments
to the Federal Government.
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\43\ For more detail on how NAHB calculated the impacts, see:
http://www.nahb.org/
generic.aspx?sectionID=1081&genericContentID=131457#top2.
\44\ NAHB's analysis was based on H.R. 4213 in the 111th Congress.
NAHB supports the current carried interest tax rules as they apply
to commercial and residential real estate. Should Congress decide to
make changes to current law, it is absolutely essential that the
transitional rules include a grandfathering provision for current
contracts. As many multifamily projects are held for years before a
gain is realized, a sudden shift in tax policy will have a significant
and negative impact on real estate.
Depreciation
Rental property can be depreciated on an accelerated timeframe over
a period of 27.5 years, versus a 39-year depreciation schedule for
commercial real estate. In addition, individual components can be
depreciated under various, shorter time frames through the use of cost
segregation rules.
Maintaining a reasonable depreciation period for rental housing is
critical. If the period is too long, it will increase costs and make it
harder to develop rental housing. Changes to the depreciation schedule
will impact the financial viability of existing multifamily buildings,
which could result in foreclosures and price declines. Depreciation is
also a key to attracting outside investors.
For these reasons, NAHB opposes changes to the depreciation rules
that would extend the depreciation period of property associated with
residential rental property. It is also worth noting that while
Congress has enacted and continues to debate the value of various
expensing proposals (e.g., bonus depreciation), such rules typically
exclude structures such as apartment buildings (property with more than
20 years of economic life).
conclusion
NAHB is an organization that represents all facets of the
residential construction industry, including for-sale builders of
housing, multifamily developers, remodelers, manufacturers, and other
associate members. As such, NAHB defends housing choice. While home
ownership offers communities and households numerous benefits, it is
important to recognize that for every family there is a time to rent
and a time to own a home.
For these reasons, NAHB also supports policies that promote a
healthy rental housing sector, including support for the Low-Income
Housing Tax Credit, which was created as part of the Tax Reform Act of
1986 and has become a successful
public-private partnership that assists in the development of
affordable housing.
NAHB also recognizes there are policies that need to be modernized
to reflect changes in the tax code, including the mortgage interest
deduction. In the next few years, many of the provisions enacted in the
Tax Cuts and Jobs Act will expire. This presents an opportunity to
refocus the home-ownership tax incentives so that the benefit flows to
lower and middle-class families, making home ownership more accessible.
And as owning a home is a significant means for savings for most
homeowners, the capital gains exclusion protects that investment, but
the value of this provisions is eroding due to inflation. We encourage
Congress to remedy this.
Without meaningful home-ownership tax incentives, NAHB believes
that disparity in economic income will increase, and the middle class
would continue to shrink. Home ownership is the major path to wealth
for the middle class. We believe that any policy change that makes it
harder to buy a home--or delays the purchase of the home until an older
age--will have significant long-term impacts on household wealth
accumulation and the makeup of the middle class as a whole.
With home prices and rents rising even faster than inflation, and a
growing scarcity of entry-level owner-occupied housing along with
affordable rental units, and rising interest rates, Americans are being
squeezed hard. National home prices are growing at an unsustainable
pace, reaching an all-time high seasonally adjusted annual growth rate
of 28.2 percent.\45\ Forty percent of core inflation is driven by
shelter costs.\46\ More cost increases are coming for this category,
which will add to inflationary forces in the months ahead. And
prospective home buyers are not only facing higher home prices, but
also higher carrying costs due to increases in interest rates.
---------------------------------------------------------------------------
\45\ https://eyeonhousing.org/2022/05/home-prices-surged-in-march/.
\46\ https://eyeonhousing.org/2022/06/inflation-hits-a-fresh-40-
year-high-in-may/.
Building material prices collectively are up 19.2 percent year-
over-year and 35.6 percent since the start of the pandemic.\47\ It
comes as no surprise that the median price of a newly built, single-
family home increased 19.7 percent year over year. This country was
already facing a housing affordability crisis, but the inflationary
effects of the building material price increases are squeezing home
buyers even more. A year ago, 23 percent of new home sales were priced
below $300,000. In May, it was only 10 percent.\48\
---------------------------------------------------------------------------
\47\ https://www.nahb.org/blog/2022/05/building-materials-up-more-
than-19-percent-year-over-year.
\48\ https://eyeonhousing.org/2022/06/new-home-sales-increase-in-
may-before-feds-june-rate-rise/.
Rising home prices and interest rates are taking a terrible toll on
housing affordability, with 87.5 million households--or roughly 69
percent of all U.S. households--unable to afford a new median-priced
home.\49\ In other words, seven out of 10 households lack the income to
qualify for a mortgage under standard underwriting criteria. We have
now seen housing affordability fall to a decade low.\50\
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\49\ https://www.nahb.org/News-and-Economics/Housing-Economics/
Housings-Economic-Impact/Households-Priced-Out-by-Higher-House-Prices-
and-Interest-Rates.
\50\ https://www.nahb.org/news-and-economics/press-releases/2022/
05/new-home-sales-down-on-rising-interest-rates-declining-
affordability.
While the Federal Reserve is attempting to quell inflation and
achieve a soft landing, history suggests that based on current rates of
inflation and labor market tightness, the probability of avoiding a
recession is small. NAHB is now forecasting a mild recession for the
coming quarters given current macro conditions. An argument can be made
that a recession took hold during the first half of 2020 (due to two
consecutive quarters of GDP decline), led by significant weakening
including 7 straight months of decline for home builder sentiment, as
measured by the NAHB/Wells Fargo Housing Market Index (HMI). In July,
the HMI fell 12 points to 55, which marks the lowest HMI reading since
June 2020 and the largest single-month drop in the history of the HMI,
except for the 42-point drop in April 2020.\51\
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\51\ https://eyeonhousing.org/2022/07/builder-confidence-plunges-
as-affordability-woes-mount/.
NAHB greatly appreciates the overwhelming bipartisan Senate support
to solve our affordable housing crisis. In this era of increasingly
partisan political discord, I hope we can all unite around this issue
and take action. Shelter is a basic human need and a leading source of
inflation. Through smart, effective policy, we have an opportunity to
do something that not only makes good economic sense but will also
---------------------------------------------------------------------------
uplift the lives of millions of Americans.
______
Questions Submitted for the Record to Jerry Konter
Questions Submitted by Hon. Chuck Grassley
Question. I called for a GAO report on the LIHTC that was released
on July 15, 2015. While the program is currently administered at the
Federal level by the Internal Revenue Service, this report recommended
giving the Department of Housing and Urban Development a joint
oversight role.
I have been a strong advocate of oversight as long as I have been
in Congress. It is impossible to conduct meaningful oversight without
consistent and available data on how programs preform, however I also
understand the need to limit unnecessary paperwork for those
participating in Federal programs.
What impact would giving HUD a partnering oversight role have on
the LIHTC program?
Answer. Administration of the Low-Income Housing Tax Credit is
overseen by two governmental agencies: federally by the Department of
Treasury, including the Internal Revenue Service, and at the State
level by the housing finance agencies (HFAs). Alongside the private
sector oversight that is a key pillar to the public-private partnership
driving the success of this program, LIHTC projects face intense
scrutiny and oversight. The success of these projects partially
reflects the ever-present threat that the government can recapture tax
credits if the project fails.
The July 15, 2015, GAO report included several recommendations that
are not supported by the evidence included in the report. For example,
the GAO report suggests that IRS oversight is lax because only seven
HFAs had been audited. But the GAO provided no evidence of widespread
noncompliance by HFAs. In fact, GAO's May 11, 2016, report on HFA
practices was largely positive. The IRS also stays in close contact
with HFAs on program administration, which may minimize the need for
formal audits.
Overall, the GAO views the HFAs as entities the IRS should regulate
rather than correctly viewing the relationship as a partnership, as
Congress has tasked both with oversight responsibilities. While the GAO
is overly focused on IRS audits of the HFAs, the IRS has properly
focused its LIHTC audit resources on individual taxpayers.
I do agree, however, with the need for improved data collection so
Congress can evaluate the effectiveness of the housing credit. Partly
in response to the GAO report, the IRS created a new database to better
collect information from Forms 8610, 8609, 8609-A, and 8823. HUD also
maintains the placed-in-service database and collects tenant data. To
the extent additional data collection is needed, NAHB supports doing
so, but not in a manner that is duplicative to the existing efforts,
which would likely be the outcome of giving HUD a larger oversight
role.
Treasury, IRS, and the HFAs have overseen LIHTC for over 25 years.
In our opinion, the GAO failed to make a convincing case of why the
existing oversight structure should be expanded to include HUD. As is
often the case with expanding the Federal Government, such a move will
likely increase administrative costs, slow down production, and provide
no meaningful benefit to the housing credit program.
Question. It is no secret that housing costs have been increasing
well before the current wave of inflation. While LIHTC has an impact on
bringing more affordable units onto the market, the varied housing
prices across the country indicate that local policies, such as zoning,
have possibly the greatest role in determining housing costs.
In addition, there are a wide variety of regulations at the Federal
level, including HUD regulations, that increase the price of new homes
and buildings.
As Professor Ohanian noted in his testimony, there are currently a
number of regulations that prevent affordable housing from being
constructed. In addition to the LIHTC, what other options would be
available to increase housing supply? How would these other options
compare to the LIHTC in cost effectiveness? What factors at the State
or local level are inhibiting the creation of affordable housing?
Answer. Regulatory burdens drive up the cost of housing. In June,
NAHB along with the National Multifamily Housing Council, released an
updated study on how much government regulation adds to the cost of
building new multifamily housing. The survey results found an average
of 40.6 percent of total development costs were attributed to complying
with regulations imposed by all levels of government.\1\ On the single-
family side, NAHB's research showed that regulation adds nearly $94,000
to the cost of a typical new home.\2\
---------------------------------------------------------------------------
\1\ https://eyeonhousing.org/2022/06/regulation-40-6-percent-of-
the-cost-of-multifamily-development/.
\2\ https://eyeonhousing.org/2021/05/regulation-now-accounts-for-
93870-of-the-average-new-home-price/.
Easing government regulation, particularly at the local level,
would bring some relief to the housing affordability crisis, especially
for middle-income households. It is not, however, the silver bullet
---------------------------------------------------------------------------
solution for our all our housing challenges.
Developers face a pricing floor driven by basic development costs
that they cannot control. Even with a significant reduction of the
regulatory burden, building new housing targeted to lower-income
Americans requires a subsidy. The 2011 study from the Harvard
University Joint Center on Housing Studies reiterates this point:
``[t]he rising costs of construction make it difficult to build new
housing for lower-income households without a subsidy.''\3\
---------------------------------------------------------------------------
\3\ ``America's Rental Housing: Meeting Challenges, Building on
Opportunities,'' Joint Center for Housing Studies of Harvard
University, 2011, pg. 23.
Although this study is more than a decade old, it continues to
offer a valuable data point. In 2009, the median asking rent for new
unfurnished apartments was $1,067; for minimum-wage workers, an
affordable monthly rent using the 30-
percent-of-income standard is just $377.\4\ The study calculated that
to develop new apartments with rents affordable to households with
incomes equivalent to the full-time minimum wage, the construction
costs would have to be 28 percent of the current average.\5\
---------------------------------------------------------------------------
\4\ Pages 23 and 21.
\5\ Page 24.
Even with meaningful regulatory changes, development costs will not
be reduced by 72 percent. In fact, development costs have substantially
increased since 2009. Building material prices collectively are up 19.2
percent year over year and 35.6 percent since the start of the
pandemic.\6\ To solve our housing affordability crisis, unnecessary
regulatory barriers to housing production must be reduced. But reducing
regulation is not an alternative to LIHTC, and demand for credits and
for affordable rental housing will still far exceed supply, even with a
substantial increase in credits. Without LIHTC, it will remain
financially infeasible to construct new affordable rental units
targeted to households earning no more than 60 percent of the area
median income.
---------------------------------------------------------------------------
\6\ https://www.nahb.org/blog/2022/05/building-materials-up-more-
than-19-percent-year-over-year.
______
Questions Submitted by Hon. Todd Young
Question. Thank you for the support you expressed during the
hearing for Senator Cantwell's and my Affordable Housing Credit
Improvement Act (S. 1136). I wanted to take this opportunity to solicit
your thoughts in greater detail regarding my bill and the Low-Income
Housing Tax Credit (LIHTC) generally.
Why do you support the Affordable Housing Credit Improvement Act
and how do you believe it will impact communities across the country?
Can you please share what it is that makes the Low-Income Housing
Tax Credit so effective in addressing the affordable housing crisis?
From a builder's perspective, can you please share how the increase
in building material prices affects LIHTC projects and why this makes
passing the Affordable Housing Credit Improvement Act so important?
Why do you support the Affordable Housing Credit Improvement Act
and how do you believe it will impact communities across the country?
Answer. To start meeting the growing and significant demand for
affordable rental housing, we must increase resources supporting
production, which is why we support the Affordable Housing Credit
Improvement Act (S. 1136).
The root of the problem is simple: we lack enough affordable
housing. The only effective, long-term solution is to increase supply.
Among other key provisions, S. 1136 takes a significant and needed step
to boost supply by increasing LIHTC allocations by 50 percent.
Estimates suggest enacting S. 1136 would result in up to 2,015,000
additional LIHTC units.\7\
---------------------------------------------------------------------------
\7\ https://static1.squarespace.com/static/
566ee654bfe8736211c559eb/t/607763314b628a205aa
010a4/1618436913622/ACTION-NATIONAL-2021.pdf.
S. 1136 would also enhance rural development opportunities. This
includes standardizing rural income limits as well as a basis boost for
projects serving extremely low-income tenants. The basis boost is an
important provision considering that rural residents' income tends to
be lower than in urban areas. The bill would also encourage development
in Native American communities, which are home to some of our most
---------------------------------------------------------------------------
vulnerable rural residents.
We also need to recognize the important role affordable housing
plays in our communities. There are meaningful social effects.
Affordable housing creates stability for tenants and their families.
LIHTC properties help to revitalize neighborhoods. Breaking the cycle
of poverty starts with access to stable and affordable housing.
The housing affordability crisis affects our economy as well. It
costs us jobs, productivity, and economic growth. Housing affordability
is critical in areas of the country experiencing robust economic
growth. As the number of open, unfilled jobs grows, the operation of
the housing market plays a key role in allowing individuals to relocate
to areas where jobs need to be filled. And if we don't address this
issue, where do our employers find their workers? How do we grow the
economy?
And for our fellow citizens who want to realize the American dream,
if they cannot afford to live where the economic opportunities are, we
are just creating an economic divide based on housing ``haves'' and
``have nots.''
Rental housing demand remains solid, and more housing is needed to
help address growing affordability challenges. Absent new supply, this
demand will increase rents and worsen existing affordability issues.
The Affordable Housing Credit Improvement Act would greatly enhance our
ability to increase the supply of affordable rental units, and I urge
the committee to mark up and favorably report out the bill.
Question. Can you please share what it is that makes the Low-Income
Housing Tax Credit so effective in addressing the affordable housing
crisis?
Answer. LIHTC is the most successful affordable rental housing
production program in U.S. history. Its public-private partnership
model is one that frankly should be replicated in other government
programs. When a developer starts a LIHTC project, the investors and
the developer assume all the risk. If the project fails, the taxpayer
is protected, as the IRS can and will reclaim the tax credits. Since
the investors cannot claim the credits until after the project is
placed in service, it is the rare public program where the taxpayer
gets what they are paying for, or the taxpayer does not pay.
And this is reflected in the data. The 2021 Affordable Housing
Credit Study released by CohnReznick reported a 0.57 percent cumulative
foreclosure rate, with only one new foreclosure reported in 2020.\8\
This is a significantly lower rate than market-rate projects and is a
testament to the scrutiny each LIHTC project undergoes.
---------------------------------------------------------------------------
\8\ https://www.cohnreznick.com/insights/cohnreznick-publishes-
major-study-housing-tax-credit-property-performance.
A key component to the LIHTC's success is the flexibility the State
agencies have to target specific types of affordable housing
developments. For example, a State with a large population of seniors
may offer a developer bonus points on an application for focusing on
senior housing. Other targeted projects include assisted living; family
housing; homeless; and housing for the disabled. This flexibility
allows each State to determine what types of affordable housing are
best suited to the demographics of their State, rather than applying a
single, national standard. Ultimately, however, a lot of needs are not
---------------------------------------------------------------------------
being met as demand simply outstrips the availability of credits.
LIHTC development remains stable because the need for affordable
housing is significant. Consistent demand for credits also reflects the
advantage of creating this credit in the tax code. Investors have
confidence in the predictability of the tax code, which allows LIHTC
developments to continue even during economic downturns. The LIHTC
enables a fairly constant supply of affordable housing, as well as a
financing mechanism that facilitates long-term operation.
Question. From a builder's perspective, can you please share how
the increase in building material prices affects LIHTC projects and why
this makes passing the Affordable Housing Credit Improvement Act so
important?
Answer. If we are going to solve our housing affordability crisis,
we must drive down the cost to build as well as the cost to own or
rent. Shelter-based inflation, which makes up 40 percent of the CPI,
increased in June at the fastest pace since 1986.\9\ While the Federal
Reserve is increasing interest rates via tighter monetary policy to
fight inflation, its policy tools are poorly situated for addressing
the housing element of the inflation challenge. Higher interest rates
increase the cost of buying a home (thus increasing demand for rental
housing and generating higher rents), while also increasing the cost of
financing single-family and multifamily construction, thereby
restricting housing supply. Rent inflation increased in June at the
fastest pace since 1986.
---------------------------------------------------------------------------
\9\ https://eyeonhousing.org/2022/07/june-inflation-reading-the-
highest-since-1981/.
Building material prices collectively are up 19.2 percent year over
year and 35.6 percent since the start of the pandemic.\10\ Updated with
the latest data since I presented my testimony, since the spring of
2020, lumber prices are up 75 percent; steel mill prices are up 120
percent; gypsum/drywall is up 40 percent; ready-mix concrete is up 12
percent; interior paint is up 33 percent and exterior paint is up 49
percent; aluminum is up 61 percent; and copper is up 57 percent.
---------------------------------------------------------------------------
\10\ https://www.nahb.org/blog/2022/05/building-materials-up-more-
than-19-percent-year-over-year.
This financial pressure is not only driving up development costs,
but it also further strains the limited resources of the LIHTC program.
LIHTC is a fixed resource. To maintain production with rising costs, we
need to increase resources. The program already took a 12.5 percent cut
at the end of last year. We need to restore that and increase funding,
which is what the Affordable Housing Improvement Act does and why we
---------------------------------------------------------------------------
support it.
Question. In May 2021, I reintroduced my Yes In My Back Yard
(YIMBY) Act with Senator Schatz to shine a light on discriminatory land
use policies, encourage localities to cut burdensome regulations, and
bring a new level of transparency to the community development process.
This bill would require Community Development Block Grant (CDBG)
recipients to go on the record with why they are not adopting specific
pro-affordability and anti-discriminatory housing policies.
Does the National Association of Home Builders support my Yes In My
Back Yard Act? Why or why not?
How would this bill increase housing stock across the country?
Answer. The housing affordability crisis is driven by lack of
supply. We need local governments to allow us to build the housing this
country needs. The YIMBY Act will encourage local governments to
examine their land development policies and eliminate barriers to
building affordable housing. NAHB strongly supports this bill.
In June, NAHB along with the National Multifamily Housing Council
released an updated study on how much government regulation adds to the
cost of building new multifamily housing. The survey results found an
average of 40.6 percent of total development costs were attributed to
complying with regulations imposed by all levels of government.\11\ On
the single-family side, NAHB's research showed that regulation adds
nearly $94,000 to the cost of a typical new home.\12\
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\11\ https://eyeonhousing.org/2022/06/regulation-40-6-percent-of-
the-cost-of-multifamily-development/.
\12\ https://eyeonhousing.org/2021/05/regulation-now-accounts-for-
93870-of-the-average-new-home-price/.
Rising home prices and interest rates are taking a terrible toll on
housing affordability, with 87.5 million households--or roughly 69
percent of all U.S. households--unable to afford a new median-priced
home.\13\ In other words, seven out of 10 households lack the income to
qualify for a mortgage under standard underwriting criteria. We have
now seen housing affordability fall to a decade low.\14\
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\13\ https://www.nahb.org/News-and-Economics/Housing-Economics/
Housings-Economic-Impact/Households-Priced-Out-by-Higher-House-Prices-
and-Interest-Rates.
\14\ https://www.nahb.org/news-and-economics/press-releases/2022/
05/new-home-sales-down-on-rising-interest-rates-declining-
affordability.
Home builders are not ignoring 70 percent of the marketplace--
development costs simply make it impossible to produce more affordable
offerings. The YIMBY Act will help us lower development costs, which
will enable home builders to produce more affordable housing. A year
ago, 23 percent of new home sales were priced below $300,000. In May,
it was only 10 percent.\15\ We have now seen housing affordability fall
to a decade-plus low.\16\ If we are going to solve our housing
affordability crisis, we must drive down the cost to build as well as
the cost to own or rent.
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\15\ https://eyeonhousing.org/2022/06/new-home-sales-increase-in-
may-before-feds-june-rate-rise/.
\16\ https://www.nahb.org/news-and-economics/press-releases/2022/
05/new-home-sales-down-on-rising-interest-rates-declining-
affordability.
Within NAHB, we often refer to the ``five Ls'' as shorthand for the
headwinds facing the industry: labor, lending, local regulatory
restrictions, lots, and lumber. Eliminating unnecessary regulations
alone will not solve the housing affordability crisis, but it is one
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the key policy solutions, which is why we support the YIMBY Act.
______
Prepared Statement of Lee E. Ohanian, Ph.D., Senior Fellow, Hoover
Institution, Stanford University; and Distinguished Professor of
Economics, University of California, Los Angeles
Chair Wyden, Ranking Member Crapo, and members of the Senate
Finance Committee, thank you for inviting me to testify at this hearing
on ``The Role of Tax Incentives in Affordable Housing.''
America's housing crisis is nearly 100 years old, dating back to
the 1920s when the average home price in Manhattan was over $1.2
million in inflation-adjusted dollars.\1\ In the last century, dozens,
and perhaps hundreds of Federal, State, and local agencies have been
created to deliver affordable housing, but affordability remains
elusive, particularly for low- and middle-income households. National
Association of Realtors data show that affordability has plummeted in
the last year, particularly in the western United States where the
median-priced home now requires over $100,000 of liquid assets for a
down payment and closing costs, and a household income exceeding
$100,000 annually to qualify for a conventional mortgage.\2\
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\1\ Nicholas, Tom and Anna Scherbina, 2013, ``Real Estate Prices
During the Roaring Twenties and the Great Depression,'' Real Estate
Economics, 41, no. 2, pp 278-309.
\2\ National Association of Realtors, ``Housing Affordability
Index,'' https://www.nar.realtor/research-and-statistics/housing-
statistics/housing-affordability-index.
Increasing housing affordability requires addressing two related
issues. We must expand housing supply and we must build new housing at
a much lower cost. There are key policy reforms that would make
considerable progress in advancing these goals. I focus on two areas
for policy responses: (1) increasing the use of manufactured housing,
which is much more cost efficient than traditionally built housing; and
(2) reforming the process of building affordable housing, as this has
become inordinately expensive in some States.
increase adoption of manufactured housing to lower building costs
Summary: Manufactured housing is 60 percent less expensive to build
per square than traditionally built housing, but regulations and
financing difficulties have significantly hampered adoption of these
homes. Tax incentives and regulatory reforms can significantly increase
affordability by expanding the use of manufactured housing to increase
U.S. housing supply.
The development of modern factory production made it possible for
virtually all Americans, not just those with high incomes, to buy
automobiles and other mass-produced durable goods. But modern
production methods are notably absent from our residential construction
industry, which builds homes in much the same way as they have always
been built, as described in an important recent study of manufactured
housing by James A. Schmitz, an economist at the Federal Reserve Bank
of Minneapolis.\3\ This means that residential construction costs are
much higher than they could be.
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\3\ Schmitz, James A. Jr., 2020, ``Solving the Housing Crisis Will
Require Fighting Monopolies in Construction,'' Federal Reserve Bank of
Minneapolis Working Paper No. 773.
The Bureau of Labor Statistics \4\ reports that worker productivity
(inflation-
adjusted output per worker) rose by only 11 percent between 1987 and
2016 in
single-family home construction. By comparison, BLS data show that
worker productivity in durable goods manufacturing industries rose by
about 150 percent over the same period. The cost savings enjoyed by
consumers of manufactured durable goods have evaded residential home
building because building practices have not adopted cost-saving
technological advances prevalent in manufacturing.
---------------------------------------------------------------------------
\4\ Bureau of Labor Statistics, ``Measuring Productivity Growth in
Construction,'' Monthly Labor Review, January 2018, pp. 1-15, https://
www.bls.gov/opub/mlr/2018/article/measuring-productivity-growth-in-
construction.htm.
The high cost of traditional home building has been documented
since at least 1937. A.C. Shire, the chief engineer of the Federal
Housing Administration, wrote at that time that ``In an age of large-
scale financing, power, and mass production, we have the anachronism
that the oldest and one of the largest of our industries . . . follows
practices developed in the early days of handiwork . . . is bogged
down by waste and inefficiency, [and] is unable to benefit by advancing
productive techniques in other fields.''\5\
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\5\ Schmitz, 2020, op. cit.
Manufactured homes are a much lower cost alternative to
traditionally built homes. Census data show that production costs are
about 60 percent lower than traditionally built homes.\6\ Because of
substantially lower costs, manufactured housing production grew
significantly, rising from 103,700 units built in 1960 (10 percent of
total single-family units) to 575,900 units in 1972 (60 percent of
total single-
family units).\7\ This growth led the Commerce Department to predict
about 800,000 manufactured units by 1980, but only about 220,000 units
were built that year.
---------------------------------------------------------------------------
\6\ Bureau of the Census, ``Cost Comparisons: New Manufactured
Homes and New Single Family Site-Built Homes,'' https://
www2.census.gov/programs-surveys/mhs/tables/2017/sitebuilt
vsmh.xls.
\7\ Schmitz, 2020, op. cit.
One factor depressing manufactured housing since that time of rapid
growth is a HUD requirement that manufactured homes be placed
permanently on a chassis.\8\ This requirement imposes a negative
aesthetic on the home, leading them to be known as ``mobile homes'' or
``trailers.'' The negative aesthetic of a home placed on a chassis has
often led local zoning ordinances to exclude manufacturing housing from
many neighborhoods. Manufactured homes typically are placed in ``mobile
home parks'' that are locally zoned for that purpose. This in turn
limits financing options, since the homes on chassis are considered
``mobile,'' which means they are financed by personal loans or chattel
loans which do not provide the homeowner with interest tax
deductibility.\9\
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\8\ U.S. Department of Housing and Urban Development, ``Frequently
Asked Questions About Manufactured Housing,'' https://www.hud.gov/
program_offices/housing/rmra/mhs/faqs.
\9\ Schmitz, 2020, op. cit.
Increasing manufactured housing would substantially improve
affordability, given their construction costs are 60 percent less per
square foot. Removing the HUD requirement that manufactured homes be
placed on a permanent chassis would considerably change the landscape
for these homes by making them aesthetically acceptable and broadening
the options available to finance these homes, including mortgage
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financing with interest deductibility.
A 2011 report by economists at the Center for Housing Research at
Virginia Polytechnic University, which was commissioned by HUD,
provides considerable detail on understanding the regulatory hurdles
facing this low-cost alternative to traditional housing, including the
permanent chassis requirement.\10\ This report's recommendations are
also very similar to those from President Reagan's Commission on
Housing, which produced a 1982 report documenting the cost advantages
of manufactured housing and the importance of removing regulatory
impediments so that manufactured homes were accessible in more
neighborhoods and could be eligible for traditional mortgage
financing.\11\
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\10\ Koebel, Theodore C. et al., 2011, ``Regulatory Barriers to
Manufactured Housing Placement in Urban Communities,'' https://
www.huduser.gov/portal/publications/affhsg/rb_mhpuc.html.
\11\ McKenna, William, 1982, ``The Report of the President's
Commission on Housing,'' Washington, DC, USGPO, https://
www.huduser.gov/Publications/pdf/HUD-2460.pdf.
The substantial cost advantages of leveraging modern production
techniques to produce housing are well known and have been discussed
within the Federal Government for at least 85 years. Expanding the use
of modern technologies to build housing is also consistent with
President Biden's recent housing proposals, which focus on rewarding
jurisdictions that reform land-use policies, deploying new financing
mechanisms, and working with the private sector to improve building
techniques and build more efficiently. Modifying local zoning rules
will be needed but reducing the chassis requirement should make a
significant difference in the acceptability of these homes.\12\
Creating specific programs that incentivize State and local agencies to
implement manufactured housing in the production of affordable housing
developments could significantly reduce costs and improve
affordability.
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\12\ The White House, May 16, 2022, Statements and Releases,
``President Biden Announces New Actions to Ease the Burden of Housing
Costs,'' https://www.whitehouse.gov/briefing-room/statements-releases/
2022/05/16/president-biden-announces-new-actions-to-ease-the-burden-of-
housing-costs.
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reducing the cost of building affordable (subsidized) housing
Summary: Affordable housing, which usually involves the use of the
Low-Income Housing Tax Credit (LIHTC), and sometimes other subsidies,
has become more expensive to build than market-rate housing in at least
some States. Studies show that high costs reflect both above market-
rate construction costs, and high indirect (soft) costs that are
related to regulatory and other requirements involved with subsidies.
Expanded collection of cost data, identifying best practices that can
be levered by all allocation agencies, and incentivizing jurisdictions
to become more efficient can make better use of taxpayer subsidies and
expand affordable housing supply.
Construction costs of affordable (subsidized) housing have
increased considerably, particularly in the western United States.\13\
In San Francisco, one affordable housing project is being renovated at
a cost of $1.226 million per unit. There are a total of 608 units
across seven projects in northern California identified in a recent Los
Angeles Times article costing over $1 million per unit.\14\ These cost
statistics are challenging to reconcile with the fact that the median
single-family California home, which includes a parcel of land and more
finished living space, can be purchased for about $325,000 less.\15\
While these statistics are from California, similar issues may be
impacting affordable housing construction in other States, and thus
California's experience of escalating costs may be more broadly
informative.
---------------------------------------------------------------------------
\13\ California Tax Credit Allocation Committee et al.,
``Construction Costs of Affordable Housing,'' https://
www.treasurer.ca.gov/ctcac/multistate-housing-costs.pdf.
\14\ Los Angeles Times, 2022, ``Affordable Housing in California
Now Routinely Tops $1 Million per Apartment,'' https://www.latimes.com/
homeless-housing/story/2022-06-20/california-affordable-housing-cost-1-
million-apartment.
\15\ California Association of Realtors, 2022, ``May Home Sales and
Price Report,'' https://www.car.org/en/aboutus/mediacenter/
newsreleases/2022releases/may2022sales.
A 2018 GAO study found extremely large cost disparities in
affordable housing construction across States, ranging from a minimum
of below $100,000 per unit in Texas to a maximum of $750,000 per unit
in California evaluating data from 2011-2015. They concluded that
better data collection to understand these cost differences is needed,
and that improved oversight of the use of subsidy funds should be
implemented.\16\
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\16\ Government Accountability Office, 2018, ``Low-Income Housing
Tax Credit: Improved Data and Oversight Would Strengthen Cost
Assessment and Fraud Risk Management,'' https://www.gao.gov/products/
gao-18-637.
The study found that only a few allocating agencies have
requirements to guard against misrepresentation of contractor costs,
which is a fraud risk. Although high-level cost certifications are
required from developers for LIHTC policies, the cost of multiple
contractors are combined in the certifications, but the IRS does not
require detailed certifications. Weaknesses in data quality were also
found by the GAO and some included inconsistencies in cost-related
variables and not including the full extent of indirect costs
associated with fees paid to syndicators acting as intermediaries
between project developers and investors that IRS requires be
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collected.
The GAO made some recommendations for the issues described above,
including designating a Federal agency to analyze LIHTC cost data,
having the IRS require contractor cost certificates, having the IRS and
other allocating agencies create more standardized cost data, and
having the IRS communicate to credit allocating agencies on how to
collect certain information.
The GAO also noted that ``Even without a designated Federal entity,
opportunities exist to advance oversight of development costs. In
particular, greater standardization of cost data would lay a foundation
for allocating agencies to enhance evaluation of cost drivers and cost-
management practices.''
The GAO also found financing inefficiencies, particularly related
to the fact that there are typically many lenders involved in these
projects, an average of six per project. UC Berkeley's Terner Center
for Housing Innovation estimates that each additional lender adds an
additional $6,400 in cost per unit.\17\ The Terner Center found other
cost drivers, including paying prevailing wage requirements, which they
found increased costs above market labor rates by $53,000 per unit, a
lack of government staff which delays approval, more stringent
environmental requirements and sustainability regulations that add
$17,000 per unit. They also found delays in approvals that increase
costs.
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\17\ Reid, Carolina, 2020, ``The Costs of Affordable Housing
Production: Insights from California's 9-Percent Low-Income Housing Tax
Credit Program,'' https://ternercenter.berkeley.edu/research-and-
policy/development-costs-lihtc-9-percent-california/.
Reducing reliance on prevailing wage requirements would not only
reduce costs, but one study found that such requirements limit
employment opportunities for minority workers.\18\
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\18\ Yurlov, Vlad, 2021, ``Why Is Affordable Housing So
Expensive?'', Cascade Policy Organization, https://cascadepolicy.org/
land-use/why-is-affordable-housing-so-expensive.
Lawsuits also delay affordable developments in California,
particularly lawsuits filed under the California Environmental Quality
Act.\19\ States should study the incidence of litigation against
development to identify any reforms that may be enacted to reduce such
lawsuits and/or speed up their resolutions. My previous research
identifies a large development in California in which plans were
submitted for approval in 1994, and lawsuits were not resolved until
around 2017, including lawsuits that were filed after the project had
been approved in 2012. Most of these lawsuits were filed under the
California Environmental Quality Act. To date, no homes have been
completed in this project, making it 28 years since the proposal was
first received by local government agencies.
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\19\ Ohanian op. cit.
I recommend that Congress revisit the GAO recommendations,
including standardization of cost data from agencies that are collected
and analyzed by a single Federal entity. Creating funding opportunities
that do not require so many funders can reduce costs and speed the
development and approval timeline. Best practices regarding approval
and funding sources should be identified and provided to all allocating
agencies. Providing incentives to do this would be consistent with
President Biden's recent guidelines to make housing more affordable.
Senate Bill 1136 and House Resolution 2573 is an important expansion of
the LHITC. Coupling S. 1136/H.R. 2573 with collecting and analyzing
cost data and incentivizing allocating agencies to improve efficiency
---------------------------------------------------------------------------
could have a significant impact on increasing affordability.
Restrictive zoning rules and other land-use regulations also impede
the development of new housing. Incentivizing State and local agencies
to expand the use of higher-density housing would reduce building costs
and place housing where it is most demanded. Reforming regulations that
limit urban boundaries, which are present in California, would also
expand housing where it is in most demand. My research identifies one
example in which it took about 40 years for a California city to
purchase undeveloped county land to expand its urban footprint. Homes
remain to be built.\20\
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\20\ Ohanian op. cit.
From this perspective, Senate Bill 1416, would be an important step
in collecting and analyzing data on how State and local agencies manage
their land use. S. 1416 would help these agencies identify and adopt
best practices that can increase housing supply where it is most
demanded, while at the same time maintain neighborhood qualities so
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that agencies can address the concerns of those who oppose development.
Thank you for this opportunity to testify to the committee on such
an important issue. American home affordability can be increased
substantially by incentivizing the adoption of low-cost production
techniques, improving efficiency in the building of subsidized housing,
and helping State and local agencies create building development
opportunities in areas that are in high demand. I welcome questions and
comments.
______
Questions Submitted for the Record to Lee E. Ohanian, Ph.D.
Questions Submitted by Hon. Robert P. Casey, Jr.
Question. Nonprofit housing developers fill valuable roles in
producing housing. However, you testified that in some places, units
cost up to a million dollars to develop and I have heard from some of
the non-profit developers in Pennsylvania that the LIHTC process takes
up to 2 years of pre-development work. Most developers do not get an
award their first year, meaning the whole process can take 3-4 years
and often involves hiring consultants to guide them. The process is
daunting and overwhelming and turns away even experienced developers
with expertise in managing accessible housing.
How can we streamline the LIHTC process to lower costs, shorten
delays, and better incentivize participation by small not-for-profit
developers?
Answer. I agree that it has indeed become challenging for non-
profit and small developers to compete within the LIHTC sphere,
particularly in recent years. HUD reports that the average scale of a
LIHTC project was about 34 units between 1987 and 1994, whereas the
average scale rose to 80.3 units between 2000 and 2019.
As project scale has increased, so has the complexity of the
planning, permitting, financing, and environmental approval processes
within LIHTC. As these soft costs have increased, this further
incentivizes even larger scale projects, so that developers can spread
the fixed component of these soft costs over a larger scale to help
keep the project economically feasible. This is becoming a vicious
circle that needs to be broken.
Participating in a LIHTC project is complex as well as complicated.
Novogradac, an accounting firm, produces an annual LIHTC guide that is
over 1,400 pages in length. The use of multiple financing agencies,
which is growing in frequency and scope as projects have become larger,
is viewed by many as increasing costs and delaying projects. LIHTC
complexity is further increased by the fact that some States have their
own LIHTC programs, and there are other housing subsidy programs at the
Federal, State, and local levels that become part of the overall
increasingly complex LIHTC equation.
We should make LIHTC less complex and less complicated so that we
reduce costs and make LIHTC more accessible to a broader set of
developers. An important first step is obtaining more data from LIHTC
projects so we can identify the priority areas that are creating drawn-
out and expensive projects, and that is increasing the complexity of
participating in the process.
Currently, we don't have the data needed to provide detailed and
specific reforms on how to do this. I recommend adopting the GAO
recommendations presented in their September 2018 report. The GAO
report expressed strong concerns about the cost of LIHTC projects and
how much these costs varied across LIHTC projects, sometimes across
projects in the same State. The GAO makes several common-sense
recommendations to create LIHTC cost databases. If the GAO
recommendations were adopted, I believe we could make considerable
progress in creating a simpler and more level LIHTC playing field that
would not be so cumbersome and difficult for non-profit developers to
navigate.
The GAO recommendations are a terrific place to start with the
process of developing a cost database that can help inform us as to how
to modify the LIHTC processes. We also should gather data on the length
of time it takes for different phases within LIHTC. Finally, we should
review the LIHTC application process to understand where we can make it
simpler.
With these data in place, we will be able to make well-informed
decisions on how to make LIHTC work better and more efficiently and
make it more accessible to a broader set of developers.
______
Question Submitted by Hon. Mike Crapo
Question. The issue of affordable housing supply was raised in the
hearing, with observations that, generally, low supply tends to
coincide with high prices for a given demand. Questions were raised
about how to generate increased affordable housing supply, and you made
observations about cost. Your observations suggested that the path to
higher supply is through lower costs, and one surefire way to lower
costs through gains in productivity in the production of housing.
Do you agree that in order to have increased supply of affordable
housing, ways must be found to lower production costs, including
through lowering costs associated with permitting, zoning requirements,
and the like?
Answer. I agree wholeheartedly that local land-use regulations,
including costly and time-consuming permitting processes and
restrictive zoning rules, substantially drive up the cost of housing
and create enormous inefficiencies in housing markets that in turn
burden millions of U.S. families.
My research shows that if local zoning regulations across the
United States were rolled back to the levels that prevailed in the
1990s, then U.S. real GDP would rise by $1 trillion due to lower
housing costs, which in turn would lead to higher productivity and a
more efficient allocation of workers in the most productive locations,
which presently are unaffordable for many. This includes highly
productive areas such as Silicon Valley in California, where the median
home price is currently around $1.8 million. Other studies of reforming
land use regulations reach similar conclusions.
The permitting process also drives up costs significantly. In
California, one planned development (Tejon Ranch proposed development)
that would ultimately be home to about 60,000 people had permit
applications filed in 1994. The development still has not seen one home
built due to chronic permitting delays and lawsuits. Lawsuit after
lawsuit, and hearing after hearing, have delayed this project for
nearly 30 years. While the Tejon Ranch project is not an LIHTC project,
this example highlights that States need to be held broadly more
accountable for building new housing and ensuring that the regulatory
process is sensible.
Policy reforms that streamline the permit approval process and
liberalize zoning rules are central for improving U.S. housing
affordability.
______
Questions Submitted by Hon. Chuck Grassley
Question. In 2018, the GAO released a report at my prompting. Among
its recommendations were to improve data collection for the LIHTC
program. Over a series of reports on the issue, they noted the
program's complexity and identified the need for more transparency.
The primary recommendation in this 2018 report was for Congress to
``consider designating a Federal agency to maintain and analyze LIHTC
cost data.'' To date, this recommendation has not been implemented.
As you noted in your testimony, better data collection and
dissemination would improve our understanding of cost differences
between states. What other analyses could be done if the
recommendations on data collection were implemented?
Answer. I agree strongly with your recommendations for improved
transparency in the LIHTC. My testimony concurs that the GAO
recommendations be adopted, as this information would provide much-
needed data that would in turn lead to the adoption of best practices
in implementing the LIHTC,
In addition to the important recommendations made by the GAO, there
are several other valuable analytics that could be produced that would
be natural extensions of the GAO recommendations. This includes
providing cost accounting for how much the many different steps and
procedure involved in LIHTC are increasing development and building
costs, including how the timeline of development and construction is
affected by LIHTC. I believe this could be done without overly
burdensome compliance reporting.
There is a general presumption that the large number of lenders
often involved in financing LIHTC projects adds considerably to project
cost, but data limitations make it difficult to quantify the higher
costs arising from having so many financing agencies involved. There is
also a presumption that requiring prevailing wages on LIHTC projects
drives up costs, but there is a lack of data on construction costs that
makes it difficult to quantify this factor.
I believe that reasonable and cost-effective reporting requirements
could be implemented without overly burdening reporting entities. Part
of this accounting should include that all LIHTC projects adopt
standardized accounting definitions and language so that direct
comparisons can be made across projects. Presently, it is very
difficult, and perhaps impossible, to make cost comparisons across
different locales. Having accurate and comparable information on key
cost items can help the LIHTC become an even more effective tool for
creating affordable housing.
Adopting the GAO recommendations is an excellent starting point for
improving the efficiency of the LIHTC. We all want LIHTC to help as
many people as possible, but we cannot achieve that goal without much
more information about costs, delays, and best practices.
Question. Another GAO report on the LIHTC I requested was released
on July 15, 2015. While the program is currently administered at the
Federal level by the Internal Revenue Service, this report recommended
giving the Department of Housing and Urban Development a joint
oversight role.
I have been a strong advocate of oversight as long as I have been
in Congress. It is impossible to conduct meaningful oversight without
consistent and available data on how programs perform, however I also
understand the need to limit unnecessary paperwork for those
participating in Federal programs.
What impact would giving HUD a partnering oversight role have on
the LIHTC program?
Answer. Implementing HUD oversight could be very effective in
improving the efficiency of the LIHTC. HUD is a natural agency to
conduct this oversight since one important component of HUD's mission
is to facilitate the creation of quality affordable housing for all.
Creating a highly focused oversight capacity within HUD to assess
LIHTC projects, particularly with an emphasis on cost, delays, fraud,
and abuse, is in my opinion a reasonable expansion of HUD's
responsibilities. Such a department within HUD would be staffed with
different specialists, including specialists in cost accounting,
auditing, and forensic accounting, and legal specialists. It would have
the potential to significantly improve the efficiency and effectiveness
of the LIHTC by increasing accountability, expanding data collection,
and improving the identification of problem areas within the LIHTC
program. The existence of such an agency would also incentivize
stakeholders within the LIHTC sphere, including developers, local
approval agencies, funding agencies, and others to improve their
relative performances.
Question. It is no secret that housing costs have been increasing
well before the current wave of inflation. While LIHTC has an impact on
bringing more affordable units onto the market, the varied housing
prices across the country indicate that local policies, such as zoning,
have possibly the greatest role in determining housing costs.
In addition, there are a wide variety of regulations at the Federal
level, including HUD regulations, that increase the price of new homes
and buildings.
As you noted in your testimony, there are currently a number of
regulations that prevent affordable housing from being constructed. In
addition to the LIHTC, what other options would be available to
increase housing supply? How would these other options compare to the
LIHTC in cost effectiveness? What factors at the State or local level
are inhibiting the creation of affordable housing?
Answer. There are indeed other policy changes at the Federal,
State, and local level that could significantly expand housing
affordability, and on a much wider scale than can be done with the
LIHTC. This includes liberalizing zoning regulations and reforming the
permitting process, both of which operate primarily at the local level,
and eliminating a HUD requirement that prevents the adoption of
manufactured housing in a much broader set of neighborhoods than is
currently available.
Local zoning rules and time-consuming and costly permitting
processes are driving up housing costs by raising building and
developer costs which in turn reduces housing supply. These cost and
supply issues are particularly acute in many of the most vibrant
economic locations in the country, including Southern California, San
Francisco, Silicon Valley, New York, and other metropolitan areas with
highly productive businesses that feature high-paying jobs. There is a
strong demand for workers in these locations, but extremely expensive
housing is driving a wedge between the businesses that wish to hire,
and the individuals who are seeking jobs.
My research finds that rolling back local zoning requirements back
to levels that prevailed in the 1990s would increase housing
affordability substantially and would raise U.S. GDP by over $1
trillion per year, with that amount growing each year at the overall
rate of economic growth. Other studies also conclude that zoning
substantially drives up housing costs and reduces economic growth.
Permitting delays are increasing costs considerably. This problem
is most endemic in high-income, metro areas such as New York, Los
Angeles, and San Francisco. To provide you with one example that shows
just how problematic this issue can, and has become, there is one
planned development about 40 miles outside of Los Angeles that would
create a new community of about 60,000 people. Permit applications were
filed in 1994. The Tejon Ranch development still has not seen one home
built due to chronic permitting delays and lawsuits. Lawsuit after
lawsuit, and hearing after hearing, have delayed this project for
nearly 30 years. While the project, named ``Tejon Ranch,'' is not a
LIHTC project, this extreme example of delays and chronic litigation
suggests that states need to be held broadly more accountable for
building new housing if they wish to compete for Federal tax subsidies.
An important reason why we don't build more affordable housing is
because the construction process has become so expensive. Much of the
way that we build homes today has changed little over time. Eliminating
the regulation that manufactured homes must be placed on a chassis, a
regulation that goes back to the 1960s, would make manufactured homes
much more widely available to consumers, and at a cost savings of 60
percent to traditionally built home.
Today's factory production methods provide a much more efficient
process for building housing than traditional home building methods, as
traditional methods cannot make use of the scale economies of mass
production nor the remarkable technological advances that have taken
place in manufacturing. The HUD requirement that these homes be placed
on a chassis relegates these homes to mobile home parks, as the chassis
requirement creates zoning rules that prevent these homes from being
placed in other neighborhoods. Prior to the chassis regulation,
manufactured homes were placed on conventional foundations and thus
were accepted in single family home neighborhoods. They looked just
like traditionally built homes but were much less expensive because
they were built with modern production technologies.
A 2011 special report commissioned by HUD, ``Regulatory Barriers to
Manufactured Housing Placement in Urban Communities,'' also recommended
the elimination of the chassis regulation. Eliminating the chassis
regulation, which appears to have no beneficial purpose for consumers,
would be a game-changer for millions of families who are now being
squeezed out of the housing market. With the median U.S. home now
costing nearly $400,000, eliminating this regulation would be expected
to reduce housing costs by over $100,000.
Implementing zoning, permitting, and chassis regulation reforms
would all substantially improve housing affordability by leveraging the
remarkable efficiencies now in place within the market process.
______
Questions Submitted by Hon. Todd Young
Question. In May 2021, I reintroduced my Yes In My Back Yard
(YIMBY) Act with Senator Schatz to shine a light on discriminatory land
use policies, encourage localities to cut burdensome regulations, and
bring a new level of transparency to the community development process.
This bill would require Community Development Block Grant (CDBG)
recipients to go on the record with why they are not adopting specific
pro-affordability and anti-discriminatory housing policies.
Do you support my Yes In My Back Yard Act? Why or why not?
Answer. I strongly concur with your assessment, and I strongly
support the Yes In My Back Yard Act. Land use regulations and zoning
regulations are driving up costs and restricting housing supply. Often,
these impediments to building housing are strongest in areas where the
demand for more housing is the highest, locations such as New York, Los
Angeles, San Francisco, and the Silicon Valley area. I support using
the lever of requiring CDBG recipients be held much more accountable
for their housing policy decisions. Leaving the current status quo in
housing policies in place will only mean that the forces that are
driving up home prices will remain in place, creating enormous burdens
on millions of families, particularly those with moderate to low
incomes. The NIMBY Act could make a significant difference by helping
change local regulatory policies to increase housing supply and reduce
costs.
Question. How would this bill increase housing stock across the
country?
Answer. An important reason why housing costs are so high is
because zoning requirement and the permitting process restrict housing
supply by delaying projects, denying projects, and by raising costs to
the point where a developer finds that the project would be
unprofitable to build. The NIMBY Act would incentivize local regulatory
agencies to reform these burdensome rules by requiring those that
receive CDBG funding to explain why the are not adopting pro-
affordability and anti-
discriminatory policies. By using the lever of CDBG funding, we can
help local communities move in a direction that increases housing
supply by changing their regulatory rules that currently prevents some
housing from being ever being built. The NIMBY Act has the potential to
be a game changer regarding increasing housing construction and
improving housing affordability.
Question. I appreciated your testimony about manufactured housing
and the need for deregulation to empower Americans through increased
housing options.
Can you please discuss how manufactured housing can help address
the affordable housing crisis?
Answer. Manufactured housing costs 60 percent less to build than
traditionally built homes. This is because manufactured housing is
built within factories using modern production methods and modern
technologies that are much less costly than traditional home building
methods. The homes can be built to virtually any quality standard, and
in many cases to tighter tolerances than in the case of traditionally
built homes. Moreover, many developers shun building small homes
because they tend to be less profitable than larger homes. Manufactured
housing can fill this important shortcoming in our home-building
process as the manufacturing home process can build smaller homes very
efficiently.
Question. What opportunities do we have at the Federal level to
expand utilization of manufactured housing?
Answer. Presently, manufactured homes are often not compliant with
local zoning requirements because they sit on a chassis. The chassis
requirement was adopted in the 1960s by HUD. Before that, manufactured
homes would be placed on a traditional foundation and would exist side-
by-side with traditionally built homes in
single-family neighborhoods. You would not be able to tell the
manufactured homes apart from the traditionally built homes.
The chassis requirement has led to most manufactured homes being
placed within mobile home communities. This means that the cost savings
afforded by modern manufacturing processes aren't available to
consumers unless they are willing to live in a mobile home community.
Eliminating the chassis requirement means that manufactured homes
could be placed on a traditional foundation and exist within many more
neighborhoods than are currently permitted by local zoning rules. In
2011, HUD commissioned a special study from housing specialists at
Virginal Tech University, who also concluded that the chassis
requirement should be eliminated.
The benefits of eliminating this one regulation could be enormous
by sharply reducing the cost of new housing and making home-buying much
more affordable than it currently is. I suspect that eliminating the
chassis requirement could reduce the cost of building new housing
substantially given the 60 percent cost savings of manufactured housing
relative to traditionally built housing. This would be a true game-
changer for millions of low- and moderate-income families.
______
Prepared Statement of Benson (Buzz) Roberts, President and CEO,
National Association of Affordable Housing Lenders
Thank you, Chair Wyden, Ranking Member Crapo, and members of the
committee.
The National Association of Affordable Housing Lenders is the
alliance of major banks and mission-driven lenders and investors in
affordable housing and inclusive community revitalization. NAAHL member
banks provided more than $180 billion in financing for low- and
moderate-income people and communities in 2020. NAAHL member banks make
most Low-Income Housing Tax Credit investments.
I have good news and bad news.
the bad news
First the bad news. Housing is less affordable now than it has been
in 15 years.\1\ Home prices rose 18.8 percent and rent climbed 17.6
percent in 2021.\2\ Last October, about half of Americans (49 percent)
called the availability of affordable housing in their local community
a major problem. That is more than cited drug addiction (35 percent),
COVID-19 economic and health impacts (34 percent and 26 percent), and
crime (22 percent), according to Pew Research.\3\ Housing is the single
largest cost the average household faces.
---------------------------------------------------------------------------
\1\ https://www.nar.realtor/blogs/economists-outlook/
housingaffordabilitydrops-as-mortgage-payments-spike-51-from-may-2021.
\2\ https://www.politico.com/news/2022/03/18/housing-costs-
inflation-00015808.
\3\ https://www.pewresearch.org/fact-tank/2022/01/18/a-growing-
share-of-americans-say-affordable-housing-is-a-major-problem-where-
they-live/.
Housing costs are not just a casualty of inflation, but also a
driver of inflation. Home prices rose 11 percent in 2020,\4\ when
overall inflation was 1.4 percent.\5\ Housing represents more than 30
percent of the CPI. As economists Mark Zandi and Jim Parrot recently
wrote: ``If policymakers are serious about reining in inflation, then
they have little choice but to take on the shortfall in housing supply.
. . . While the other drivers of inflation are set to ease in the
coming months, the shortfall in housing isn't going anywhere unless
policymakers do something.''\6\
---------------------------------------------------------------------------
\4\ https://www.mba.org/docs/default-source/research-and-forecasts/
forecasts/forecast-commentary-april-2022.pdf?sfvrsn=a5365ab7_2.
\5\ https://www.bls.gov/news.release/archives/cpi_01132021.htm.
\6\ https://www.washingtonpost.com/business/2022/01/31/if-
policymakers-are-serious-about-tackling-inflation-they-need-address-
soaring-housing-costs/.
The affordability problem started in high-growth coastal markets
but is now nationwide. From 2012 to 2019, supply worsened in 47 States
and the District of Columbia. Among 310 metropolitan areas nationwide,
supply was shrinking or shortages were growing worse in three-quarters
of them heading into the pandemic. Boise, for example, was short 13,000
housing units in 2019, equivalent to about 5 percent of the region's
housing stock.\7\
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\7\ https://www.nytimes.com/2022/07/14/upshot/housing-shortage-
us.html.
This problem has been building for years because we have not been
building enough housing for years, especially lower cost homes and
apartments. ``Total housing stock grew at an average annual rate of 1.7
percent from 1968 through 2000,'' but only 0.7 percent over the last
decade. The shortfall over the past 20 years is as much as 6.8 million
units.\8\ And, although multifamily construction is now rising, it is
mostly aimed at the luxury market, while the worst supply shortages are
for lower cost housing.\9\
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\8\ https://www.politico.com/news/2022/03/18/housing-costs-
inflation-00015808.
\9\ https://www.bloomberg.com/news/articles/2022-07-13/rents-in-us-
rise-at-fastest-pace-since-1986-buoying-inflation?srnd=premium.
Moreover, in the past, supply increases at the top end of the
market would ``filter down'' to ease affordability at all price points,
but now we are seeing some markets where supply shortages are so great
that prices for older properties are ``filtering up.''\10\
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\10\ https://www.huduser.gov/portal/pdredge/pdr-edge-featd-article-
061520.html.
In other words, we are literally paying the price for failing to
produce and preserve enough housing, especially for low- and moderate-
income people and communities, where the needs are greatest. Because
the obstacles to housing production will take years to address, we must
get started right away.
the good news
The good news is that we do know how to expand housing supply for
the people and communities that need it most. The Low-Income Housing
Tax Credit (Housing Credit) has produced more than 3.6 million
affordable rental apartments,\11\ virtually all the affordable
production over the past 35 years. This total is equivalent to more
than one-third of the entire multifamily stock with similar rents. The
Housing Credit is widely considered the U.S. Government's best
affordable housing production program ever. The proposed Neighborhood
Homes Investment Act would apply the Housing Credit's successful
approach to a different challenge: to revitalize struggling communities
and expand home-ownership opportunities by building and rehabilitating
starter homes.
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\11\ https://rentalhousingaction.org/.
NAAHL urges Congress to pass the bipartisan Neighborhood Homes
Investment Act (S. 98) and the Affordable Housing Credit Improvement
Act of 2021 (S. 1136). Together, these bills would produce up to 2.5
million additional affordable homes.\12\
---------------------------------------------------------------------------
\12\ https://rentalhousingaction.org/wp-content/uploads/2021/10/
AHCIA-One-Page-Summary-September-2021.pdf and https://
static1.squarespace.com/static/589b48fbe3df28f7ed63b31b/t/
622909ff205750275598eb8d/1646856704390/
NHIA%2BSummary%2BMarch%2B2022.pdf.
The Housing Credit and Neighborhood Homes have earned bipartisan
support because they are based on the same broadly embraced principles:
Private Market Discipline
Project sponsors use tax credits to raise capital from
investors to finance home building and rehabilitation.
Private investors--not the Federal Government--bear
construction and marketing risks. Investors claim the tax credits only
after development is successfully completed.
Tax credits are limited to the minimum amounts required for
financial feasibility.
A competitive and efficient investment market minimizes
investor returns and maximizes public impact.
Investments leverage other project funds, further improving
cost-effectiveness.
State Administration
States have proven to be excellent stewards of the Housing
Credit and other affordable housing programs. They define their
specific needs and priorities; allocate tax credit authority on a
competitive basis; and monitor compliance.
The Federal Government's role is limited. The IRS develops
regulations and monitors State and investor compliance.
Targeting and Flexibility
The Housing Credit and Neighborhood Homes are targeted to
ensure that rigorous policy goals are met while providing flexibility
so States, communities, and the private market can address local needs,
maximize efficient execution, and adapt to changing conditions.
Metropolitan and rural communities are equitably served.
Positive Economic and Community Impact
The Housing Credit's 3.6 million apartments have generated 5.7
million jobs, $643 billion in wages and business income, and $223
billion in tax revenue.
Neighborhood Homes is projected to produce 500,000 homes over
10 years, generating $100 billion in development activity, nearly
800,000 jobs, $43 billion in wages and business income, and $29 billion
in tax revenue.
Other benefits include crime reduction, more income diversity
in low-income neighborhoods,\13\ and the physical and economic
stabilization of neighborhoods.
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\13\ https://web.stanford.edu/diamondr/LIHTC_spillovers.pdf.
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neighborhood homes investment act
National home price data mask an incredible diversity among and
within regional housing markets. In 2021, the median home value was
more than $1.6 million in San Jose but less than $160,000 in
Toledo.\14\ Moreover, every State has struggling urban and rural
communities where homes are in poor condition and the cost of
rehabilitating them or building new homes exceeds their market value.
Development is not financially feasible in these circumstances without
governmental support.
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\14\ https://cdn.nar.realtor/sites/default/files/documents/metro-
home-prices-q1-2022-ranked-median-single-family-2022-05-03.pdf.
The absence of quality housing for home ownership has been driving
economic distress in these communities. Single-family homes are the
predominant land use in most of these communities, so it is hard to
revitalize them without attractive, affordable homes. We hear from
rural communities that they cannot retain or attract growing businesses
without quality affordable housing for workers. We hear from urban
neighborhoods that the absence of good housing drives out middle-income
families, while concentrating poverty and limiting the disposable
income required to support shopping, services, economic development,
and a sustainable local tax base. Conversely, we also hear from urban
and rural communities alike that new or improved housing can replace
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decline with revitalization.
As Christopher Herbert, Managing Director at the Harvard Joint
Center for Housing Studies, told the House Ways and Means Committee
last week:
Expanded public subsidies are needed to increase the supply of
deeply affordable housing available both for rent and to own.
Particular attention should be given to efforts that expand the
supply of affordable housing in lower-income communities where
the depressed value of homes impedes both new construction and
substantial rehabilitation of existing homes as the costs of
these investments exceed current market values. Not only would
these communities benefit from such investments, it would also
provide residents of these areas with opportunities to own or
rent good quality homes in their own neighborhoods. For this
reason, the Neighborhood Homes Investment Act deserves serious
consideration as a tool for expanding the supply of good
quality homes and home-ownership opportunities in these
communities.\15\
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\15\ https://waysandmeans.house.gov/sites/
democrats.waysandmeans.house.gov/files/documents/Testimony%20-
%20Dr.%20Chris%20Herbert.pdf.
The bipartisan Neighborhood Homes Investment Act is carefully
targeted to these struggling communities, based on their lower incomes,
elevated poverty, and low home values. About 22 percent of metro census
tracts nationwide, and 27 percent of non-metro census tracts would
qualify, with additional flexibility for certain other non-metro census
tracts. Maps of eligible communities in each State are available at
---------------------------------------------------------------------------
https://neighborhoodhomesinvestmentact.org/.
Neighborhood Homes meets these communities where they are by
offering tax credits sized to cover the gap between the cost of
developing homes and the price at which they can be sold. The credits
would be capped at 35 percent of development costs for starter homes;
prices would be limited so they are broadly affordable; and high-income
buyers would be excluded. These guardrails promote revitalization
without gentrification.
Neighborhood Homes is limited to home ownership, but it is
otherwise very flexible. It can build new homes or acquire and
rehabilitate homes for sale, and special provisions would also allow
using credits to rehabilitate homes for current homeowners. It can be
used for detached homes, townhomes, two- to four-unit homes,
condominiums, and cooperatives. Manufactured homes are eligible,
provided they are permanently attached to a foundation and are titled
as real property. A minimum level of rehabilitation prevents merely
superficial improvements.
The credit is also simple enough to accommodate even small-scale
developments. Homes must only be in eligible communities, meet cost and
sales price standards, and be occupied by eligible home buyers (or
existing owners). The tax credits are claimed when the homes are
completed and owner-occupied. No further compliance is required of
investors. If a homeowner resells their home within 5 years, they would
pay a declining portion of their profit to the State for use on future
homes.
State housing agencies will administer the credits, by setting
their own priorities and standards for costs and profits, running a
competitive process for allocating the credits, and ensuring
compliance. The States' experience and excellent record of
administering Low-Income Housing Tax Credits qualifies them well to
take on these responsibilities.
No current tax incentive is designed to fill this gap. Tax-exempt
bonds and the mortgage interest deduction can lower effective mortgage
payments, but they do not close development cost/sales price gaps.
Opportunity Zones incentives require long-term investments, not the
development and immediate sale of properties.
Neighborhood Homes has support from a wide range of national
associations representing the housing industry, financial services,
affordable housing and community development, civil rights, and State
agencies.\16\
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\16\ https://neighborhoodhomesinvestmentact.org/coalition.
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low-income housing tax credits
The Housing Credit is America's primary tool to create and preserve
affordable rental housing.
There is a vast and growing demand for affordable housing. More
than 10 million low-income households spend more than half of their
monthly income on rent, cutting into other essential expenses like
childcare, medicine, groceries, and transportation.\17\ Meanwhile,
there is a growing shortage of affordable housing. For every 100
extremely low-income households, there are only 37 affordable homes
available. In total, there is a shortage of 7.1 million rental homes
affordable and available for households making 50 percent of area
median income and below, according to the National Low Income Housing
Coalition.\18\
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\17\ https://www.jchs.harvard.edu/sites/default/files/reports/
files/Harvard_JCHS_State_
Nations_Housing_2021.pdf.
\18\ https://reports.nlihc.org/sites/default/files/gap/Gap-
Report_2021.pdf.
However, the need for affordable housing has skyrocketed. According
to the Harvard Joint Center for Housing Studies' just-released ``State
of the Nation's Housing'' report, last year brought the largest year-
over-year increase in the cost of rental housing in over 20 years, with
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rent increases in some metro areas over 20 percent.
As already noted, the Housing Credit has financed the development
of 3.6 million affordable rental homes in urban, suburban, and rural
areas since its inception in 1986. In 2019 and 2020, the Housing Credit
produced or preserved roughly 130,000 apartments annually.\19\
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\19\ https://drive.google.com/file/d/
1HC75l9CQ4WpvAbs5tcZKNeyiKSIPs9tJ/view.
In total, the Housing Credit has housed over 8 million low-income
households,\20\ including low-wage workers, veterans of the armed
forces, senior citizens, formerly homeless families and individuals,
people recovering from opioid addiction, and people with
disabilities.\21\ The median income for households living in Housing
Credit properties is less than $18,200, and approximately 52 percent of
households are extremely low-income, making 30 percent or less of the
area's median income, according to the Department of Housing and Urban
Development.\22\ If forced to pay market-rate rent, many of these
households would be just one unforeseen event away from losing their
housing.
---------------------------------------------------------------------------
\20\ https://rentalhousingaction.org/wp-content/uploads/2021/10/
ACTION-NATIONAL-2021-NEW-LOGO-01-2.pdf.
\21\ https://www.taxcreditcoalition.org/the-housing-credit/.
\22\ https://www.huduser.gov/portal/Datasets/lihtc/2019-LIHTC-
Tenant-Tables.pdf.
The Housing Credit works in all types of communities, including
large and small urban areas, suburban communities, rural towns, and on
Tribal land. Roughly 22 percent of properties are in non-metropolitan
counties, where it has historically been challenging to develop
affordable housing. The Housing Credit has also been important for
communities recovering from natural disasters--from California
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wildfires to Hurricane Katrina to the floods in Iowa.
``Housing Credit properties are financially sound and stable for
the long term,'' according to the accounting firm CohnReznick. ``Our
survey showed only a 0.57-
percent cumulative foreclosure rate, which to the best of our knowledge
is lower than any real estate asset class. This included only one new
reported foreclosure in 2020, despite the challenges of COVID-19. The
industry's remarkably low foreclosure rate is attributable primarily to
the effective public-private partnership and oversight, the pent-up
demand for affordable housing, and the industry's collaborative efforts
to enhance underwriting and asset management quality.''\23\
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\23\ https://drive.google.com/file/d/
1HC75l9CQ4WpvAbs5tcZKNeyiKSIPs9tJ/view.
The Housing Credit remains vastly oversubscribed. In 2020, Housing
Credit developers requested nearly 2.5 times as many Housing Credits as
there was available allocation. Further, a growing number of States,
including California, New York, Massachusetts, Washington, Georgia,
Tennessee, and close to 20 others, are already using or close to using
all of their bond volume cap, which limits their ability to finance 4-
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percent Housing Credit developments.
Here are the most important steps Congress should take to support
Housing Credits:
Restore the temporary 12.5-percent increase in Housing Credit
allocation authority enacted in 2018, which expired at the end of 2021.
We are losing production now because of this expiration.
Increase State allocation authority by 50 percent over 2
years. This expansion would boost production and preservation
nationwide.
Allow Housing Credits in conjunction with tax-exempt
multifamily bonds if bond proceeds exceed 25 percent of expected
project costs, a reduction from 50 percent under current law. This
change would allow private activity bonds to support more affordable
housing.
Reform the Qualified Contract rules to prevent the premature
loss of affordability and nonprofit Right-of-First-Refusal rules to
extend public-mission control of Housing Credit properties. These
provisions would actually raise Federal revenues by $1 billion,
according to the Joint Committee on Taxation.\24\ I am appending a more
detailed explanation of why these changes are urgently needed.
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\24\ https://www.jct.gov/publications/2021/jcx-46-21/.
This concludes my testimony. I would be happy to answer your
questions.
appendix: reforming low-income housing tax credit provisions for
qualified contracts and the nonprofit right of first refusal
As policymakers deal with the extreme challenges posed by a
shortage of affordable housing, the most efficient, cost-effective
means of addressing this crisis is to adopt policies that prevent the
loss of existing affordable housing.
There are two issues with the Low-Income Housing Tax Credit program
that require the attention of Congress. These issues have been before
Congress for several years, but enactment has been elusive despite the
support of Chairman Wyden and Chairman Neal. These are the Qualified
Contract provision in section 42(h)(6)(E)(i)(II) and the nonprofit
Right of First Refusal in section 42(i)(7). According to the National
Council of State Housing Finance Agencies, we have lost more than
100,000 affordable housing units because of the Qualified Contract
provision. Meanwhile, outside investors have come into the Housing
Credit program, obtained control of limited partnership interests, and
have used ambiguities in the Right-of-First-Refusal law--and the lack
of IRS guidance--to make demands on nonprofit housing providers which
have taken hundreds of millions of dollars from nonprofit controlled
properties. It is well past time for Congress to act to amend section
42 to eliminate these abuses.
qualified contracts
A fundamental feature of the Housing Credit program is that Federal
tax subsidies are provided to enable the development of properties that
are rented to qualifying low-income residents at reduced rents for a
period of 30 years, including a 15-year tax compliance period and
another 15 years of extended use subject to deed restriction. This is
the essential structure of the program and it is commonly understood.
However, there are two little-known exceptions to the requirement that
Housing Credit properties remain affordable for 30 years: (1) in the
case of foreclosure; and (2) where a Qualified Contract is presented to
the State Housing Credit agency. Under the qualified contract
provision, an owner of a Housing Credit property may, after year 14,
approach the Housing Credit allocating agency to request a qualified
contract. This request begins a 1-year period during which the
allocating agency seeks a qualified buyer to purchase the property and
maintain it as affordable for the duration of the extended use period.
The required purchase price for a Qualified Contract is stipulated by
section 42 and was designed to prevent back-end windfalls to owners and
investors by limiting them to an inflation-adjusted return on the
original equity contribution.
While the original intent of this provision was to create a limited
return and some liquidity for investors at a time when the Housing
Credit was an unproven program, for some properties it has come to
function as a nearly automatic affordability opt-out after just 15
years of affordability. This is because the qualified contract formula
price in nearly all cases significantly exceeds the market value of the
property as affordable housing. As a result, it is rare for the
allocating agency to find a buyer willing to pay the qualified contract
price. If the allocating agency fails to identify a qualified buyer
within 1 year, the property is released from the affordability
requirements of the Housing Credit program. At that point, the owner is
free to either sell the property at market value without any deed
restriction or continue to own and manage the property charging market
rents after a 3-year rent protection period for existing tenants.
In recent years, rental markets across the country have heated up
considerably, resulting in sharply higher market rents. This means that
in many markets, Housing Credit properties could demand far higher
rents if they did not have the affordability restrictions required by
the program. Some owners are now seeking a way to lift the
affordability restrictions on their properties even though such action
was not expected when the property was originally financed with Housing
Credit subsidies. These owners did not build Housing Credit properties
on the basis that they would be able to get out of the affordability
restrictions after 15 years because there was no expectation at the
time of construction that the statutory formula would result in an
above-market price, and thus function as an ``opt-out.'' This was an
after-the-fact realization.
Many States have changed their policies to require a waiver of
Qualified Contract rights for new developments but in other States
developers have resisted attempts to close this loophole, particularly
with the 4-percent credit used in the bond program. In these States, a
Federal subsidy designed to ensure a minimum of 30 years of rent
affordability is instead a 15-year rent affordability program.
Housing Credit properties located in high opportunity areas or
areas that have gentrified since the property was placed in service are
most at risk. These neighborhoods are often the most difficult to
develop new affordable housing in and/or are experiencing high rates of
displacement of low-income households, so preserving existing
affordable housing is extremely important.
Recent analyses indicate that the Qualified Contract process is
resulting in the premature loss of more than 10,000 low-income homes
annually, and often more. As of 2021, over 100,000 apartments
nationwide have already been lost, and the losses continue each year.
Affordable housing and tenant advocates are deeply concerned that
unless the qualified contract process is corrected, the number of
Housing Credit properties lost before fulfilling their intended 30-year
affordability period will continue to grow at an accelerating rate.
The House-passed Build Back Better legislation includes language
closing this loophole identical to bipartisan legislation introduced in
the last Congress by Chairman Wyden and Senator Young, S. 1956, along
with other Senators. This legislation would repeal the Qualified
Contract loophole for future developments while correcting the
statutory price for the purchase of existing properties so that it is
based on the fair market value of the property as affordable housing.
Closing the qualified contract loophole would not only protect
lower-income residents, but it would also save the Federal Government
money. According to the Joint Committee on Taxation, the provision in
the BBB bill would raise $457 million over 10 years.
nonprofit right of first refusal
As nonprofit sponsored Housing Credit properties reach the end of
their initial 15-year compliance period, investors (the limited
partners) in the property's original partnership generally want to sell
their interests, and the nonprofit sponsors (the general partners) want
to gain full control of the property in order to maintain the
affordable housing use restrictions indefinitely. However, in some
cases the transfer of properties to nonprofits is causing conflicts
between investors and nonprofit sponsors as a result of a difference in
how the parties interpret provisions in section 42 which have not been
clarified by the IRS. These disputes would be minimized, and the
original intent of the law carried out, through legislation clarifying
section 42(i)(7).
Section 42(i)(7) was designed to permit nonprofit sponsors (as well
as government agencies and tenant organizations) to obtain full
ownership of Housing Credit properties at the end of the tax compliance
period through a Right of First Refusal (ROFR). Under the statute, a
safe harbor is created that permits the general partner and limited
partner to negotiate a partnership agreement that permits a nonprofit
to purchase the Housing Credit property at the end of the compliance
period for a ``minimum purchase price'' calculated by adding the
outstanding debt on the property and any taxes attributable to that
sale.
Housing Credit limited partnership agreements where a nonprofit
serves as the general partner almost always include the ROFR language
as permitted under the safe harbor in section 42(i)(7). In fact, in a
2007 memorandum for exempt organization determinations, the IRS takes
the position that nonprofit general partners must have a ROFR in
Housing Credit deals in which they serve as the general partner. Since
the ROFR provision was enacted more than 30 years ago, the operating
assumption of all parties to a Housing Credit deal is that after 15
years the investor will exit the property as the nonprofit general
exercises its ROFR rights and take full ownership of the property.
In most cases, the ROFR has worked as intended to transfer
ownership to the nonprofit in whose name the ROFR is granted, typically
an affiliate of the general partner. However, in recent years, outside
entities without any connection to the Housing Credit program have been
acquiring control of investor interests, after all credits have been
claimed, with the purpose of resisting the expected investor exit in
order to leverage cash payments not contemplated in the partnership
agreement or payments that would be superseded by the exercise of the
ROFR. In such disputes, these outside investors--often backed by
private equity interests--have typically taken the position that the
section 42(i)(7) ROFR is simply a common law right of first refusal and
they do not have to recognize the rights established in the partnership
agreement without a bona fide offer from an unrelated third party that
the investor has singular authority to accept. In essence, they have
rejected a bargained-for right in the partnership agreement held by the
nonprofit. Most nonprofits do not have the resources to litigate these
issues in court, so a stalemate ensues that the investors use to
leverage a cash payment or a sale of the property in return for the
investor leaving the partnership. The payment of such scarce funds
undermines the continued viability of the property as affordable
housing in contravention of public policy.
This situation arises because of ambiguities in Federal law that
are reflected in unclear partnership agreement language with respect to
the requirements and scope of the execution of the ROFR. This had led
to scores of legal disputes, and, in many cases, costly litigation
which has produced conflicting opinions by State and Federal court
judges ill-suited to sort through these types of tax issues. There is
no consistent court interpretation of what is required by section
42(i)(7) which serves to only accentuate the current legal ambiguities.
This problem becomes of greater concern as more properties reach
year 15. Regardless of the contractual issues that arise in these
disputes, the efforts by these outside interests to take advantage of
the Housing Credit program to demand a residual return in excess of the
agreed upon return is contrary to the intent of the program and at odds
with the understanding of the original parties to the partnership when
the property was first financed.
Legislation supported by Chairman Wyden, but not yet passed by the
Senate, would address this issue. First, by changing the safe harbor to
permit the partnership agreement to include an option in the name of a
nonprofit for deals entered into after date of enactment, and second by
clarifying existing law with respect to existing agreements. These
clarifications would not change the terms of any existing agreements
but would clarify ambiguous language that the courts have struggled to
interpret. Specifically, the law would be clarified that: (a) a ROFR
may be exercised without the approval of the limited partner and in
response to any offer to purchase the property, including an offer by a
related party; (b) that the reference to the property that is purchased
includes all assets of the partnership; and (c) that the purchase can
be of the partnership interest as well as of the property.
These legislative clarifications reflect the work of The Tax Credit
Equity and Financing Committee of the American Bar Association on
Affordable Housing and Community Development Law which going back
several years has requested, to no avail, that the IRS clarify the law.
This issue was placed on the 2017 Priority Guidance Plan, but no action
has been taken.
It is long past time for Congress to act to stop the exploitation
of the Housing Credit program by outside investors who are taking
advantage of an unclear law to generate windfall returns at the expense
of nonprofit affordable housing. This provision, like the Qualified
Contract provision, would save the Federal Government significant
money, $553 million over 10 years according to the Joint Committee on
Taxation.
______
Questions Submitted for the Record to Benson (Buzz) Roberts
Question Submitted by Hon. Robert P. Casey, Jr.
Question. The pandemic taught us that congregate care settings are
not always safe or the choice that many would make for their home. In
fact, AARP reports that 90 percent of older adults and people with
disabilities would choose to remain at home as they age.
However, only about 10 percent of all homes are accessible for
people with disabilities. That's a poor fit when our population is
aging and 2 out of 5 older adults have a disability.
The Federal Government currently spends over $50 billion every year
on housing tax subsidies. From your perspective, does this spending do
enough to incentivize the construction of housing that is accessible to
the elderly and to people with disabilities?
Answer. Of the estimated $82.7 billion in housing tax expenditures
in 2022, only about $11.9 billion is directly associated with
construction and rehabilitation ($10.9 billion for Low-Income Housing
Tax Credits plus $1.0 billion for exclusion of interest on State and
local government qualified private activity bonds for rental housing),
per the Joint Committee on Taxation (JCX-23-20). State housing agencies
have broad discretion in allocating these volume-limited development
incentives, but they must address a wide range of needs. According to
the National Council of State Housing Agencies, about 25 percent and 6
percent of Housing Credit units receiving allocations in 2020 are
targeted to serve elderly and disabled residents, respectively. In
addition, elderly and disabled people also occupy other properties that
are not specifically targeted to serve them. Expanding the volume of
Housing Credits and private activity bonds would enable States to serve
more low-income elderly and disabled renters. The most helpful changes
would be to: (1) expand the Housing Credit allocation caps--which
dropped in 2022 after a temporary 12.5-percent increase in allocated
Housing Credit authority expired--by making the temporary 12.5-percent
increase permanent and adding a further 50-percent increase; and (2)
reduce from 50 percent to 25 percent the percent of project costs
required to be financed from private activity bond proceeds in order to
activate the full amount of 4-percent Housing Credits.
______
Question Submitted by Hon. Bill Cassidy
Question. Many federally supported affordable housing projects
around the country also pair with other incentives, like the Historic
Tax Credit. In the case of historic buildings, I have long been a
supporter of the Historic Tax Credit and have a bill--the Historic Tax
Credit Growth and Opportunity Act--that would make the first meaningful
improvements to the Credit since it was made permanent in 1986. One of
those changes, eliminating the basis adjustment, would make it easier
to use the Affordable Housing Tax Credit and the Historic Tax Credit to
ensure the most difficult buildings are rehabilitated and used for
workforce and other housing. I look forward to working with Senator
Cardin, Chairman Wyden, Ranking Member Crapo, and the rest of the
committee to move this bill forward. It is my understanding that when a
project uses both the Affordable Housing Tax Credit and the Historic
Tax Credit, the tax rules operate to decrease the value of both credits
because of the Historic Tax Credit's basis adjustment provision.
Do you think more historic buildings would be made into affordable
housing if the Historic Tax Credit's basis adjustment were eliminated,
as it is in my bill?
Answer. Yes. It would be entirely appropriate to eliminate the
basis adjustment. The Historic Tax Credit is intended to offset the
additional cost of rehabilitating historic structures to meet strict
historic standards, not to make the properties affordable to low-income
renters. Conversely, the Low-Income Housing Tax Credit is designed to
enable the substantial rehabilitation (and new construction) of housing
that is affordable, not to cover the incremental cost of meeting
historic rehabilitation standards. The basis reduction under current
law impedes historic rehabilitation of affordable rental housing.
Questions Submitted by Hon. Chuck Grassley
Question. I called for a GAO report on the LIHTC that was released
on July 15, 2015. While the program is currently administered at the
Federal level by the Internal Revenue Service, this report recommended
giving the Department of Housing and Urban Development a joint
oversight role.
I have been a strong advocate of oversight as long as I have been
in Congress. It is impossible to conduct meaningful oversight without
consistent and available data on how programs perform, however I also
understand the need to limit unnecessary paperwork for those
participating in Federal programs.
What impact would giving HUD a partnering oversight role have on
the LIHTC program?
Answer. We strongly support the reporting of consistent data on
Federal program performance, including the Low-Income Housing Tax
Credit. Indeed, HUD already publishes data on LIHTC tenants. To this
end, we would support more data reporting at the property level, as
well as specific authority for the Internal Revenue Service to share
property-level data with HUD to facilitate data reporting and analysis
without adding substantial new administrative burdens.
However, we would not support joint administration of LIHTC between
Treasury/IRS and HUD. In our experience, Treasury and the IRS have done
a good job in carrying out their responsibilities. Moreover, Congress
successfully designed LIHTC to limit unnecessary Federal involvement
and ensure compliance. Instead of HUD selecting, underwriting, and
monitoring properties--as was the case for previous affordable housing
programs such as public housing--the States add their own priorities
and policies to the limited number of Federal requirements and monitor
and inspect properties. In addition, private investors, usually large
corporations and their agents, carefully oversee project plans,
development, and properties to ensure compliance with Federal and State
rules with maximum efficiency. This approach has been highly
successful, making LIHTC the Nation's most effective affordable housing
production program ever. Adding another layer of administrative burden
is unnecessary and would reduce LIHTC's efficacy.
Question. It is no secret that housing costs have been increasing
well before the current wave of inflation. While LIHTC has an impact on
bringing more affordable units onto the market, the varied housing
prices across the country indicate that local policies, such as zoning,
have possibly the greatest role in determining housing costs.
In addition, there are a wide variety of regulations at the Federal
level, including HUD regulations, that increase the price of new homes
and buildings.
As Professor Ohanian noted in his testimony, there are currently a
number of regulations that prevent affordable housing from being
constructed. In addition to the LIHTC, what other options would be
available to increase housing supply? How would these other options
compare to the LIHTC in cost effectiveness? What factors at the State
or local level are inhibiting the creation of affordable housing?
Answer. We agree that States and localities should do more to
encourage the production and preservation of affordable housing,
including by reducing unnecessary regulations, exclusionary zoning, and
excessively long and uncertain project approval processes. That said,
building decent, affordable rental housing has not been financially
feasible without significant public support for a century or longer,
even in jurisdictions with relatively light regulatory regimes. The
first Federal interventions, in the Great Depression of the 1930s,
supported public housing for moderate-income families. Building
affordable rental housing was not financially possible without
subsidies then, in 1986 when LIHTC was enacted, or now. According to
the Harvard Joint Center for Housing Studies, ``to develop new
apartments affordable to renter households with incomes equivalent to
the full-time minimum wage, the construction costs would have to be 28
percent of the current average''--essentially making the financing
impossible. https://www.jchs.harvard.edu/sites/jchs.harvard.
edu/files/ahr2011-4-stock.pdf.
______
Questions Submitted by Hon. Todd Young
Question. Thank you for the support you expressed during the
hearing for Senator Cantwell's and my Affordable Housing Credit
Improvement Act (S. 1136). I wanted to follow up on our conversation
with a couple additional questions.
What are some of the positive externalities you believe the
Affordable Housing Credit Improvement Act would have on communities
across the country?
Answer. We would expect the Affordable Housing Credit Improvement
Act to amplify the same positive externalities that Housing Credit
properties have generated for the past 35 years.
First and foremost, the Act would produce more high quality
affordable rental apartments--more than 2 million more than would
otherwise be produced, according to the Novogradac accounting and
consultancy firm.
Economic benefits would be substantial. For every 100 new
Housing Credit units, an estimated 186 jobs are supported and an
estimated $7.4 million in tax revenue and $21.2 million in wages and
business income are generated. For every 100 rehabilitated Housing
Credit units, an estimated 128 jobs are supported and an estimated $4.9
million in tax revenue and $14.3 million in wages and business income
are generated.
Affordable housing also saves Federal, State, and local
governments' valuable dollars through reductions in Medicare, Medicaid,
police services, and other spending.
Stanford University researchers have found that Housing Credit
properties help to revitalize distressed low-income neighborhoods,
lifting the value of nearby properties and reducing crime and economic
and racial isolation.
Research by staff of the Joint Committee on Taxation shows
that children residing in Housing Credit properties are more likely to
increase their educational attainment and these gains increase for each
year of residency.
The Housing Credit is a Federal housing policy that delivers much
more than good housing.
Question. Why is it important and necessary that we pass the
Affordable Housing Credit Improvement Act this year?
Answer. The need for affordable housing is urgent. Housing is less
affordable now than it has been in 15 years.\1\ Home prices rose 18.8
percent and rent climbed 17.6 percent in 2021.\2\ Last October, about
half of Americans (49 percent) called the availability of affordable
housing in their local community a major problem. That is more than
cited drug addiction (35 percent), COVID-19 economic and health impacts
(34 percent and 26 percent), and crime (22 percent), according to Pew
Research.\3\ Housing is the single largest cost the average household
faces.
---------------------------------------------------------------------------
\1\ https://www.nar.realtor/blogs/economists-outlook/
housingaffordabilitydrops-as-mortgage-payments-spike-51-from-may-2021.
\2\ https://www.politico.com/news/2022/03/18/housing-costs-
inflation-00015808.
\3\ https://www.pewresearch.org/fact-tank/2022/01/18/a-growing-
share-of-americans-say-affordable-housing-is-a-major-problem-where-
they-live/.
Housing costs are not just a casualty of inflation, but also a
driver of inflation. Home prices rose 11 percent in 2020,\4\ when
overall inflation was 1.4 percent.\5\ Housing represents more than 30
percent of the CPI. As economists Mark Zandi and Jim Parrot recently
wrote: ``If policymakers are serious about reining in inflation, then
they have little choice but to take on the shortfall in housing supply.
. . . While the other drivers of inflation are set to ease in the
coming months, the shortfall in housing isn't going anywhere unless
policymakers do something.''\6\
---------------------------------------------------------------------------
\4\ https://www.mba.org/docs/default-source/research-and-forecasts/
forecasts/forecast-commentary-april-2022.pdf?sfvrsn=a5365ab7_2.
\5\ https://www.bls.gov/news.release/archives/cpi_01132021.htm.
\6\ https://www.washingtonpost.com/business/2022/01/31/if-
policymakers-are-serious-about-tackling-inflation-they-need-address-
soaring-housing-costs/.
The affordability problem started in high-growth coastal markets
but is now nationwide. From 2012 to 2019, supply worsened in 47 States
and the District of Columbia. Among 310 metropolitan areas nationwide,
supply was shrinking or shortages were growing worse in three-quarters
of them heading into the pandemic. Boise, for example, was short 13,000
housing units in 2019, equivalent to about 5 percent of the region's
housing stock.\7\
---------------------------------------------------------------------------
\7\ https://www.nytimes.com/2022/07/14/upshot/housing-shortage-
us.html.
This problem has been building for years because we have not been
building enough housing for years, especially lower cost homes and
apartments. ``Total housing stock grew at an average annual rate of 1.7
percent from 1968 through 2000,'' but only 0.7 percent over the last
decade. The shortfall over the past 20 years is as much as 6.8 million
units.\8\ And, although multifamily construction is now rising, it is
mostly aimed at the luxury market, while the worst supply shortages are
for lower cost housing.\9\
---------------------------------------------------------------------------
\8\ https://www.politico.com/news/2022/03/18/housing-costs-
inflation-00015808.
\9\ https://www.bloomberg.com/news/articles/2022-07-13/rents-in-us-
rise-at-fastest-pace-since-1986-buoying-inflation?srnd=premium.
Moreover, in the past, supply increases at the top end of the
market would ``filter down'' to ease affordability at all price points,
but now we are seeing some markets where supply shortages are so great
that prices for older properties are ``filtering up.''\10\
---------------------------------------------------------------------------
\10\ https://www.huduser.gov/portal/pdredge/pdr-edge-featd-article-
061520.html.
In other words, we are literally paying the price for failing to
produce and preserve enough housing, especially for low- and moderate-
income people and communities, where the needs are greatest. Because
the obstacles to housing production will take years to address, we must
---------------------------------------------------------------------------
get started right away.
______
Prepared Statement of Hon. Dana T. Wade, Chief Production
Officer, FHA Finance, Walker and Dunlop
Chairman Wyden, Ranking Member Crapo, and other members of this
committee, thank you for the opportunity to testify today. My name is
Dana Wade, and I am a chief production officer at Walker and Dunlop
(NYSE: WD), and former Commissioner of the Federal Housing
Administration and Assistant Secretary at the Department of Housing and
Urban Development. I was also a former staffer for both the Senate
Banking and Appropriations Committees, so it is a special honor for me
to be on the other side of the dais.
Walker and Dunlop, where I work, is one of the largest providers of
capital to the multifamily industry in the United States, and the
fourth-largest lender for all commercial real estate. We are based in
Bethesda, MD and employ over 1,400 people across the country. As a top
affordable housing lender and the sixth largest Low-Income Housing Tax
Credit syndicator, we see every day both the need to produce more
affordable housing and the barriers that stand in the way.
This committee's hearing on the topic comes at a time when the need
for decent, safe, and affordable housing has never been more critical.
Make no mistake about it, our Nation has faced an affordable housing
crisis for years, which has only been exacerbated by the COVID-19
pandemic as well as inflationary pressures that have driven up costs
for food, gas, and other essentials.
According to nonprofit Up for Growth's report, ``Housing
Underproduction in the U.S.,'' the housing deficit has more than
doubled in recent years, resulting in a current shortage of 3.8 million
homes.\1\ While that number is almost hard to grasp--and some estimates
even double it--it does paint a very real picture of what Americans
face in their day-to-day lives. People simply do not have adequate
access to good, quality housing near their places of work or their
children's schools.
---------------------------------------------------------------------------
\1\ Up for Growth, ``Housing Underproduction in the U.S. 2022,''
July 18, 2022, https://upforgrowth.org/apply-the-vision/housing-
underproduction/.
Further, Up for Growth reported, ``In October, 2021, nearly half of
all Americans said that the availability of affordable housing was a
significant issue in their local community, up 10 percentage points
from 2018. In a ranking of community concerns, housing affordability
outpolled drug addiction, the economic and health effects of COVID-19,
and crime.''\2\
---------------------------------------------------------------------------
\2\ Up for Growth, ``Housing Underproduction in the U.S. 2022,''
July 18, 2022, https://upforgrowth.org/apply-the-vision/housing-
underproduction/.
Millions of Americans spend hours and hours in cars, and on trains,
buses and other means of transit going back-and-forth between work and
home, because they cannot afford to live closer to work. And most of
them do not have the option to work virtually. Many spend more time in
transit than they do with their families, which robs them of the
ability to do things like have family dinners, help their children with
homework, and attend school sports games, just to name a few. And the
alternative is often making the choice to live in less desirable, and
more distressed neighborhoods, which brings with it a range of problems
including crime, subpar education, lack of health care, and an aging
---------------------------------------------------------------------------
housing stock.
The bottom line is that millions of Americans are just tapped out:
over 10 million low-income households spend more than half of their
monthly income on rent.\3\ That's 25 percent of all renters. And this
is not a problem limited to certain urban areas or high-cost cities
like New York, San Francisco, and Washington, DC. Lack of affordable
housing supply is a challenge across the country in urban, suburban,
and rural areas where a plethora of constraints such as labor
shortages, land restrictions, and building cost increases have limited
the creation of new housing units.
---------------------------------------------------------------------------
\3\ Joint Center for Housing Studies of Harvard University,
``America's Rental Housing 2022,'' https://www.jchs.harvard.edu/sites/
default/files/reports/files/Harvard_JCHS_Americas_Rent
al_Housing_2022.pdf.
Given the widespread and acute need for more affordable housing,
this committee's consideration of legislation, The Affordable Housing
Credit Improvement Act, which would both expand and improve the Low-
---------------------------------------------------------------------------
Income Housing Tax Credit (LIHTC), is an important step forward.
Since its enactment by President Ronald Reagan in 1986, LIHTC has
financed the development of nearly 3.5 million affordable rental homes
across the country.\4\ The Housing Credit has supported over 8 million
low-income households.\5\ These include veterans of the armed forces,
senior citizens, formerly homeless families and individuals, people
recovering from opioid addiction, people with disabilities, and low-
wage workers.
---------------------------------------------------------------------------
\4\ Novogradac, ``DASH Act's Middle-Income Housing Tax Credit Would
Finance 344,000 Affordable Rental Homes for Households Just Above LIHTC
Income Limits,'' Dirk Wallace and Peter Lawrence, September 2, 2021,
https://www.novoco.com/notes-from-novogradac/dash-acts-middle-income-
housing-tax-credit-would-finance-344000-affordable-rental-homes-
households.
\5\ Affordable Housing Finance, Factsheet, August 13, 2020, https:/
/www.housingfinance.com/news/updated-fact-sheets-show-lihtcs-impact_o.
Virtually no new affordable housing is built today without the
---------------------------------------------------------------------------
Housing Credit, period.
I'd like to provide a real-world example of LIHTC's impact in
communities. We recently financed and provided LIHTC equity for a 100-
unit affordable townhouse development in Cayce, SC called Abbott Arms.
Ninety-seven percent of Abbott Arms residents use Housing Choice
Vouchers, and the property will restrict rents on 100 percent of the
units to 60 percent of area median income (AMI). In addition, the
owners have partnered with a local non-profit to hire a full-time
Community Life Director who will focus on creating community
partnerships and coordinating services and activities for the
residents. These include monthly community gatherings, holiday events,
partnerships with local food pantries, children's programs, adult
education programs, and elderly care. In addition, a full-time on-site
learning coach will help provide tutoring services for school-age
children at no cost to residents.
Having a secure and stable place to live will increase the quality
of life for these residents and allow them to have a better economic
future. We have many other examples across-the-board of LIHTC
properties housing formerly homeless populations, seniors, military
veterans, as well as working families.
In addition, there are added benefits of the LIHTC program,
including lower vacancies in LIHTC properties, very strong protections
for affordability like a 15-year compliance period and the ability to
claw back credits, and a low cumulative foreclosure rate of about 0.57
percent.
LIHTC, while a cornerstone for affordable housing, is one part of
the housing ecosystem. The efficacy of LIHTC and other housing programs
that can bridge the affordability gap and increase the housing stock is
at risk without serious and meaningful reforms that reduce regulatory
barriers at the Federal, State, and local levels.
When you pass an apartment building on a busy street housing
hundreds of families, it is the outcome of a long, complex, and
sometimes arduous, process. It involves extensive underwriting and
diligence to adhere to governmental standards by companies like Walker
and Dunlop as the tax-credit syndicator, lender, and risk manager. It
involves layers of planning, reviews, government approvals, and the
hard work and financial investment of the development partners. It
involves hundreds of American jobs throughout planning, design, and
construction, and requires dozens of materials transported and made by
Americans.
A lot has to go right to produce multifamily housing, and a lot can
go wrong.
Quite literally, unnecessary bureaucratic hurdles can make or break
a project. An estimated 40 percent of development costs can be
attributed to regulation at the Federal, State, and local levels.\6\
---------------------------------------------------------------------------
\6\ National Multifamily Housing Council and National Association
of Home Builders, Regulation, Paul Emrath and Caitlin Sugrue Walter,
2022, https://www.nmhc.org/globalassets/research--insight/research-
reports/cost-of-regulations/2022-nahb-nmhc-cost-of-regulations-report.
pdf.
As one example at the Federal level, HUD's current 75-decibel limit
on noise at the potential development site is outdated and prevents
many transit-oriented projects from being built. In addition, the
unpredictability and lack of clarity when it comes to environmental and
labor requirements compound timing issues for construction projects.
All the while, labor and material costs are at record highs, and
securing contractors and storing building products are especially time-
sensitive tasks. Waiting for governmental reviews and decisions
involving Federal statutes such as the National Environmental Policy
Act (NEPA) can take months and jeopardize the project. And that is just
at the Federal level. The fate of affordable multifamily housing really
---------------------------------------------------------------------------
rests in the hands of local jurisdictions.
A recent article in The New York Times, which focuses on the surge
of homelessness, discusses issues impeding housing at the State and
local levels. It cites the example of zoning policies across the State
of California, where laws in both Los Angeles and San Francisco
restrict 76 and 85 percent of land for single-family housing,
respectively. The article states that ``California has 23 available
affordable homes for every 100 extremely low-income renters--among the
worst rates of any State.''\7\
---------------------------------------------------------------------------
\7\ The New York Times, ``Homeless in America,'' German Lopez, July
15, 2022, https://www.nytimes.com/2022/07/15/briefing/homelessness-
america-housing-crisis.html.
Zoning policies like density limits, requirements for parking,
height restrictions, lengthy permitting and approval processes, and
other land-use restrictions create a perfect storm that can often
---------------------------------------------------------------------------
stymie new development.
That said, some local jurisdictions have reached their breaking
point and are making positive reforms. States including California,
Oregon, and Maine have all recently passed some form of legislation to
end single-family zoning and allow the construction of more than one
home per parcel of land.\8\
---------------------------------------------------------------------------
\8\ NPR, ``There's a massive housing shortage across the U.S.,''
Arnold, Benincasa, Ganun, and Chu, July 14, 2022, https://www.npr.org/
2022/07/14/1109345201/theres-a-massive-housing-shortage-across-the-u-s-
heres-how-bad-it-is-where-you-l.
Similarly, experts at the Urban Land Institute (ULI) recently
worked with the city of Boise, ID to tackle the growing affordability
issues in the area, which accelerated as a result of migration to
southwest Idaho during the COVID-19 pandemic. In fact, Zillow reported
a 59-percent increase in housing prices during the first quarter of
2022 alone.\9\ ULI's recommendations include changing land-use policies
to allow density in an expanded city core and other commercial centers,
as well as creating incentives for development and lower-cost units
like fee and permit waivers, fast-track permitting, and streamlining of
local reviews for affordable units.\10\
---------------------------------------------------------------------------
\9\ Up for Growth, ``Housing Underproduction in the U.S. 2022,''
July 18, 2022, https://upforgrowth.org/apply-the-vision/housing-
underproduction/.
\10\ Up for Growth, ``Housing Underproduction in the U.S. 2022,''
July 18, 2022, https://upforgrowth.org/apply-the-vision/housing-
underproduction/.
While zoning and other issues are the purview of local citizens and
their governments--as they should be--policymakers at the Federal level
can provide a forum for best practices and use other Federal resources
such as LIHTC to encourage the development of housing. In addition,
given the many pieces that must work together to make housing more
affordable, it is essential that the private sector as well as
government at all levels standardize policies, practices, and
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timelines.
For instance, during my tenure as FHA Commissioner, HUD announced a
pilot program that would better integrate FHA financing with Federal
Housing Credits. It has largely been a success, providing thousands of
affordable units, but it is just one smaller solution to a bigger
problem.
We need both the combination of a lot of smaller solutions as well
as the big ideas to solve the housing crisis. I appreciate the work of
this committee in considering policies to make housing more accessible,
secure, and affordable, and am happy to answer any questions you have.
Appendix--LIHTC Case Studies
Kentonwood Apartments (Portland, OR):
Walker and Dunlop financed Kentonwood Apartments, a 44-unit, 100-
percent
income-restricted development in Portland, OR's Kenton neighborhood.
To finance the development, our team secured a combination of
financing sources, including a $3,030,000 Federal Low Income Housing
Tax Credit (``LIHTC'').
Kentonwood Apartments will address the needs for affordable
housing in an expensive market, offering rental housing for low- and
moderate-income households. The development will offer 44 apartment
units, comprised of a mix of studio and three-bedroom unit types within
one, 5-story walk-up apartment building on a 0.13 acre site
in the Kenton neighborhood of North Portland. The property is also
located in the Interstate Corridor Urban Renewal Area (ICURA). All of
the units will be targeted to households meeting 60 percent or less of
the Area Median Income (AFI) restrictions for the market area.
Amenities will include a community amenity room, courtyard, bike
room, and high-speed Internet, all with Energy Star appliances and
other resource-
efficient measures for sustainable energy use. The subject is located
very near the Max Light Rail Kenton Station and offers easy bus
access--this will be a walkable, transit-oriented, and diverse
community.
Amber Woods (Indianapolis, IN):
Amber Woods, financed by Alliant Capital (now part of Walker and
Dunlop), involved the acquisition and rehabilitation of 200 LIHTC units
for families earning less than 60 percent of the area median income in
Indianapolis, IN.
Amber Woods is a two-phase development with one-, two-, and
three-bedroom apartments. Twenty units are set aside for families with
disabilities and the units are fully accessible.
Social services will be provided by Pathway, Community Alliance
of the Far Eastside, and United Way, along with tenant services
provided through the management company, which will include: quarterly
resident meetings, holiday events, a monthly development newsletter,
and a social service coordinator.
Community Alliance of the Far Eastside will provide residents
with a food pantry and clothing pantry as referred by the management
company and summer youth activity referrals. Pathway will provide
residents with classes in resume building, computer training, and
after-school activities. The Property Manager will provide residents
with referrals to agencies providing counseling services.
All social services are being provided at no cost to the
residents.
Abbott Arms (Cayce, SC):
Walker and Dunlop recently financed and provided LIHTC equity for a
100-unit affordable townhouse development in Cayce, SC called Abbott
Arms.
97 percent of Abbott Arms residents use Housing Choice Vouchers,
and the property will restrict rents on 100 percent of the units to 60
percent of area median income (AMI).
The owners have partnered with a local non-profit to hire a
full-time Community Life Director who will focus on creating community
partnerships and coordinating services and activities for the
residents. These include monthly community gatherings, holiday events,
partnerships with local food pantries, children's programs, adult
education programs, and elderly care.
In addition, a full-time, on-site learning coach will help
provide tutoring services for school-age children at no cost to
residents.
______
Questions Submitted for the Record to Hon. Dana T. Wade
Questions Submitted by Hon. Michael F. Bennet
Question. In Colorado, homelessness increased 2.4 percent in 2020,
and now affects nearly 10,000 people. The rise in homelessness is
directly linked to our severe lack of affordable housing. Rents are
rising faster than incomes in virtually every part of the State, and
today more than a quarter of Coloradans are ``cost-burdened,'' meaning
they spend more than 30 percent of their income on housing.
How would expanding LIHTC and other effective Federal programs
reduce the number of people experiencing homelessness? What can and
should the private sector do to be part of the solution to this crisis?
Answer. As described by the National Alliance to End Homelessness,
``The solution to homelessness is straightforward: housing.''\1\ I
agree that the lack of affordable housing and homelessness are
inextricably linked. Expanding the supply of affordable housing in the
areas hardest hit by rent and other cost increases is a necessary step
towards eradicating homelessness.
---------------------------------------------------------------------------
\1\ The National Alliance to End Homelessness, ``Housing,'' updated
January 2020: Housing--National Alliance to End Homelessness, https://
endhomelessness.org/homelessness-in-america/what-causes-homelessness/
housing/.
Working families who are priced out of neighborhoods and at risk
for dislocation can be given access to decent, safe, and affordable
housing through programs like the LIHTC in conjunction with private-
sector development, a concerted effort to reduce regulatory barriers to
---------------------------------------------------------------------------
housing, and other assistance at the Federal, State, and local levels.
Solving chronic homelessness in cities like Denver, CO requires
rapid re-housing to immediately get people off the streets as well as
more permanent, supportive housing once they are back on their feet.
Every individual has unique challenges which must be addressed not only
through shelter, but also through supportive services that provide
health care, substance abuse counseling, job training, and other
necessary functions. The private sector can and should work with
nonprofits and governmental entities to combine affordable housing
development with these supportive services.
We at Walker and Dunlop and Alliant Capital have financed multiple
LIHTC properties designed to house formerly homeless populations in
partnership with local nonprofits and other governmental programs. One
example is the Olin Hotel, a historic building in downtown Denver, CO.
We helped to finance the substantial rehabilitation and construction of
112 units using both LIHTC equity and HUD's section 8 program, as well
as support from both the city of Denver and the State of Colorado. The
project produced rental units for formerly homeless and low-income
seniors and was sponsored by Senior Housing Options, a Colorado
nonprofit corporation that provides both housing and supportive
services for at-risk populations.
The LIHTC is a program targeted towards the Nation's most
vulnerable populations, including the homeless, many of whom are our
Nation's veterans, seniors, persons with disabilities, people
recovering from opioid addictions, and low-income families. Increasing
the supply of the LIHTC will allow for more of these projects to be
built and paired with the essential services to keep individuals off
the streets.
In addition, we would be happy to meet with you and your staff any
time in the future to discuss additional ways that Walker and Dunlop
can help to address the challenging issues of homelessness and the lack
of affordable housing.
______
Questions Submitted by Hon. Chuck Grassley
Question. I called for a GAO report on the LIHTC that was released
on July 15, 2015. While the program is currently administered at the
Federal level by the Internal Revenue Service, this report recommended
giving the Department of Housing and Urban Development a joint
oversight role.
I have been a strong advocate of oversight as long as I have been
in Congress. It is impossible to conduct meaningful oversight without
consistent and available data on how programs perform, however I also
understand the need to limit unnecessary paperwork for those
participating in Federal programs.
What impact would giving HUD a partnering oversight role have on
the LIHTC program?
Answer. I agree that strong oversight of the LIHTC program is
essential to protect taxpayers as well as to ensure that the tax
credits are delivering on the mission to produce much-needed affordable
housing. Thank you for your leadership in ensuring that Federal dollars
are used efficiently and effectively.
As I mentioned in my testimony, since its enactment by President
Ronald Reagan in 1986, LIHTC has financed the development of about 3.5
million affordable rental homes across the country and supported over 8
million low-income households.\2\ It is virtually the only source of
Federal support for the new construction of affordable housing. In
addition, by certain measures, the LIHTC has historically performed
well: LIHTC properties have lower vacancies and a low cumulative
foreclosure rate of about 0.57 percent.
---------------------------------------------------------------------------
\2\ Novogradac, ``DASH Act's Middle-Income Housing Tax Credit Would
Finance 344,000 Affordable Rental Homes for Households Just Above LIHTC
Income Limits,'' Dirk Wallace and Peter Lawrence, September 2, 2021,
https://www.novoco.com/notes-from-novogradac/dash-acts-middle-income-
housing-tax-credit-would-finance-344000-affordable-rental-homes-
households; Affordable Housing Finance, Factsheet, August 13, 2020,
https://www.housingfinance.com/news/updated-fact-sheets-show-lihtcs-
impact_o.
Strong private-sector oversight of the LIHTC is one important
component of the program. For example, the program allows for a
recapture of credits in the event of noncompliance during the 15-year
affordability period. Specifically, if a property ceases to provide the
required affordability levels, a portion of the tax credits are
recaptured, and program participants can be blocked from future credit
---------------------------------------------------------------------------
allocations.
In addition to private-sector compliance standards and the
oversight of the Department of the Treasury, the Government
Accountability Office (GAO) has recommended that the Department of
Housing and Urban Development (HUD) provide another layer of
supervision for the LIHTC. HUD is the primary agency for enforcing
Federal housing laws and administering Federal housing programs. Should
HUD receive the authority to oversee the LIHTC program, it has several
existing enforcement mechanisms in place, including the Real Estate
Assessment Center (REAC) and the Departmental Enforcement Center (DEC).
HUD also has several offices with strong program knowledge in
affordable housing and development, such as the Federal Housing
Administration (FHA) and the Office of Community Planning and
Development (CPD).
While HUD does have strong expertise in these areas, any additional
oversight of the LIHTC program should complement protections already in
place, have clearly defined roles and responsibilities, and mitigate
regulatory and compliance burdens for the private sector.
Question. It is no secret that housing costs have been increasing
well before the current wave of inflation. While LIHTC has an impact on
bringing more affordable units onto the market, the varied housing
prices across the country indicate that local policies, such as zoning,
have possibly the greatest role in determining housing costs.
In addition, there are a wide variety of regulations at the Federal
level, including HUD regulations, that increase the price of new homes
and buildings.
As Professor Ohanian noted in his testimony, there are currently a
number of regulations that prevent affordable housing from being
constructed. In addition to the LIHTC, what other options would be
available to increase housing supply? How would these other options
compare to the LIHTC in cost effectiveness? What factors at the State
or local level are inhibiting the creation of affordable housing?
Answer. Yes, regulatory barriers at both the local and Federal
level are big determinants of how much housing supply can be brought to
market. As I mentioned in my testimony, unnecessary bureaucratic
hurdles can make or break a project. The National Multifamily Housing
Counsel and the National Association of Homebuilders estimate that 40
percent of development costs can be attributed to regulation at all
levels.\3\
---------------------------------------------------------------------------
\3\ National Multifamily Housing Council and National Association
of Home Builders, Regulation, Paul Emrath and Caitlin Sugrue Walter,
2022, https://www.nmhc.org/globalassets/research--insight/research-
reports/cost-of-regulations/2022-nahb-nmhc-cost-of-regulations-
report.pdf.
At the Federal level, HUD policies such as outdated noise
requirements as well as the unpredictability and lack of clarity around
certain environmental and labor rules only compound cost increases
---------------------------------------------------------------------------
caused by the current unavailability of labor and materials.
I agree, however, that the fate of affordable multifamily housing
rests in the hands of local jurisdictions. Zoning policies such as
density limits, parking requirements, height restrictions, and lengthy
permitting processes have all had a dramatic impact on the ability to
build new, affordable housing. Shortages of affordable housing
exacerbate other problems such as homelessness and also add hours to
the commuting times of millions of working Americans.
Federal programs, including LIHTC, will not live up to their
potential and will end up costing taxpayers more money unless
communities work to eradicate these barriers to affordable housing.
I believe that the Federal Government can provide a forum for the
best practices of local governments, which include policies such as
fast-track permitting, pilot programs for increased density, and
``countdown clocks'' for local reviews. No local jurisdiction is alike
and every community should determine its own zoning rules, but there
are many examples of commonsense policies that eliminate waste and red
tape, and can have a meaningful difference in how people live and work.
Currently, LIHTC is virtually the only Federal program that
produces new affordable housing. Many other capital sources come
together in order to increase the overall housing supply, however. The
multifamily housing market is diverse and has multiple players;
including developers, HUD, Fannie Mae and Freddie Mac, banks, insurance
companies, nonprofits, and other financial services entities. LIHTC
must work with other debt and equity sources that provide the financing
and capital needed to execute a new construction project. It serves as
an offset to the cost of providing lower rents; without LIHTC or
similar programs, such as FHA financing or Federal, State and local
grants, many properties would lose the ability to offer lower rents as
doing so would not be financially feasible.
______
Questions Submitted by Hon. Todd Young
Question. Thank you for the support you expressed during the
hearing for Senator Cantwell's and my Affordable Housing Credit
Improvement Act (S. 1136). I wanted to follow up on our conversation
with a few additional questions.
Why do you support the Affordable Housing Credit Improvement Act,
and how do you believe it will impact the populations Walker and Dunlop
serves?
Can you please share what it is that makes the Low-Income Housing
Tax Credit so effective in addressing the affordable housing crisis?
What are some of the positive externalities you believe the
Affordable Housing Credit Improvement Act would have on communities
across the country?
Why is it important and necessary that we pass the Affordable
Housing Credit Improvement Act this year?
Answer. Thank you for leading on the important issue of bringing
more affordable housing units to market.
Walker and Dunlop sees every day the urgent need to increase the
housing supply and make more available decent, safe, and affordable
rental units for millions of Americans. The bipartisan Affordable
Housing Credit Improvement Act (AHCIA) would strengthen and increase
the LIHTC, which is the most effective Federal program for the
development of new, affordable housing.
Given the acute need for lower-cost housing, the LIHTC is
oversubscribed in many states across the country for both 9-percent and
4-percent credits. As a result, developers are facing costly delays
that can jeopardize the success of affordable projects.
AHCIA would relieve the burden on states and help create millions
of additional rental units by legislating the following: an increase in
the supply of the 9-percent credit by 25 percent; a decrease in the
private activity bond (PAB) threshold to improve the feasibility of
LIHTC projects; and an increase in the basis for 4-percent credits to
generate more equity.
As I mentioned in my testimony, the LIHTC is virtually the only
Federal program that allows for the new construction of affordable
properties. Since its inception, LIHTC has helped create over 3.5
million affordable rental homes.\4\ Its success has been possible
because it is an incentive-based program that allows the private sector
to take a leading role in financing, development, and risk-taking.
Multiple entities involved in the deal--from developers, to lenders, to
nonprofits and community organizations, to Federal and local
governments--all have a stake in ensuring the project is built and
affordability targets are met for residents.
---------------------------------------------------------------------------
\4\ Novogradac, ``DASH Act's Middle-Income Housing Tax Credit Would
Finance 344,000 Affordable Rental Homes for Households Just Above LIHTC
Income Limits,'' Dirk Wallace and Peter Lawrence, September 2, 2021,
https://www.novoco.com/notes-from-novogradac/dash-acts-middle-income-
housing-tax-credit-would-finance-344000-affordable-rental-homes-
households.
In addition, there are many positive benefits of increasing the
supply of affordable housing. First of all, stable and secure housing
leads to positive outcomes such as reduced commuting times, better
health outcomes, access to better education for children, increased
labor availability for community-based jobs, and the list continues. I
give one example in my testimony of the hours and hours many Americans
spend commuting to and from work, which reduces the amount of time they
spend with their families and significantly decreases their quality of
life. Further, families forced to lived in distressed neighborhoods to
secure housing that they can afford are faced with other problems like
---------------------------------------------------------------------------
crime, lack of health care, and a shortage of good schools.
LIHTC is one crucial tool to incentivize the creation of affordable
housing, which has led to an improved standard of living and the
ability to climb the economic ladder for millions of American families.
Question. In May 2021, I reintroduced my Yes In My Back Yard
(YIMBY) Act with Senator Schatz to shine a light on discriminatory land
use policies, encourage localities to cut burdensome regulations, and
bring a new level of transparency to the community development process.
This bill would require Community Development Block Grant (CDBG)
recipients to go on the record with why they are not adopting specific
pro-affordability and anti-discriminatory housing policies.
Do you support my Yes In My Back Yard Act? Why or why not?
Answer. I do support increased transparency to the American public
and Congress for the Community Development Block Grant (CDBG), which
will lead to better accountability of recipients and the ability to
track and measure the outcomes of funding allocated.
The YIMBY Act sheds light on many of the harmful regulatory
barriers that prevent affordable housing development, such as high-
density zoning, other limited zoning practices, disincentives for
innovation, minimum lot sizes, height restrictions, certain
preservation requirements, lengthy permitting processes, noise
thresholds for transit-oriented communities, and other policies.
Incentives that break down these barriers to affordable housing
would improve the ability of communities to increase the housing stock.
While zoning and other land-use decisions are and should be in the
hands of local jurisdictions, the Federal Government can encourage best
practices in order to make housing affordability a ``race to the top''
across the country.
Question. How would this bill increase housing stock across the
country?
Answer. My written testimony mentions that the efficacy of LIHTC
and other housing programs designed to bridge the affordability gap and
increase the housing stock is at risk without serious and meaningful
reforms that reduce regulatory barriers at the Federal, State, and
local levels. Unless action is taken to eradicate these obstacles, the
housing supply will continue to be insufficient to meet the demands for
rental units across the country, causing acute shortages and
exacerbating the affordability crisis in high-cost areas.
______
Prepared Statement of Hon. Ron Wyden,
a U.S. Senator From Oregon
The Finance Committee meets this morning to discuss housing. This
hearing comes at a time when Americans' are getting clobbered by
climbing rents and home prices--key drivers of inflation.
Data released last week showed that rents increased in June at the
fastest rate since 1986. Buying a home is also getting more expensive.
Many young people who have modest incomes or big student loan debts
feel like the dream of owning their own home is unattainable.
The root cause is, the U.S. simply isn't building enough housing.
It's been that way for decades, and the shortage is affecting cities of
all kinds. For example, my hometown of Portland has skyrocketing rents
and a low supply of suitable housing. It's also an issue in central
Oregon, southern Oregon, and eastern Oregon, where they can't build
housing fast enough to keep up with demand. I'd wager that every member
of the committee could tell a similar story about their home States.
I'd like to raise a relatively new issue that deserves real
scrutiny: private equity firms and sophisticated companies armed with
terabytes of housing data are hoovering up properties nationwide.
They're jacking up rents. They're using algorithms to outbid aspiring
American homeowners. Why do these big guys want to get into the
American housing market? Because there are upward of 330 million people
in this country, and there aren't nearly enough homes for all of them.
Huge demand, limited supply--typical people on a budget are going to
come out on the losing end of that deal every time.
The cost of housing is also getting pushed up by the snarls of
State and local red tape. Zoning rules too often ban the kind of
construction that's badly needed and perpetuate segregation. In some
places it can take years of tireless work to get a ruling on permits
and approval for new construction, and then come the big up-front
costs. Fortunately, my home State of Oregon is one of the States that's
stepping up on this issue, and others need to do the same.
It's also a fact that when housing costs go up, homelessness goes
up. You can save a lot of individual suffering and taxpayer dollars
tomorrow by building more housing today.
The bottom line is, when it comes to housing, the U.S. needs to
build and build some more. The Finance Committee plays an important
role in helping get shovels in the ground. That's because much of
housing policy deals with tax policy, and there are a lot of ideas in
this room.
I've proposed the DASH Act. It stands for Decent, Affordable, and
Safe Housing for All. It's all about getting help to the most
vulnerable: children and families experiencing homelessness. It would
also create a credit for more affordable rental units, boost the Low-
Income Housing Tax Credit, and encourage the construction of more
middle-income housing without taking one single penny away from LIHTC.
Local officials in Oregon tell me they badly need more incentives to
build housing for
middle-class families.
The Finance Committee has had a bipartisan coalition working on
important housing issues for a long time. In recent years Senator
Cantwell has been the champion of LIHTC, leading big legislative
expansions that are creating more than 150,000 new affordable homes. I
think she'd agree that's a good down payment for housing, and looking
ahead, there's so much more to do.
Her next proposal is the Affordable Housing Credit Improvement Act,
which I cosponsored with Senator Young and Senator Portman. That bill
would add even more punch and even more flexibility to build even more
affordable housing--an estimated 2 million new units nationwide.
Senator Cardin and Senator Portman have proposed a bill called the
Neighborhood Homes Investment Act that would be a big magnet for new
affordable housing in struggling communities that need it most.
And finally, continuing our bipartisan focus with Senator Crapo's
help, Senators Leahy, Collins, and I wrote the LIFELINE Act. Our bill
would create more flexibility for States, local governments, and Tribes
to use existing funds to get more affordable housing built. With costs
where they are today, the alternative is a whole lot of unfinished
construction and plans that stall out before they ever get going.
While there's bipartisan interest in getting this done
legislatively, the Treasury also has the authority to accomplish a lot
of this on its own with rule changes. So, if the Congress and the
Treasury move forward together, this can get done a lot quicker than it
would if Congress moves alone, and I'll be discussing this with the
administration directly.
Clearly there are a lot of big ideas out there for housing. Every
member of this committee has an interest in getting more affordable
housing built back home. So I look forward to our discussion today, and
I thank our witnesses for joining us.
______
Communications
----------
AHEPA Affordable Housing Management Company
10706 Sky Prairie St.
Fishers, IN 46038
317-845-3410
www.ahepamgmt.com
Statement of Steve Beck, President and CEO
Chairman Wyden, Ranking Member Crapo, and Members of the Committee, the
AHEPA Affordable Housing Management Company (AMC), a mission-driven
nationwide provider of affordable senior living communities, commends
the Committee for holding a hearing to examine the role of tax
incentives in affordable housing and appreciates the opportunity to
provide our perspective on this very important and timely topic.
We simply want to echo the resounding support by senators on both sides
of the aisle and from the hearing's witnesses for the Low-Income
Housing Tax Credit program (LIHTC), and the legislation aimed to
strengthen it, the Affordable Housing Credit Improvement Act (AHCIA).
We sincerely thank Chairman Wyden, Ranking Member Crapo, and several
Senate Finance Committee members, for their demonstrated support of
AHCIA as sponsors and co-sponsors of the bill. We also want to convey
the important role LIHTC, or Housing Credit, plays in the production
and preservation of affordable housing for older adults.
A model public-private partnership, LIHTC is our nation's primary tool
for incentivizing and encouraging private investment in the production
and preservation of affordable housing and vital to job creation. Since
1986, the affordable housing credit has leveraged billions in private
dollars to build and preserve affordable housing in every single state.
Furthermore, it represents a significant and cost-effective investment
in affordable housing for older adults. Of the Housing Credit's 3.5
million homes built and preserved since the program's inception, about
1.1 million Housing Credit homes are headed by older adults. Finally,
if enacted, AHCIA could also support nearly three million jobs, and
generate $346 billion in wages and business income and nearly $120
billion in tax revenue, leading to the production an estimated two
million more affordable homes.
Why the Housing Credit Is Important to Our Mission
Almost our entire affordable housing portfolio is comprised of
affordable independent senior living communities administered by the
U.S. Department of Housing and Urban Development's Section 202
Supportive Housing for the Elderly program. We manage 87 HUD Section
202 properties in 19 states, totaling 4,467 units. We own 6 of the 87
properties.
As HUD Section 202 communities have aged, the ability to finance major
renovations to preserve affordable housing for older adults, used to be
a challenge. However, in the FY2018 Omnibus appropriations bill,
Congress provided authority for Section 202 communities with Project
Rental Assistance Contracts (``202/PRACs'') to participate in HUD's
Rental Assistance Demonstration (RAD) to facilitate the preservation of
these homes. This policy change provided HUD 202 PRACs with the ability
to utilize RAD to access private capital for the rehab and preservation
of our properties. One key financing mechanism utilized in this process
is the Housing Credit. Thus, will rely upon a strong Housing Credit to
help us address our preservation needs. In fact, we have ``RAD for
PRAC'' deals in the works for three properties in Montgomery, Alabama,
three properties in Mobile, Alabama; and four properties in Columbia,
South Carolina--and they all involve the 4% Housing Credit.
Furthermore, in recent years, HUD has resumed issuing Notices of
Funding Opportunity (NOFOs) that provide capital advances to nonprofits
for the construction of new Section 202 units. These capital advance
funds often must be augmented, or supplemented, with gap financing,
such as the Housing Credit, to help complete the capital stack.
How the Affordable Housing Tax Credit Has Helped AMC
We are pleased to share a few examples of how the Housing Credit has
help us meet our mission.
The Housing Credit helped us to complete development of a HUD Section
202 property in Ohio. By the time of the project's initial closing, it
was advisable to utilize the 4% housing tax credit bonds to augment the
original grant provided in the HUD award to provide the upgrade needed
for construction materials and to meet Greening Guidelines.
In 2014, we utilized 4% housing tax credits and revenue bonds to rehab
and add much needed common area space to two of our Mobile HUD 202
properties in 2014.
In Michigan, the 4% housing tax credit helped us to renovate a HUD
Section 202 property when it was blended with funding from the Michigan
State Housing Development Authority.
Moreover, as witness Benson Roberts hinted, assisted living also is a
beneficiary of the Housing Credit. We proudly have utilized LIHTC to
bring affordable assisted living services to very low-income older
adults and people with disabilities in Indiana. There, the Housing
Credit played an important role with our efforts to expand our mission
to include the development of four affordable assisted living
communities, totaling 532 units. Here, the Housing Credit was blended
with multifamily housing revenue bonds to provide financing. Today, we
own and manage all four properties, and we aim to grow the affordable
assisted living model with the help of a strong Housing Credit.
The Need and Demand
We would be remiss if we did not share our experiences with the clear
need and demand for affordable senior housing with the Committee, which
is why strong tax incentives, such as LIHTC, are vital. When older
adults do learn about our HUD Section 202 communities, they are
oftentimes confronted with the harsh realities of lengthy wait lists
and wait times, unfortunately.
To demonstrate, our nationwide wait list at our HUD Section 202
communities is 4,575 submissions, an increase of 339 submissions since
January 1, 2022. Nationwide, we have 4,467 units. The wait time for our
applicants range from 6 months to 3 years.
In addition to our alarming nationwide wait list and wait times, here
is what we are hearing from our professionals out in the field:
Some inquiring people don't even request an application because
our waiting lists are too long. They want and need immediate
housing.
The number of seniors unable to afford a safe place to live in
many areas will continue to rise. They are most often faced
with choosing between healthcare and paying rent.
Unfortunately, these sentiments expressed by seniors that amplify our
wait list and wait time statistics will continue as an increased demand
in HUD-assisted housing, especially for the 202 program, is expected. A
May 2020 Government Accountability Report (GAO) report on Rental
Housing found, ``The late middle-aged group (50-64 years) experienced
the largest estimated increase in the number of renter households--an
increase of 4 million households--and accounted for more than half of
the total increase in renter households from 2001 through 2017.''\1\
The GAO noted many of these households have not recovered from the
financial crisis, and the GAO cited a Harvard Joint Center for Housing
Studies report that this group has lower incomes and higher rentership
rates than previous generations. Moreover, HUD's Worst Case Housing
Needs 2021 Report to Congress found that 2.24 million very low-income
elderly households have worst-case housing needs, paying more than 50%
of their income in rent.\2\ Finally, a 2021 Urban Institute report
predicts there will be 13.8 million new older adult households between
2020 and 2040; 40% of which (5.5 million) will be renter households.\3\
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\1\ https://www.gao.gov/products/gao-20-427.
\2\ https://www.huduser.gov/portal/sites/default/files/pdf/Worst-
Case-Housing-Needs-2021.pdf.
\3\ https://www.urban.org/research/publication/future-headship-and-
homeownership.
AMC thanks the Committee for the opportunity to share our views on how
and why tax incentives are important to affordable housing,
specifically for our nation's older adults. We welcome the opportunity
to work with the Committee to ensure older adults have access to the
safe and dignified housing they need to age in place, live
independently, and thrive; and the role tax incentives play in
providing it. Thus, it is imperative that Congress pass bipartisan-
backed legislation such as the AHCIA that strengthens programs such as
the Low-Income Housing Tax Credit to help providers like us to meet the
need and demand. Thank you.
About AMC
AHEPA Affordable Housing Management Company (AMC) is a mission-driven,
nationwide provider of affordable independent senior living and
affordable assisted living communities. It has developed and manages 87
affordable independent senior living communities in 19 states, totaling
4,467 units, that are administered by the U.S. Department of Housing
and Urban Development's Section 202 Supportive Housing for the Elderly
program.
AMC, through its subsidiaries, Hellenic Senior Living, Inc., and
Hellenic Management, Inc., owns and manages four affordable assisted
living communities with 532 units located in Indiana.
AMC is a subsidiary of AHEPA National Housing Corporation (ANHC) and is
based in Fishers, Indiana.
______
Capital One
1600 Capital One Drive
McLean, Virginia 22102
Statement of Andy Navarrete, Executive Vice President, External Affairs
Thank you for the opportunity to submit testimony for the record for
the Senate Committee on Finance's hearing entitled, ``The Role of Tax
Incentives in Affordable Housing.''
I am Andy Navarrete, Executive Vice President of External Affairs at
Capital One. Capital One was founded in 1988 by our current Chairman
and CEO, Rich Fairbank, and went public in 1994. From the beginning,
we've challenged the status quo. Through a commitment to great
products, great talent and great technology, Capital One was able to
revolutionize banking and democratize credit, bringing innovative
products to consumers across the credit spectrum. Since our founding,
we have diversified our business, enhanced our technology and analytics
capabilities, and delivered breakthrough products for customers and
clients in the U.S., United Kingdom and Canada. More than 50,000
associates serve millions of customers every day. We are a Fortune 100
leader, a nationally-recognized brand and a digital innovator on a
journey to become a leading information-based technology company.
In addition to serving our associates and customers, we believe it is
equally important to support financial inclusion and well-being
throughout the communities we serve. To embody this commitment, we
support community investments, partnerships and grants designed to
benefit affordable housing developments and their residents. In our
testimony below, we outline the following recommendations:
Increase the effectiveness of tax programs through the removal
or reduction of the 75 percent limit on general business credits,
permanently extending the carryback period, and allowing general
business credits to be creditable against any minimum tax.
Maximize Low-Income Housing Tax Credit (LIHTC) funding
opportunities by reducing the 50 percent Private Activity Bonds
financing requirement and prioritizing finalization of treasury
regulations around the average income test for LIHTCs.
Beyond our ability to provide capital to finance affordable rental
housing developments, we also invest in enhanced resident services,
including programs that deliver digital access, health services,
financial literacy and coaching and entrepreneurial support. Notably,
Capital One has a robust history as a tax credit investor through:
Financing LIHTC Developments: One of the most significant ways
Capital One supports the development of affordable housing is by
financing new construction and renovation of LIHTC developments. Since
2007, Capital One's Community Finance team, which specializes in
affordable housing and LIHTC transactions, has originated more than $16
billion in debt and equity investments. Through these investments, the
team has benefited over 154,000 households. In 2021 alone, Capital
One's Community Finance team lent and invested $1.84 billion in
affordable housing, financed over 11,000 affordable housing units and
created an estimated 14,000 jobs.\1\ Since 2007, this team has lent and
invested $16.8 billion in affordable housing, financed over 154,000
affordable housing units and created an estimated 177,000 jobs.
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\1\ Capital One uses www.nahb.org for job creation estimates per
1,000 rental units. For job creation estimates before 2019, we used the
ratio of 1.13, and for 2020 and after, we used the updated ratio of
1.25.
Serving Low-Income Communities Through NMTC: New Markets Tax
Credit (NMTC) developments can support solutions to some of the
toughest challenges low-income communities \2\ face, such as
employment, food accessibility, education and equity. Working with a
wide range of businesses, Capital One has funded projects that help
provide greater access to housing, community facilities, and commercial
goods and services, in addition to creating jobs. Since 2005, Capital
One has invested more than $3.2 billion into over 250 NMTC
developments. These projects, designed to serve or employ low-income
persons,\3\ are located in 39 U.S. states and territories. In 2021,
Capital One financed 17 NMTC projects and injected nearly $221 million
of capital in projects that serve low-income persons in the low-income
communities in which the projects are located.
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\2\ For NMTC purposes, a low-income community is a geographic area
where either the (1) poverty rate is in excess of 20 percent or (2)
median family income for the tract does not exceed 80 percent of the
greater of statewide median family income of metropolitan area median
family income.
\3\ For NMTC purposes, a low-income person is any individual having
an income, adjusted for family size, of not more than: (1) for
metropolitan areas, 80 percent of the area median family income; and
(2) for non-metropolitan areas, the greater of (a) 80 percent of area
median family income or (b) 80 percent of the statewide non-
metropolitan area median family income.
Financing Municipalities: Capital One is a national direct
municipal lender to U.S. state and local governments. Capital One's
municipal loan portfolio primarily consists of low-cost tax-exempt debt
financing products. The tax-exempt nature of the loans reduces interest
costs to the borrowers. Capital One's more than $7 billion tax-exempt
municipal loan portfolio includes $2.7 billion to K-12 public school
districts, $2.5 billion to local governments, $579 million to public
higher education and $463 million to states. The remaining amount is
distributed among public housing, special purpose districts, public
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utilities, municipal health care entities and transit authorities.
Investing in Renewable Energy Projects: Financing alternative
energy efforts helps advance Capital One's sustainable energy
initiatives. Since 2014, Capital One has invested nearly $900 million
into 12 renewable energy projects comprising utility scale wind and
solar as well as portfolios of residential solar installations. In
2021, these projects generated more than 6.2 million MWh, enough to
power nearly 600,000 homes with renewable power for one year.
As the Committee explores ways to help address the housing
affordability crisis, Capital One is grateful for the opportunity to
share our program experiences, recommendations and support for
improving tax incentives that drive positive affordable housing
outcomes.
In Action: Recognizing NMTC Resilience Amid Disruption
In 2019, Mosaic Development Partners and Shift Capital, alongside the
Philadelphia Housing Authority, embarked on a revitalization plan for
an affordable housing development and shopping center to support
Sharswood, one of the poorest and most neglected communities in
Philadelphia, PA. The North Philadelphia neighborhood had an
unemployment rate of 16 percent--nearly two times the national rate--
and a 23.26 percent area median gross income (AMI).
After decades of experiencing severe distress and access to limited
resources, the Sharswood redevelopment will provide quality residential
units and access to healthy food, retail, healthcare and financial
services through the commercial space. Additionally, it will bring an
estimated 200 construction jobs and 300 permanent jobs to the
neighborhood, with an estimated 70 percent of jobs accessible to local
community members and residents. The grocery store and other commercial
tenants plan to hire primarily low-skilled workers from the community,
which will help drive positive outcomes both for individuals and the
neighborhood.
Capital One invested in a $25 million NMTC transaction for construction
of the 45,000 square-foot shopping center, which includes 98
residential units, of which 30 percent are affordable. NMTCs were a
crucial part of the funding efforts for this development. Because the
developer and housing authority tailored the shopping center to the
needs of the neighborhood, the costs were projected to be higher and
rents projected to be lower than in a traditional development. Without
NMTCs, the project would not be able to service the debt necessary to
move forward.
COVID caused tremendous disruption to the development's progress and
completion, but the developer and project stakeholders have
demonstrated their commitment to seeing the project to fruition. Though
the project incurred increased costs and suffered from supply chain
delays, stakeholders refused to turn their backs on the project because
of the community's dire need for housing and goods and services. To
help support the development during a volatile period, government
officials and the Philadelphia Housing Authority secured additional
grant funding. The developer pledged a significant amount of its
developer fee to the project to ensure a successful construction
completion. And lead investors agreed to accept a lower return on their
investment to help absorb the increased costs.
Because of stakeholders' creativity and sheer commitment to bringing
critical housing and services to the neighborhood, the Sharswood
redevelopment is now on track to open its grocery outlet, bank and
residential units throughout the rest of this year with a targeted
completion in December 2022.
Increasing the Effectiveness of Tax Credit Programs
There is an evergreen need across the U.S. for affordable housing.
Nationwide home prices have increased nearly 19 percent year-over-
year,\4\ and rents have increased year-over-year in all large metro
markets, ``growing by double digits in 116 out of 150 metro markets and
by more than 20 percent in 25 markets.''\5\ Given Capital One's history
as a tax credit investor and our ample experience working alongside
organizations that leverage the LIHTC and NMTC programs, we have seen
first-hand the effectiveness of these programs. In fact, these programs
exemplify the success that comes when the government and the private
sector partner to reach a common goal.
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\4\ The State of the Nation's Housing 2022, Joint Center for
Housing Studies of Harvard University, 2022 available at: https://
www.jchs.harvard.edu/son-2022-home-price-growth.
\5\ The State of the Nation's Housing 2022, Joint Center for
Housing Studies of Harvard University, 2022 available at: https://
www.jchs.harvard.edu/sites/default/files/interactive-item/files/
Harvard_JCHS_State_Nations_Housing_2022_Key_Facts.pdf.
Further, Capital One has witnessed the resiliency of these tax credit
programs, first through the Great Recession, and now through the
pandemic. These disruptive moments have shaken--but not broken--the
investor community's interest in these programs. As the country
continues to struggle with the economic consequences of COVID,
investors like Capital One are renewing their focus on LIHTC and NMTC
investments with the expectation that these programs will continue to
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buttress corporate imperatives for social and community engagement.
Still, recent history has shown that investor demand for LIHTC and NMTC
can be volatile under current law during times of economic duress.
Predictions related to taxable income--and taxable income itself--can
quickly and dramatically change during times of economic uncertainty.
This volatility makes it difficult for investors to commit to future
tax credit investment activity. For example, during the 2007-2009 Great
Recession, the demand for LIHTCs plummeted \6\ when most LIHTC
investors--primarily large, national banks, and Fannie Mae and Freddie
Mac--swung from profitability to loss and could no longer use tax
credits. There was an estimated 40 percent decrease in investment in
tax credits nationally, and investment fell by much more in small
metropolitan and rural areas.\7\
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\6\ Capital One has remained an active market participant in LIHTC
and NMTC investments since prior to the Great Recession.
\7\ The Disruption of the Low-Income Housing Tax Credit Program:
Causes, Consequences, Responses, and Proposed Correctives, Joint Center
for Housing Studies of Harvard University, 2009 available at https://
www.jchs.harvard.edu/sites/default/files/
disruption_of_the_lihtc_program_
2009_0.pdf.
Now, the pandemic has also impacted investor appetite, especially with
respect to NMTC investments. Historically, the NMTC investor space has
been dominated by a small number of large financial institutions that
invest in NMTC transactions for philanthropic purposes as well as for
the Community Reinvestment Act (CRA), tax planning and financial return
reasons. As a result, their sensitivity to economic volatility is much
greater, especially over the short term. When one or two banks
``pause'' their investments, it has a very material impact on the
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industry.
While one large NMTC investor is pursuing a syndication program within
the space, there is not a widely functioning syndication market that
could broaden the investor base similar to what's available in the
LIHTC market. The complexity of the NMTC structure also impacts the
development of a true ``yield'' investor marketplace. As such,
broadening the demand of the existing market is critical to the
industry's stability.
The volatility that impacts LIHTC and NMTC investment is directly
influenced by the federal income tax code. The general business credits
authorized by the Internal Revenue Code of 1986, as amended (the Code)
typically only offset up to 75 percent of an investor's annual tax
liability, which shrinks taxpayer tax credit investing capacity so much
that investors with declining revenues and unclear prospects for future
profitability may choose to pause their investment activity.
Further, while the Code allows investors to apply unused tax credits to
the immediately preceding taxable year or the following 20 future
taxable years, this carryback/carry forward framework has negative
consequences for bank regulatory capital calculations and does little
to bolster investor confidence or facilitate investment return
computations. Generally, tax credit investors commit to individual
transactions and allocate their total pipeline in a way that will best
utilize a company's expected tax capacity for any given year without
exceeding that capacity. As a result, when an economic disruption
occurs, investors must battle the economic impacts of the disruption
while armed with only the excess tax capacity that was generated--and
actively minimized--in the immediately preceding year. This is
especially challenging considering future taxable income levels are
either unknowable in the near-term or likely to be depressed.
Because of these Code provisions, tax credit investor appetite is
constrained by the volatility that accompanies times of economic
stress. Therefore, it may not rise to the level of investment needed to
ensure a steady supply of affordable housing units that benefit
households with low to moderate incomes and support living wage or low-
income community jobs, goods and services.
With these considerations in mind, Capital One recommends the following
actions:
Remove or Reduce the 75 Percent Limit on General Business
Credits: Capital One recommends removing or reducing the 75 percent
limit on general business credits, which would increase the amount of
LIHTCs and other general business credits each investor could claim.
Easing this limit would be impactful during years when macroeconomic
conditions cause corporate profits to decline, yet safe affordable
housing is still needed--especially for households with low to moderate
income.
Permanently Extend the Carryback Period: Capital One recommends
permanently extending the carryback period for LIHTCs and NMTCs from
one to five years to reduce volatility in investor demand. This
carryback extension would allow investors that experience--or expect to
experience--losses (or drastically lower profits) to continue to
utilize credits. It would also shorten the time span over which future
tax liabilities would need to be predicted, making these tax credit
investments more attractive and reliable. When surveyed in 2009,
several of the largest banks with the worst losses at that time
calculated that a five-year carryback would double their demand for tax
credits in the near term.\8\ Notably, because LIHTC and NMTC
investments are already subject to allocation caps versus unlimited
volumes, the fiscal cost of this change should be limited to the cost
associated with having few unused or expired credits, which would be a
minor expense.
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\8\ The Disruption of the Low-Income Housing Tax Credit Program:
Causes, Consequences, Responses, and Proposed Correctives, Joint Center
for Housing Studies of Harvard University, 2009 available at https://
www.jchs.harvard.edu/sites/default/files/
disruption_of_the_lihtc_program_
2009_0.pdf.
Allow General Business Credits to be Creditable Against Any
Minimum Tax: Capital One supports having general business credits be
creditable against any minimum tax based on book and/or worldwide
income. For example, as outlined in the Biden Administration's proposed
budget for fiscal year 2023,\9\ the base erosion anti-avoidance tax
imposed when certain U.S. taxpayers make deductible payments to
foreign-related parties would be replaced with an under taxed profit
rule. This change is intended to ensure income earned by a
multinational company, whether based in the U.S. or elsewhere, is
subject to a minimum rate of taxation regardless of where the income is
earned. As proposed, general business credits would be creditable
against this minimum tax. Capital One commends Congress and the Biden
Administration for their continued support of the public policy
considerations that led to the initial creation of these tax
incentives.
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\9\ General Explanations of the Administration's Fiscal Year 2023
Revenue Proposals, U.S. Treasury Department, 2022 available at https://
home.treasury.gov/system/files/131/General-Explanations-FY2023.pdf.
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In Action: LIHTC Provides Veterans and Grandfamilies with Quality,
Safe Housing
When American Legion Post 139 began working with the Arlington (VA)
Partnership for Affordable Housing (APAH) to redevelop its Virginia
Square site, it stayed true to its mission to serve and prioritize
veterans' needs. The new facility, Terwilliger Place, will add 160
affordable housing units to the community--half of which will be set
aside for veterans. According to the APAH, this community is
``Virginia's largest affordable housing project for veterans and the
first Housing Credit project in Virginia with a leasing preference for
veterans.''\10\ The property elected the average income test (AIT) set
aside to serve households earning between 30 and 80 percent of AMI.
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\10\ APAH and American Legion Post 139 Celebrate the Terwilliger
Place Construction Start, Arlington Partnership for Affordable Housing,
2020 available at https://apah.org/apah-and-american-legion-post-139-
celebrate-the-terwilliger-place-construction-start/.
The $80 million development includes $25 million in construction debt
and $37 million LIHTC equity investment originated by Capital One.
Capital One also provided $70,000 in pre-development grants. Beyond
creating much needed affordable housing, the community will also offer
veteran-focused resident services and programming in its community
spaces. Terwilliger Place will celebrate its grand opening with a
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ribbon-cutting ceremony in September 2022.
Less than 10 miles from Terwilliger Place, a second LIHTC development
is helping support another population. Grandfamilies, or families in
which grandparents are the primary caregivers for their grandchildren,
can be impacted by circumstances such as parents' addiction or
incarceration. At the same time, these households can typically
struggle to access housing resources and subsidies that are available
to parents. That's the challenge that Plaza West in Washington, DC,
aimed to solve when it reserved 50 of its 223 units for grand families
earning 30 percent, 40 percent and 50 percent of AMI.
According to grandmother and Plaza West resident, Vera Long, the
community has provided her with support. ``What I can say about Plaza
West is that it's been a relief to have somewhere to live, to raise my
grandchildren. It's a joy being here. It's home.''\11\
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\11\ Grandfamilies Find Support in DC Development, Affordable
Housing Finance, 2020 available at https://www.housingfinance.com/
developments/grandfamilies-find-support-in-d-c-development_o.
The development of the property benefitted from a $34 million LIHTC
equity investment from Capital One in 2016, inclusive of a $200,000
social purpose investment to help fund support services for residents.
Beyond supporting grandfamilies, the development includes 173
additional affordable apartments for individuals and families earning
less than 60 percent of AMI.
Maximizing LIHTC Funding Opportunities
The LIHTC program is the most important source of funding for building
affordable housing in the U.S. Leveraging tax credits provides a much-
needed source of capital for developers. Capital One is committed to
working with industry and policy stakeholders to identify and design
solutions that create more affordable housing and ultimately strengthen
communities and advance socioeconomic mobility across the country.
We propose the following recommendations to maximize LIHTC funding
opportunities:
Reduce the 50 Percent Private Activity Bonds (PAB) Financing
Requirement: Under current law, a multifamily property qualifies for 4
percent LIHTCs only when at least 50 percent of the total development
cost--including land--is financed with tax-exempt multifamily
obligations/bonds called Private Activity Bonds (PAB). Capital One
recommends reducing the 50 percent PAB financing requirement.
Reducing the 50 percent PAB financing requirement to 25 percent
would create additional PAB availability, which in turn could be
allocated to finance more affordable rental properties. In 2021, an
accounting firm specializing in tax credits estimated that lowering the
threshold for tax-exempt PABs from 50 to 25 percent for buildings
financed by obligations in 2022-2026--as was included in the House-
passed version of the Build Back BetterAct--could generate an
additional 735,500 affordable rental homes according to some estimates.
Support for reducing the 50 percent PAB financing requirement was also
proposed in 2021 through The Decent, Affordable, Safe Housing For All
(DASH) Act and The Affordable Housing Credit Improvement Act of 2021.
Prioritize Treasury Regulations Around the Average Income Test
(AIT) for LIHTCs: Capital One recommends prioritizing swift
finalization of the Treasury guidance needed to fully operationalize
the AIT for LIHTC qualification.
For properties to qualify for LIHTCs, a minimum number of units
must be set aside for households with low incomes. In 2018, Congress
created a new set aside, the AIT, to increase the supply of affordable
units.\12\ The AIT allows a property to qualify for LIHTC if the unit
income designations for the property averages at or below 60 percent of
AMI, provided that individual units are designated no lower than 20
percent and no higher than 80 percent of AMI. This allows LIHTC
properties to serve a wider band of households, including households
with extremely low income. It is also inclusive of households between
61 and 80 percent of AMI that have traditionally been excluded from
LIHTC properties but are cost-burdened for market rate housing,
especially in high-cost metro areas.
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\12\ Code Section 42(g)(1)(C) requires designations at 20, 30, 40,
50, 60, 70, or 80 percent of AMI.
President Biden's Housing Supply Action Plan notes, ``this
`average income test' for LIHTC qualification will enable the creation
of more financially stable, mixed-income developments and make LIHTC-
supported housing more feasible in sparsely populated rural areas. It
will also facilitate the production of additional affordable and
available units for extremely low-income households.''\13\ However,
guidance released by the Internal Revenue Service in 2020 in the form
of proposed Treasury Regulations \14\ had a chilling effect on the
application of this qualification test, in part by prescribing a more
punitive result for noncompliance with the AIT minimum set aside test
than the two historic minimum set aside tests.
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\13\ President Biden Announces Actions to Ease the Burden of
Housing Costs, White House, 2022 available at https://
www.whitehouse.gov/briefing-room/statements-releases/2022/05/16/
president-biden-announces-new-actions-to-ease-the-burden-of-housing-
costs/.
\14\ Proposed Treas. Reg. Sec. 1.42-15 and Sec. 1.42-19; REG-
119890-18 (10/30/2020).
As it was intended, the AIT benefits residents and helps avoid
displacement. In its 2021 tax credit application submitted to the
California Tax Credit Allocation Committee, MidPen Housing Corporation
elected to the AIT set aside to avoid permanently displacing existing
residents at Willow Garden Apartments and Greenridge Apartments--now
known as Willow Greenridge--whose income exceeded 60 percent of the
area median income. Capital One financed the acquisition and
rehabilitation of the 70-unit family development in South San Francisco
in which eight units were set aside at 80 percent AMI, thus permitting
those residents to stay in their homes. An additional 10 units were set
aside for households at 30 percent AMI, with another 18 units set aside
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for households at 40 percent AMI.
It's critical to finalize Treasury Regulations that incorporate
stakeholder feedback and restore widespread use of the AIT minimum set
aside, as intended by Congress. These regulations are key to expanding
the housing supply and affordability for households with the lowest
incomes as well as households with moderate and middle income
households.
Conclusion
Without tax incentive programs, communities like Sharswood, Terwilliger
Place, Plaza West and Willow Greenridge Apartments would not be
accessible to the hundreds of households and residents they serve. And
these communities are representative of the countless properties that
tax incentive programs support. Government programs like NMTC and LIHTC
are critical enablers of investment, and they are driving solutions to
some of the toughest challenges the U.S. faces today, from affordable
housing to financial well-being and inclusion.
Capital One appreciates the Committee's continued focus on improving
affordable housing outcomes through tax incentives and this opportunity
to share our thoughts. We look forward to working with the Committee in
the future as we pursue our common goal of building thriving
communities.
______
Center for Fiscal Equity
14448 Parkvale Road, Suite 6
Rockville, MD 20853
[email protected]
Statement of Michael G. Bindner
Chairman Wyden and Ranking Member Crapo, thank you for the opportunity
to submit these comments for the record to the Committee on this topic.
They are ``counter-programming'' in an effort to raise issues that are
mostly ignored by the invited witnesses. We will address two sets of
issues: Housing and Income.
HOUSING ISSUES
The Housing Market
Building scientist Belinda Carr highlights why the current economy is
similar to 2005 in a recent YouTube video at https://www.youtube.com/
watch?v=77g6j
RBG1cI&list=WL&index=4&t=570s. Her five main points against an actual
housing shortage are:
1. Declining population growth: Low birth rate, higher death
rates. Permits are meeting population growth rates.
2. People per unit has declined.
3. Number of rental units--large number of investor units,
especially in minority neighborhoods. Investors driving out individual
buyers.
4. Low interest rates have driven up prices, driving up investor
incentives.
5. Mismatch of housing types and locations. The rise of remote
work and possibility of large firms linking wages to housing prices if
a recession occurs (because, as monopsonies, they can).
I recommend asking her for comments or testimony. At least circulate
the YouTube link.
Her research is in keeping with other analyses, including my own, on
the prospect of a housing recession.
Starting in 2009, properties that have been seized in foreclosure have
been purchased with private equity and are so heavily leveraged that
they cannot be sold until the holding company files for bankruptcy in
the next Great Recession. See Homewreckers: How a Gang of Wall Street
Kingpins, Hedge Fund Magnates, Crooked Banks, and Vulture Capitalists
Suckered Millions Out of Their Homes and Demolished the American Dream,
by Aaron Glantz. The C-SPAN Book TV discussion with Mr. Glantz will
give the committee a heads-up on what such testimony would include. See
https://www.c-span.org/video/?465567-1/homewreckers.
The long and short of it is that many now have to rent or own leveraged
properties. Our absentee landlords have cashed out and left servicing
companies to bleed us dry. They essentially own us because we have to
work harder and longer to have a place to live while those who have
cashed out live in gated and high-end assisted living communities. In
the last year, Exchange Traded Funds have been all the rage. Who wants
to bet on where the latest pool of junk is hiding?
In 2008, the Troubled Asset Recovery Program was enacted, promising aid
to homeowners. The next year, CNBC Rick Santelli had his ``rant of the
year'' which put the kibosh on any aid to homeowners, although there
was little appetite to provide it from the Larry Summers wing of Obama
economic team anyway. They did, however, stay behind bailing out the
holders of the bad paper.
Let us not repeat (or rather continue to repeat) the bad practices that
left the economy in the doldrums. During the pandemic, the Federal
Reserve has purchased bad paper, but without benefit to those whose
debts are held in those bonds.
This time around, credit card balances and back rent should be forgiven
when the Federal Reserve buys the bonds that hold the debt. Loans could
also be written down, which would stop bondholders from benefiting from
issuing bonds that should never have been issued in the first place.
Renters of both commercial and residential property should be offered
the chance to purchase their locations and homes, with assistance from
Government Sponsored Enterprises, with their paper replacing the debt
paper that has been securitized in Exchange Traded Funds.
ETFs may take a hit, but what was falsely sold as AAA paper would
actually become what was sold. Bad landlords, and Glantz demonstrates
that Mr. Mnuchin and Mr. Ross truly are bad landlords, degrade
properties so that the bonds that were issued for them to cash out are
nowhere near the value at issue.
In 2009, the United States aided and abetted those who created the
crisis. We are currently repeating the mistake. When the inevitable
crisis occurs again, doing the right thing will also be the right
medicine for the economy.
The Opportunity Zone Program and Who It Left Behind (November 16,
2021)
Opportunity zones are the flavor of the decade, proceeding from
enterprise, urban renewal and the destruction of neighborhoods in order
to bring Interstate Highways to cities.
Worse than redlining and segregation, urban renewal, which the civil
rights community calls Negro Relocation. Hispanic neighborhoods are
also suffering the same fate. Time and again, poorer residents are
moved to the suburbs so that coffee shops, high end grocery stores and
luxury apartments can be built for professionals, also known as the
creative class. In short, young and middle aged white people with high
incomes.
Developers bridge the gap between property acquisition and sale so that
those who are displaced leave with lower payments while the developers
benefit from any increase in property values. Such actions are why
Henry George proposed pergovian land value tax, collecting 100% of land
value each year and then distributing a citizens dividend to everyone
(so that poorer people benefit from the price loss experienced by high
end developers.
I usually do not endorse Georgism as the sole solution to inequality.
Creating cooperatives that democratically give members control of the
means of production, consumption, human services and finance is more my
speed; but even I would have the cooperative pay a land value tax to
fund services for those who continue to live in a Smart Growth area
dominated by such a cooperative. It would continue to fund services
after any relocation (unless families wish to join the cooperative.
In the interim, Opportunity Zone provision should be repealed. We need
no more displacement from here on in. This type of tax incentive is
counter-productive.
Fair Housing Enforcement
There is a similar matter that needs mention--Fair Housing (especially
considering recent campaign bloviating). In light of recent Supreme
Court rulings including sexual orientation in sex for employment law--
there is no reason to believe that this revised definition does not
apply to every part of the Civil Rights Act--as well as the Fair
Housing Act.
Are civil penalties enough to force compliance? Experience shows that
they do not. A former roommate, who got his Section 8 before I did, was
exposed to possible discrimination couched in the language of credit.
He complained to the Housing Office and the landlord caved in. This was
2018 in liberal Montgomery County. The continued need for training by
the Patricia Roberts Harris National Fair Housing Training Academy
(where I also worked) is less anecdotal.
When I was the Ward 3 Community Relations Representative in the D.C.
Office of the Ombudsman, we were given a talk by the Solid Waste
Management office. Their motto was that there is no better education
than a ticket. This would be equally true in fair housing, as well as
all other civil rights enforcement. It is time to quit talking about
reform and to actually start doing it.
Bias in Housing Policy
When dealing with federal housing, and income support in general, the
desire for economic justice and environmentalism sometimes conflict.
Anti-poverty programs are notorious for not funding those with the
father in the home. This is the result of both racism and the desire to
limit the number of clients. In short, the Zero Population Growth
mentality has made it into housing and income support policy.
There should be no conflict here. The ZPG/racist and cost control
arguments are simply unworthy of American Society, while being endemic
within them. All people of good conscience should resist such nonsense
and I will do so with my last dying breath.
Prior to the Wars on Drugs and on Poverty (the Poor?), the model for
housing in modern America was the three bedroom house. This included a
bedroom for parents, one for the boys and one for the girls. An oldest
child may eventually get his or her own room at some point if there
were a four bedroom or basement/attic space that could be used as a
bedroom.
Aside from the war on the poor, there is no reason that publicly funded
housing should have departed from this norm. This includes Section 8
assistance. If public housing included three bedroom units, there would
not be a drive toward driving families toward ownership that they
cannot afford over the long term.
Federal low- and moderate-income housing, including the low-income
housing my family participated in during the 2000s, gave generous
assistance to get us in, but was not adequate to keep us there. We
mistakenly borrowed using a step-up mortgage. This would have been fine
if the payment itself, rather than the mortgage rate, had ``stepped
up'' by inflation each year. What we received was unsustainable, which
ended in foreclosure, bankruptcy and divorce. I doubt we were the only
ones. See the above discussion on the 2008 bailout for other
difficulties which could have been dealt with via public policy.
Federal rental and purchase support should be two sides of the same
program. As with Medicare, some participants should be dual eligible
for both down payment assistance and rental assistance. Indeed,
everyone approved for one must be declared eligible for the other. If
this were the case, my family may have stayed in more affordable
housing.
The surest way to help federal housing beneficiaries escape the need
for rental assistance, indeed any assistance--including bankruptcy
protection--is to make sure that families have adequate incomes. The
entire low-income housing program--from mortgage subsidies to Section
8, as well as most other statutory low-income support benefits--could
be decreased or curtailed with adequate support for families through
adequate wages, training programs, child tax credits, and the other
elements of the Build Back Better proposals.
Fix income inequality with higher minimum wages and child tax credits
and the free market will respond to the real needs of families. Two
parent families with more than two kids should be able to demand three
bedroom apartments, all things being equal. End the bias against two-
parent families in current programming and creativity will take care of
the rest.
INCOME SECURITY
It is time to end the two-tier economy. No one should have to work in
what Michael Harrington called The Other America. With the end of
welfare as we knew it, circumstances have actually gotten worse since
Harrington's seminal work. The rise of delivery services, which require
drivers to earn tips, and the gig economy, which prevents easy tipping,
has made things even worse in the name of progress. We are working
harder for less. This Committee can start the ball rolling to fix this.
Minimum Wage
The best option for food security and low income housing is to increase
incomes by increasing the minimum wage and the child tax credit and
indexing them to inflation.
Increasing the minimum wage to $10 should take effect immediately,
phasing to $12. You can argue about a $15 or $18 minimum after the
midterm elections. Higher minimum wages increase job growth, as lower
wage employees spend every dime of the increase, as do higher wage
workers below the middle-management level whose wages will also rise.
Provisions should also be included in law to hold franchisees harmless
if minimum wage increases impact their own livelihoods. The conditions
of franchise employment and agreement deserve attention as well in
terms of agreed to standards, payment of franchise owners in low wage
industries and the ability of workers to organize. If some firms decide
to turn franchise employment into full-time employment, so much the
better.
It is indeed a poor job where the physical productivity of workers in
comparison with other factors is under this level, especially when
child tax credits are excluded from the equation. The intermediate goal
should be either a $12 minimum wage (so that it is comparable to the
buying power experienced in 1965) or an $11 wage with a 32-hour work
week.
The perception that doing the right thing makes a business non-
competitive is the reason we enact minimum wage laws and should require
mandatory leave. Because the labor product is almost always well above
wages paid, few jobs are lost when this occurs. Higher wages simply
reduce what is called the labor surplus, and not only by Marx. Any CFO
who cannot calculate the current productive surplus will soon be
seeking a job with adequate wages and sick leave.
The requirement that this be provided ends the calculation of whether
doing so makes a firm non-competitive because all competitors must
provide the same benefit. This applies to businesses of all sizes. If a
firm is so precarious that it cannot survive this change, it is
probably not viable without it.
Childcare and Paid Leave
Childcare is best provided by the employer or the employee-owned or
cooperative firm. On-site care, with separate spaces for well and sick
children, as well as an on-site medical suite to treat sick employees,
will uncomplicate the morning and evening routines. Making yet another
stop in an already busy schedule adds to the stress of the day. Knowing
that, if problems arise at a work-based daycare, they can be right
there, will help parents focus on work.
Larger firms and government agencies can more easily provide such
facilities. Indeed, in the Reeves Center of the District Government,
such a site already exists. Smaller firms could make arrangements with
the landlord of the building where offices or stores are located,
including retail districts and shopping malls. For security reasons,
these would only serve local workers, but not retail customers.
A tax on employers would help society share the pain for requiring paid
leave. Firms that offer leave would receive a credit on their taxes
(especially low wage firms). Tax rates should be set high enough so
that.
Child Tax Credits
The Child Tax Credit should support the income of each dependent child
at median wage levels and be fully refundable. If a parent participates
in education and training, their child tax credit should be paid with a
training stipend set to the minimum wage. Including these benefits with
pay reduces the need for a $15 minimum wage. $12, which is in line with
historical averages prior to 1965, should be adequate.
There are two avenues to distribute money to families. The first is to
add CTC benefits to unemployment, retirement, educational (TANF and
college) and disability benefits. The CTC should be high enough to
replace survivor's benefits for children.
The second is to distribute them with pay through employers. This can
be done with long term tax reform, but in the interim can be
accomplished by having employers start increasing wages immediately to
distribute the credit to workers and their families, allowing them to
subtract these payments from their quarterly corporate or income tax
bills.
Tax Reform
Tax reform will help both low wage and gig/1099/staffing services
workers who are essentially full-time but are not treated as such.
Because these ``vendors'' would have to pay the tax and receive the
breaks, client firms would have the incentive to hire them instead
Our tax reform plan, which was last adjusted on June 10th of this year,
features a Subtraction Value-Added Tax. This tax can serve as an
employer-based vehicle for distributing child tax credit, healthcare
and childcare benefits.
The S-VAT could be levied at both the state and federal levels with a
common base and tax benefits differing between the states based on
their cost of living (which would be paid with the state levy). The
federal tax would be the floor of support so that no state could keep
any part of its population poor, including migrants. It is time to end
the race to the bottom and its associated war on the poor.
Between the CTC and the Earned Income Tax Credit, the CTC is to be
preferred. Applying for an EITC is part of why it is expensive to be
poor. For most, outside help is needed to calculate it. Having to get
such help is a ``poor tax.'' Our proposed changes to individual payroll
taxes propose a way to end this credit while assuring adequate
retirement savings and family income. The following paragraphs are an
excerpt from our current tax reform plan.
Subtraction Value-Added Tax (S-VAT). These are employer paid Net
Business Receipts Taxes. S-VAT is a vehicle for tax benefits, including
Health insurance or direct care, including veterans' health care
for non-
battlefield injuries and long-term care.
Employer paid educational costs in lieu of taxes are provided as
either
employee-directed contributions to the public or private unionized
school of their choice or direct tuition payments for employee children
or for workers (including ESL and remedial skills). Wages will be paid
to students to meet opportunity costs.
Most importantly, a refundable child tax credit at median income
levels (with inflation adjustments) distributed with pay.
Subsistence level benefits force the poor into servile labor. Wages and
benefits must be high enough to provide justice and human dignity. This
allows the ending of state administered subsidy programs and
discourages abortions, and as such enactment must be scored as a must
pass in voting rankings by pro-life organizations (and feminist
organizations as well). To assure child subsidies are distributed, S-
VAT will not be border adjustable.
The S-VAT is also used for personal accounts in Social Security,
provided that these accounts are insured through an insurance fund for
all such accounts, that accounts go toward employee ownership rather
than for a subsidy for the investment industry. Both employers and
employees must consent to a shift to these accounts, which will occur
if corporate democracy in existing ESOPs is given a thorough test. So
far it has not. S-VAT funded retirement accounts will be equal-dollar
credited for every worker. They also have the advantage of drawing on
both payroll and profit, making it less regressive.
A multi-tier S-VAT could replace income surtaxes in the same range.
Some will use corporations to avoid these taxes, but that corporation
would then pay all invoice and subtraction VAT payments (which would
distribute tax benefits). Distributions from such corporations will be
considered salary, not dividends.
Individual payroll taxes. Employee payroll tax of 7.2% for Old-Age and
Survivors Insurance. Funds now collected as a matching premium to a
consumption tax based contribution credited at an equal dollar rate for
all workers qualified within a quarter. An employer-paid subtraction
value-added tax would be used if offsets to private accounts are
included. Without such accounts, the invoice value-added tax would
collect these funds. No payroll tax would be collected from employees
if all contributions are credited on an equal dollar basis. If employee
taxes are retained, the ceiling would be lowered to $85,000 to reduce
benefits paid to wealthier individuals and a $16,000 floor should be
established so that Earned Income Tax Credits are no longer needed.
Subsidies for single workers should be abandoned in favor of radically
higher minimum wages. If a $10 minimum wage is passed, the employee
contribution floor would increase to $20,000.
Pro-Life Scoring
The following paragraphs should be familiar to members and staff. Now
that Roe v. Wade has been overturned, they should be made available to
everyone.
These reforms MUST be scored as pro-life legislation and be funded more
broadly than the President has promised. Having served on the staff of
a major abortion rights organization in the past, I can assure you that
no such organization would ever oppose higher living standards for
women and their families!
The chief obstacle for funding families is not the feminist movement.
It is the so-called right to life movement who would rather women be
penalized for having abortions than subsidized so that they are not
necessary. Over the course of many decades, I have had conversations
with conservative members of the pro-life community. When push comes to
shove, they oppose the measures above because their objections to
abortion are more about sexuality than the welfare of children.
In the pro-choice movement, many jump to the defend women's bodies
argument before first addressing the need for adequate family income.
Doing so now will shame the leadership of the pro-life movement into
supporting these provisions to Build Back Better.
Many in the pro-life movement already do. Catholic Charities USA,
NETWORK and the Catholic Health Association all stand with working and
poor women. They must be very publicly leveraged to get the U.S.
Conference of Catholic Bishops behind them as well--and to have the
bishops insist that these measures be considered must-pass legislation
for the computation of pro-life voting records.
Catholic members of Congress and the President should also lead on this
effort. It is time to stop grandstanding on this issue. These measures
must pass--and on a larger scale than provided for in Build Back
Better.
Thank you for the opportunity to address the committee. We are, of
course, available for direct testimony or to answer questions by
members and staff.
______
Housing Development Center
524 E Burnside Street, Suite 210
Portland, OR 97214
503-335-3668
https://www.hdc-nw.org/
August 1, 2022
U.S. Senate
Committee on Finance
Dirksen Senate Office Bldg.
Washington, DC 20510-6200
Re: The Role of Tax Incentives in Affordable Housing--Hearing Date:
July 20, 2022
Dear Members of the Committee:
I am writing to urge you to continue building on your past work to use
tax incentives to address our nation's vast unmet need for affordable
housing. Specifically, I encourage the committee to pass four pieces of
currently proposed legislation:
The Affordable Housing Credit Improvement Act (AHCIA),
The LIFELINE Act,
The Neighborhood Homes Investment Act, and
The Affordable Housing Bond Enhancement Act.
AHCIA is bipartisan legislation. It contains critical provisions to
improve the effectiveness of the two most important production tools
available to finance affordable rental housing: low-income housing tax
credits (LIHTCs) and tax-exempt private activity housing bonds. LIHTCs
have financed more than 3.6 million affordable rental homes for low-
income families, seniors, veterans, and those with special needs since
its creation in 1986. In recent years, more than half of LIHTC-financed
homes have been financed with the help of multifamily housing bonds.
I am offering my perspective as the executive director of Housing
Development Center (HDC), a mission-driven nonprofit that has managed
the financing of hundreds of rent-restricted affordable housing
developments in Oregon and southwest Washington. HDC provides
development services to community-based nonprofits and housing
authorities operating across our region--organizations that provide
affordable homes to populations ranging from single adults
transitioning from homelessness in Portland to farm workers and their
families in rural southern Oregon.
Nearly all these homes (HDC has helped to develop 7,000+ since 1993)
are financed in part with equity from the sale of LIHTCs, often in
addition to tax-exempt private activity housing bonds. Without these
sources, it would be economically infeasible to create them. Community-
based housing providers would not be able to pay the costs of
developing and operating the housing without charging rents out of
reach of their low-income residents.
I encourage the Senate Finance Committee to pass the AHCIA to
strengthen the impact of low-income housing tax credits and housing
bonds. Additionally, I encourage the committee to pass the LIFELINE
Act, which would create more flexibility for states, local governments,
and tribes to use existing funds to get more affordable housing built.
Finally, I support Senator Wyden's and Oregon Housing and Community
Services Director Andrea Bell's calls to pass the Neighborhood Homes
Investment Act and the Affordable Housing Bond Enhancement Act. These
bills will further enhance our community's tool kits for creating
affordable housing for families and individuals who are priced out of
the market.
Lack of access to affordable housing creates devastating impacts on
low-income families, seniors, people with disabilities, and others who
are struggling to meet their basic needs in Oregon, Washington, and
communities across the country. Thank you for prioritizing these and
other policies to address our nation's ongoing housing affordability
crisis.
Sincerely,
Traci Manning
Executive Director
______
National Community Renaissance
9421 Haven Avenue
Rancho Cucamonga, CA 91730
Statement of Steve PonTell, President and CEO
I am pleased to submit this statement for the record for the July
20, 2022 Senate Finance Committee Hearing on ``The Role of Tax
Incentives in Affordable Housing.''
The purpose of this statement is to ask the Committee to consider
legislation to create a supportive services tax credit, to complement
the low income housing tax credit. The purpose of such legislation is
to fund critically needed supportive services for residents living in
federally assisted low income housing.
I am submitting this statement on behalf of National Community
Renaissance (also known as National CORE). National Core is one of the
nation's largest non-profit affordable housing developers. We provide
affordable housing to 25,000 residents in over 8,500 affordable rental
units. We are proud of the fact that National CORE recently become only
the second nonprofit affordable housing developer in the country to
receive an A+ bond rating from Standard and Poors (S&P). We then used
that rating to issue $100 million in bonds to expand our ability to
build more affordable housing units.
The construction of affordable rental housing should be one of our
nation's highest priorities, at a time of skyrocketing rents and
historic challenges with housing affordability. For that reason,
National CORE continues to be a strong supporter of a significant boost
in the volume of low income housing tax credits, the principal funding
mechanism for new construction of affordable housing units.
It is disappointing that the Senate has not acted on the House's
original Build Back Better provision, which would have created $30
billion in additional funds, resulting in an estimated 1.4 million
affordable rental units, serving over 3.5 million Americans.
However, we note that there is widespread support for this
provision, so I will focus my statement today on a critical component
that should go along with the construction of new affordable housing--
which is enriched resident services to serve the families living in
federally assisted affordable housing.
Our federal housing policies cannot just be about building more
affordable housing units. It must also be about improving the lives of
the families, seniors, and disabled persons living in that housing. To
that end, a top priority of National CORE is providing enriched
supportive services to our residents, through our subsidiary Hope
Through Housing.
Hope Through Housing is at the forefront in providing family self-
sufficiency and financial literacy services, so families can pull
themselves out of poverty. Our after-school programs give youth a sense
of belonging and a constructive way to spend their time. We help
seniors and persons with disabilities access health care, through
partnerships with major health care providers like Common Spirt and
Inland Empire Health Plan (``IEHP'').
Unfortunately, there is no reliable federal funding source for such
resident services. In fact, while HUD has programs for service
coordinators to help access already existing services in the community,
there is no HUD program that directly funds resident services in low
income housing. Moreover, the service coordinator programs that HUD
does have exclude low income tax credit programs from eligibility, with
most dollars going to public housing agencies.
That is why National CORE was pleased to support House bill H.R.
6602, the ``Affordable Housing Resident Services Act of 2022,''\1\
which would authorize $300 million for each of the next five years for
supportive services for residents living in federally assisted low
income housing. H.R. 6602 is supported by numerous national advocacy
groups like the Corporation for Supportive Housing, the Housing
Partnership Network, the Affordable Housing Tax Credit Coalition, and
the National Leased Housing Association.
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\1\ https://www.congress.gov/bill/117th-congress/house-bill/6602/
text.
National CORE is also pleased that the recent House FY 2023 Labor
HHS Appropriations bill included a $3 million in funding for
demonstration program to provide resident services in federally
assisted housing. Additionally, the House FY 2023 THUD Appropriations
bill included Report Language that ``recognizes the importance of
supportive services in affordable housing properties as a proven
solution to improving housing stability, employment, mental and
physical health, and other benefits for low-income families'' and asked
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for a GAO report on the subject.
We encourage the Senate to boost the funding level above the $3
million in demonstration funding in the House bill.
We also encourage Congress to take authorizing action on H.R. 6602.
At the same time, a strong case can be made that the simplest and
most efficient way to provide federal resources for resident services
in federally assisted housing is to create a supportive services tax
credit, that complements the low income housing tax credits being used
for housing construction.
The Affordable Housing Tax Credit Coalition (AHTCC), a trade
organization of for profit and non-profit organizations involved in
developing and financing affordable rental housing using low income
housing tax credits, is the acknowledged leader in working to
continuously improve the impact and effectiveness of the housing tax
credit program. AHTCC would be an ideal organization to ask for
guidance on how to structure a resident services tax credit.
From our perspective, an effective supportive services tax credit
would allocate such tax credits to the states, which could then use
their housing tax credit allocation process to additionally allocate
these new tax credits for this purpose.
Basic components of such legislation could include:
(1) Eligible resident services--which should include economic
self-sufficiency activities (including job training, financial
literacy, financial counseling), after school programs, youth services,
health services, assistance with mental health, alcohol and addiction
problems, childcare and eldercare, and access to services in the local
community.
(2) A specified amount of credit increase for providing the
supportive services.
(3) Existence of an extended supportive services commitment for
the project--identifying amounts to be spent on different services,
certification (including re-certification every five years), and annual
reporting to the housing credit agency on expenditures and outcomes.
(4) Responsibilities of the housing credit agency to establish
criteria to determinate appropriate evidence based supportive services
and a process for monitoring rule compliance.
(5) Provision for credit recapture in the case of non-
compliance.
In closing, I thank the Committee for the opportunity to present
this proposal, and would be happy to discuss it in more detail.
______
National Multifamily Housing Council and
National Apartment Association
The National Multifamily Housing Council (NMHC) and the National
Apartment Association (NAA) respectfully submit this statement for the
record for the Senate Finance Committee's July 20, 2022, hearing titled
``The Role of Tax Incentives in Affordable Housing.''\1\
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\1\ For more than 20 years, the National Multifamily Housing
Council (NMHC) and the National Apartment Association (NAA) have
partnered in a joint legislative program to provide a single voice for
America's apartment industry. Our combined memberships are engaged in
all aspects of the apartment industry, including ownership,
development, management and finance. NMHC represents the principal
officers of the apartment industry's largest and most prominent firms.
As a federation of 141 state, local, and global affiliates, NAA
encompasses over 92,000 members representing more than 11 million
apartment homes globally. One-third of all Americans rent their
housing, and 36.8 million of them live in an apartment home.
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ADDRESSING THE HOUSING AFFORDABILITY CHALLENGE
The apartment industry today plays a critical role in housing this
nation's households by providing apartment homes to 36.8 million
residents, contributing $3.4 trillion annually to the economy while
supporting 17.5 million jobs.\2\, \3\ At the same time, it
is apparent that the nation is experiencing a significant challenge
surrounding housing affordability that is exacerbated by an
insufficient supply of multifamily housing.
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\2\ NMHC tabulations of 2020 American Community Survey microdata.
\3\ Hoyt Advisory Services, National Apartment Association and
National Multifamily Housing Council, ``The Contribution of Multifamily
Housing to the U.S. Economy,'' https://www.weare
apartments.org/.
Affordability has been a longstanding problem in housing. In 1985, 28.0
percent of all households were cost-burdened (paying over 30 percent of
their income on housing), while 12.1 percent had severe cost-burdens
(paying over half of their income on housing). Over 30 years later,
these shares of cost-burdened and severely cost-burdened households
increased to 35.8 percent and 18.0 percent, respectively.\4\ The
multifamily industry has faced even greater challenges: The total share
of cost-
burdened apartment households increased steadily from 42.4 percent in
1985 to 54.6 percent in 2019. During this period, the total share of
severely cost-burdened apartment households increased from 20.9 percent
to 29.9 percent.\5\
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\4\ NMHC tabulations of American Housing Survey microdata (1985-
2019).
\5\ Ibid.
A historic unmet demand for multifamily housing reflects the nation's
overall housing affordability challenges. The United States needs to
build 4.3 million new apartments by 2035 to meet both future demand and
the existing shortage of apartments.\6\ Yet, rising costs, construction
delays and labor shortages are making it increasingly difficult to
build housing that is affordable to a wide range of income levels.
Fully 97 percent of apartment developers reported experiencing
construction delays in NMHC's most recent Quarterly Survey of Apartment
Construction and Development Activity. A majority of respondents (83
percent) reported that deals have been repriced up over the past three
months while 40 percent said labor costs increased more than expected.
According to the Harvard Joint Center for Housing Studies, between 2012
and 2019, the price of vacant commercial land doubled, while the
combined costs of construction labor, materials and contractor fees
increased by 39 percent.\7\ For comparison, the overall price level
rose 11 percent.\8\
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\6\ Hoyt Advisory Services, ``Estimating the Total U.S. Demand for
Rental Housing by 2035'' (2022), https://www.weareapartments.org/.
\7\ Harvard Joint Center for Housing Studies, ``America's Rental
Housing'' (2020), available at https://www.jchs.harvard.edu/sites/
default/files/reports/files/Harvard_JCHS_Americas_
Rental_Housing_2020.pdf.
\8\ U.S. Bureau of Labor Statistics, CPI for All Urban Consumers
(CPI-U), seasonally adjusted.
High regulatory costs are further constraining supply. Recent research
published by NMHC and the National Association of Home Builders found
that regulation imposed by all levels of government accounts for an
average of 40.6 percent of multifamily development costs.\9\ The
research, which was based on a survey of 49 developers, finds that
three quarters (74.5 percent) of respondents said they encountered
``Not In My Back Yard'' (NIMBY) opposition to a proposed development.
Confronting that opposition adds an average of 5.6 percent to total
development costs and delays the completion of those new properties by
an average of 7.4 months.\10\ Identifying duplicative and unnecessary
regulatory costs is a critical factor as we work to address the
critical shortage of affordable housing facing this nation.
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\9\ National Association of Home Builders and National Multifamily
Housing Council, Regulation: 40.6 Percent of the Cost of Multifamily
Development, https://www.nmhc.org/globalassets/research--insight/
research-reports/cost-of-regulations/2022-nahb-nmhc-cost-of-
regulations-report.pdf.
\10\ Ibid.
While housing affordability is a significant challenge, the multifamily
industry has long been at the forefront of addressing this issue. NMHC
published its Housing Affordability Toolkit with HR&A Advisors in 2018
with the goals of both providing background on the underlying causes of
the apartment industry's affordability crisis and providing specific
tools that could be used to help defray the cost of building new
apartments, allowing more units to be built at a variety of price
points.\11\
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\11\ https://housingtoolkit.nmhc.org/.
We cited three main reasons for the worsening affordability conditions:
(1) a chronic demand/supply imbalance; (2) a rise in the ``lifestyle''
renter (or renter by choice); and (3) an increase in overall
development costs including materials and regulatory compliance.
Together, these factors created a scenario that put the brakes on
affordable housing production. It became increasingly challenging to
buy land and build a property at rates that were broadly affordable.
Furthermore, it was exceedingly difficult for lower-income renter
households to find an apartment without becoming cost-burdened. In the
time since the publication of the Affordability Toolkit, there has been
a pandemic-induced economic downturn, one that put lower-income
apartment residents particularly at risk financially.\12\
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\12\ https://www.nmhc.org/research-insight/research-notes/2020/
which-apartment-residents-are-most-affected-by-job-losses.
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TAX POLICY CAN PLAY A KEY ROLE IN PROMOTING HOUSING SUPPLY
The multifamily industry wishes to work with Congress and the Biden
Administration, which in May released a thoughtful Housing Supply
Action Plan, to address these challenges.\13\ While it will take a
variety of tax and non-tax approaches to increase supply, we believe
tax policy can play a critical role in this regard. To this end, we
strongly urge Congress to:
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\13\ https://www.whitehouse.gov/briefing-room/statements-releases/
2022/05/16/president-biden-announces-new-actions-to-ease-the-burden-of-
housing-costs/.
Expand and enhance the Low-Income Housing Tax Credit;
Enact the Middle-Income Housing Tax Credit to support workforce
housing;
Enhance Opportunity Zones to incentivize the rehabilitation and
preservation of multifamily buildings;
Encourage the adaptive reuse of underutilized commercial
properties into multifamily housing;
Promote the rehabilitation of multifamily housing located near
transit; and
Support measures to help property owners retrofit properties to
meet building performance goals in line with our national climate
policy.
Each of these proposals is briefly described in the pages that follow,
and we note that many have bipartisan support.
OVERVIEW OF PROPOSALS TO SUPPORT THE DEVELOPMENT AND PRESERVATION OF
MULTIFAMILY HOUSING
Housing production is not a zero-sum game; we need to produce housing
at prices that are broadly affordable across the income spectrum. Our
nation's supply of multifamily properties is aging. In fact, 46 percent
of apartment units were built prior to 1980, and 76 percent were built
prior to 2000.\14\ The country must build 4.3 million new apartment
homes by 2035 to meet both projected demand and the existing shortage
of apartments.\15\ To address housing production and preservation, we
recommend Congress enact the following policies:
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\14\ NMHC tabulations of 2020 American Community Survey microdata.
\15\ Hoyt Advisory Services, ``Estimating the Total U.S. Demand for
Rental Housing by 2035'' (2022), https://www.weareapartments.org/.
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Expand and Enhance the Low-Income Housing Tax Credit
The Low-Income Housing Tax Credit (LIHTC) is a public/private
partnership that leverages federal dollars with private investment to
produce affordable rental housing and stimulate new economic
development in many communities. Since its inception in 1986, the LIHTC
program has according to the A Call To Invest in Our Neighborhoods
(ACTION) Campaign financed 3.6 million apartments and served 8 million
households. The LIHTC program provides critical support to the nation's
affordable housing production but could be made even more impactful.
NMHC and NAA strongly support the Affordable Housing Credit Improvement
Act of 2021 (S. 1136/H.R. 2573). Introduced by Senate Finance Committee
Members Maria Cantwell, Todd Young, Ron Wyden, and Rob Portman (and
cosponsored by other committee members), this bipartisan bill would,
among other provisions, make permanent the increased LIHTC credit
authority enacted in March 2018 to enable the production of new units
and further augment credit authority by 50 percent. The ACTION Campaign
estimates this legislation would ``result in the production of over 2
million additional affordable homes over the next decade, support the
creation of nearly 3 million jobs, and generate more than $346 billion
in wages and business income and nearly $120 billion in additional tax
revenue.''\16\
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\16\ https://rentalhousingaction.org/wp-content/uploads/2021/10/
AHCIA-One-Page-Summary-September-2021.pdf.
Additionally, it should be noted that Congress enacted a 12.5 percent
increase in credit authority for years 2018-2021. Given that this
increase has now expired, the nation is experiencing a decrease in
LIHTC resources. If Congress cannot agree to a substantial increase in
credit authority over 2021 levels, it should at a minimum restore the
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reduction in credit authority.
Finally, the multifamily industry encourages Congress to enact the
LIHTC Financing Enabling Long-term Investment in Neighborhood
Excellence Act (LIFELINE Act) (S. 4181/H.R. 7078). Introduced by
Senators Patrick Leahy and Susan Collins and cosponsored by Senate
Finance Committee members Michael Bennet, Catherine Cortez Masto,
Margaret Hassan, Sheldon Whitehouse, and Ron Wyden, this legislation
would facilitate the use of the Coronavirus State and Local Fiscal
Recovery Fund (SLRF) with the LIHTC program. Although the Treasury
Department's final rule governing the SLRF technically enables funds to
be used for affordable housing, it is either extremely challenging or
impossible to do so in the context of a LIHTC development. The LIFELINE
Act would address this issue by permitting states and localities to use
SLRF to make long-term loans to LIHTC developments. Given the shortage
of affordable housing and rising construction costs confronting the
nation, it only makes sense to allow SLRF to be used to help make LIHTC
projects financially feasible.
Enact the Middle-Income Housing Tax Credit (MIHTC) to Support
Workforce Housing
Housing affordability is an issue threatening the financial well-being
of solidly
middle-income households in addition to low-income families. According
to the Joint Center for Housing Studies of Harvard University, ``the
median asking rent for an apartment completed in the second quarter of
2021 was $1,669, a 17 percent increase from the same period in
2016.''\17\ For a renter to afford one of those units at the 30 percent
of income standard, they would need to earn at least $66,760 annually.
Moreover, the Joint Center reports that ``Although much lower, the
cost-
burdened share of middle-income households increased the most in 2014-
2019. The share of renters making between $30,000 and $74,999 with at
least moderate housing cost burdens rose 4 percentage points to 41
percent, while the share with severe burdens rose from 7 percent to 8
percent.''\18\, \19\ Accordingly, this is an issue impacting
those workers who comprise the very fabric of strong communities
nationwide, including teachers, firefighters, nurses and police
officers.
---------------------------------------------------------------------------
\17\ Joint Center for Housing Studies of Harvard University,
America's Rental Housing 2022, pg. 28, https://www.jchs.harvard.edu/
sites/default/files/reports/files/Harvard_JCHS_Amer
icas_Rental_Housing_2022.pdf.
\18\ Joint Center for Housing Studies of Harvard University,
America's Rental Housing 2022, pg. 32, https://www.jchs.harvard.edu/
sites/default/files/reports/files/Harvard_JCHS_Amer
icas_Rental_Housing_2022.pdf.
\19\ NMHC has also done some additional tabulations of 2020
American Community Survey microdata. Looking at the 50 most populous
metro areas in the 2020 American Community Survey microdata, just 4.4
percent of apartment units built in 2019 or 2020 were affordable (30
percent of monthly income or less) to apartment households making 60
percent of their metro's median apartment household income; 7.8 percent
of apartment units built in 2019 or 2020 were affordable to apartment
households making 80 percent of their metro's median apartment
household income; and 16.8 percent of apartment units built in 2019 or
2020 were affordable to apartment households making 100 percent of
their metro's median apartment household income. For this calculation,
NMHC calculated the median apartment household income separately by
unit type (e.g., studio, one-bedroom, or two-bedroom) and assumed that
households would only consider living in an apartment of a similar unit
type.
Tax policies to spur the production of multifamily housing targeted to
middle-income Americans should be a part of any legislation that seeks
to address housing affordability on a comprehensive basis. We urge
Congress to strongly consider the Middle-Income Housing Tax Credit that
Senate Finance Committee Chair Ron Wyden introduced as part of the
Decent, Affordable, Safe Housing for All Act (DASH Act) (S. 2820) to
address the shortage of workforce housing available to American
households. A worthy complement of measures to expand and improve
LIHTC, the Middle-Income Housing Tax Credit (MIHTC) takes over where
LIHTC leaves off. LIHTC is currently designed to serve populations of
up to 60 percent of area median income. MIHTC is designed to benefit
populations earning below 100 percent of area median income.
Enhance Opportunity Zones to Incentivize Rehabilitation of Housing
Units
Enacted as part of tax reform legislation in 2017, Opportunity Zones
are designed to provide tax incentives for investments in distressed
communities. Opportunity Zones hold great promise for the development
of multifamily housing. Under the new program, Governors have
designated over 8,700 qualified low-income census tracts nationwide as
Opportunity Zones. Up to 25 percent of a state's qualified census
tracts may qualify as Opportunity Zones, with each state having to
designate a minimum of 25 Zones.
While we expect the Opportunity Zones program to be beneficial in
spurring the production of new multifamily housing, the program could
be improved with respect to incentives for the rehabilitation and
preservation of existing multifamily units. Current regulations work
against using this program to rehabilitate properties for affordable
housing since the developer must double her basis in the property
without consideration of the cost of land. In many cases, such
significant renovation is unnecessary to preserve buildings and units
that might otherwise be lost to obsolescence. Congress could leverage
the Opportunity Zones program to promote the rehabilitation and
preservation of multifamily units and, thereby, positively address the
shortage of apartment units.
NMHC and NAA recommend that Congress consider statutory modifications
to reduce the basis increase necessary to qualify a multifamily
rehabilitation project for Opportunity Zone purposes. It is noteworthy
that to qualify for an allocation under the LIHTC, owners must commit
to rehabilitations valued at the greater of: (1) 20 percent of adjusted
basis of a building; or (2) $6,000 ($7,400 in 2022 as adjusted for
inflation) per low-income unit.
Encourage the Adaptive Reuse of Underutilized Commercial Properties
into Multifamily Housing
With the COVID-19 pandemic modifying where Americans work and shop, the
multifamily industry believes there is great promise in proposals to
convert underutilized properties into multifamily housing. Office
buildings, shopping centers, and hotels, for example, can be
transformed into new units in places Americans want to live.
Notably, Senate Finance Committee member Debbie Stabenow, joined by
Senate Finance Committee member Sherrod Brown as a cosponsor, has
introduced the Revitalizing Downtowns Act (S. 2511) that would provide
a 20 percent tax credit to convert office buildings into other uses,
including residential use. Rep. Jimmy Gomez has introduced companion
legislation (H.R. 4759) in the House of Representatives. The
multifamily industry is interested in working with Congress on this
type of proposal but would like to see it modified to enable other
types of commercial properties (e.g., shopping centers and hotels) to
qualify for the tax incentive, as well as to ensure REITs could utilize
the benefit.
Alternatively, the multifamily industry would encourage Congress to
explore whether tax-exempt private activity bonds could be used as a
means of promoting adaptive reuse. Housing finance agencies could issue
such bonds to help facilitate adaptive reuse of underutilized
properties, particularly in areas that have a plan to track
discriminatory land-use policies as envisioned by the Yes In My Back
Yard Act (YIMBY Act) (S. 1614/H.R. 3198).
Promote the Rehabilitation of Multifamily Housing Located Near Transit
NMHC and NAA strongly support bipartisan legislation that would provide
a new tool aimed at encouraging greater community development and
inclusive neighborhood revitalization. Introduced by House Ways and
Means Committee member Earl Blumenauer and cosponsored by committee
members Mike Kelly, Dan Kildee, and Darin LaHood, the Revitalizing
Economies, Housing and Business Act (REHAB Act) (H.R. 1483) provides:
A 15 percent tax rehabilitation credit for buildings that are
more than 50 years old, not certified historic structures, and are
within one-half of a mile of a public transportation station;
Expanded credit eligibility to include building expansion on the
same block; and
A bonus credit of 25 percent for expenses related to public
infrastructure upgrades and rent-restricted housing.
Strengthen Communities through Policies that Support Resiliency
Building utility costs are second only to debt service in terms of
property expenses. Efficient use of resources, including updating
building systems and appliances, is key to ensuring that housing
remains affordable for residents. The multifamily industry has a long
history of support for building-performance benchmarking and water and
energy conservation and favors incentive-based strategies that improve
building energy performance and community-wide resiliency efforts.
Building performance standards that overlook the age of the existing
apartment stock and fail to consider the inherent efficiencies of
compact development that is the hallmark of multifamily design
buildings will exacerbate the shortage of affordable apartment units.
Policies that provide financial assistance for owners to reinvest in
higher-performing building systems and components outside of
replacement pro formas will be critical to advancing building
performance goals. Layering additional conditions on these investments,
including requirements about the workforce that must be employed to
make these renovations, will eliminate the utility of the efficiency
incentives that have been available under Sec. 45L or Sec. 179D.
As Congress considers legislation to promote resilience and reduce
greenhouse gas emissions across the economy, programs that address
building energy performance are an essential element. Policymakers
should resist applying one-size-fits-all efficiency mandates that will
exacerbate the shortage of affordable housing in the near term.
Incentives that enable developers to invest in engineering,
construction and development costs that are required to build/rehab
multifamily apartment homes will speed the development of higher-
performing, more resilient housing that is affordable for renter
households.
Make Permanent the New Energy Efficient Homes Credit (Sec. 45L): This
tax credit has provided a necessary incentive for builders of apartment
buildings (3 stories or fewer) to install higher performance building
systems and upgraded appliances than they otherwise could justify
within the pro forma for developing the property. While this credit was
extended through 2021, it has subsequently expired and should be made
permanent as an essential part of a national plan to boost production
of high-performance buildings and reduce greenhouse gas emissions.
Improve the Energy Efficient Commercial Buildings Deduction (Sec. 179):
This tax deduction has primarily been used to encourage energy-
efficient new construction. However, since 179D's initial enactment in
2005, the intent has also been to encourage private-sector and non-
profit owners to retrofit existing buildings. In this regard, Sec. 179D
can be improved. Considering the age of current high-rise apartment
building stock, Sec. 179D should be strengthened to encourage retrofits
and, thereby, maximize the incentive's potential as an engine for sound
tax, jobs, energy and environmental policy. Title I of the Energy
Efficiency Tax Incentives Act (S. 2189), introduced by Senators Ben
Cardin, Dianne Feinstein, and Brian Schatz in the 113th Congress,
preserves the deduction's application for new construction and public
buildings, while also meaningfully incentivizing private-sector and
non-profit retrofits.
______
New York State Homes and Community Renewal
641 Lexington Avenue, 5th Floor
New York, NY 10022
www.hcr.ny.gov
KATHY HOCHUL
Governor
August 3, 2022
The Honorable Ron Wyden
Chairman
U.S. Senate
Committee on Finance
219 Dirksen Senate Office Building
Washington, DC 20510
The Honorable Mike Crapo
Ranking Member
U.S. Senate
Committee on Finance
219 Dirksen Senate Office Building
Washington, DC 20510
Re: Senate Finance Committee Hearing of ``The Role of Tax Incentives in
Affordable Housing''
Dear Chairman Wyden and Ranking Member Crapo:
Thank you for conducting the July 20th hearing on ``The Role of Tax
Incentives in Affordable Housing.'' I write to you as the Commissioner
and CEO of New York State Homes and Community Renewal inclusive of the
NYS Housing Finance Agency and the State of New York Mortgage Agency
which administer the State's housing credit and bond programs and the
other federal and state affordable housing resources.
New York State, along with New York City, have long been the top two
issuers of municipal housing bonds in the nation. With this valuable
resource, the State has been able to finance the creation of much-
needed affordable and supportive housing to low- and moderate-income
individuals and families, as well as vulnerable populations such as
those experiencing homelessness, seniors, veterans, and many others
across the state in need of on-site supportive services in order to
live independently.
Since 2011, our 4% Low Income Housing Tax Credit (LIHTC) and Private
Activity Bond program has financed over 66,000 units of affordable
housing to assist 150,000 New Yorkers. During the same period, our 9%
Low Income Housing Tax Credit Program has provided $368 million in tax
credit equity to create nearly 20,000 units.
The Federal Low-Income Housing Tax Credits are the most powerful and
impactful financing tool in the development of affordable and
supportive housing. By leveraging significant private investment
together with tax incentives, these projects have had multiple positive
impacts and helped address various complimentary policy goals beyond
the expansion of affordable housing. These range from:
Boosting community revitalization and countering disinvestment;
Addressing environmental justice goals through restoration and
reuse of brownfields;
Preserving and repurposing historic structures;
Lowering dependence on fossil fuels through highly energy-
efficient and all-
electric housing design;
Reducing the concentration of poverty through mixed-income
projects and creating affordable housing opportunities in well-
resourced areas; and
Creating jobs in stable, well-paying fields such as
construction, finance, personal services and property management.
Despite New York's success in utilizing these programs, more needs to
be done. The economic fallout from the COVID-19 pandemic and increasing
inflation has resulted in skyrocketing rental costs that put the dream
of homeownership out of reach for too many families. The affordable
housing crisis demands more action by all levels of government.
To this end, New York State has taken significant steps on its own to
tackle this crisis. In the 2022-23 State Budget, Governor Kathy Hochul
introduced and successfully secured a new $25 billion, five-year,
comprehensive housing plan that will increase housing supply by
creating or preserving 100,000 affordable homes across New York
including 10,000 with supportive services for vulnerable populations,
plus the electrification of an additional 50,000 homes.
The State recently enacted legislation that will allow the New York
City Housing Authority (``NYCHA''), the nation's largest public housing
authority, to create a Public Preservation Trust that will unlock
additional federal funding through tenant protection vouchers and lead
to billions of dollars in critical repairs and improvements to more
than 25,000 apartments in NYCHA developments across the City.
Additionally, the State of New York Mortgage Agency recently agreed to
provide insurance coverage for a mortgage loan to Co-op City in the
Bronx, the nation's largest middle-income building cooperative, so it
could refinance debt to fund major rehabilitations and preventative
maintenance.
But we must ask that our partners in the federal government provide
more resources to aid in these efforts. Two immediate actions that can
be taken are the passage of the Affordable Housing Credit Improvement
Act (AHCIA) and the Neighborhood Homes Investment Act (NHIA).
The AHCIA, sponsored by Senators Maria Cantwell (D-WA) and Todd Young
(R-IN), has garnered bipartisan support and, as you know, many members
of the Committee on Finance have already agreed to co-sponsor it. Put
simply, the AHCIA would expand and strengthen the federal Housing
Credit and give a significant increase in credit allocation authority
in the LIHTC 9% Program. Additionally, this legislation would lower the
threshold of Private Activity Bond financing--from 50 to 25 percent--
that is required to trigger the maximum amount of 4 percent Low Income
Housing Tax Credits.
It is estimated that passage of this legislation would result in 2
million additional affordable homes over the next decade across the
country. In New York, the State and City would be able to finance
approximately 100,000 more homes over the next ten years, which would
go a long way in addressing the State's housing crisis.
On the single-family side, the NHIA, introduced by Committee members
Senators Ben Cardin (D-MD) and Rob Portman (R-OH), would establish a
new tax credit, the Neighborhood Homes Credit, modeled after the
Housing Credit. The NHIA would help incentivize developers to construct
or substantially rehabilitate 500,000 affordable owner-occupied homes
over the next 10 years.
The new credit would help close the ``value gap'' in distressed urban,
suburban, and rural neighborhoods--where the cost of building or
renovating a home is greater than the post-construction value of the
property by offsetting up to 35 percent of eligible development costs.
These credits provide a significant incentive for the private sector to
invest in struggling neighborhoods across the nation and, moreover,
help address the financial inequities caused by the racial disparity in
homeownership rates among minority communities.
New York joins the chorus of state and local governments, housing
advocates, and private business leaders that believe in strengthening
and protecting the LIHTC. Incentivizing the creation of affordable
housing can help reduce the nation's severe shortage of affordable
rental housing, improve property values, decrease blight in communities
across the country, and increase family wealth.
We thank you for your work in support of the creation of affordable
housing and look forward to our continued partnership.
Very truly yours,
RuthAnne Visnauskas
Commissioner/CEO
______
UMH Properties
3499 Route 9, Suite 3C
Freehold, NJ 07728
Statement of Sam Landy, President and CEO
I am pleased to submit this statement for the record for the July
20, 2022 Senate Finance Committee Hearing on ``The Role of Tax
Incentives in Affordable Housing.''
I am submitting this statement in order to request that the
Committee consider adoption of legislation to amend the existing
Opportunity Zone statute to allow the 10 year step-up basis treatment
that currently exists for investments in Opportunity Zones to apply to
targeted investments in manufactured home communities--without the
requirement to link such treatment to a capital gain in the prior 180
months.
I am the President and CEO of UMH Properties, one of the premier
owners and operators of manufactured home communities in the Nation.
UMH Properties is publicly traded on the New York Stock Exchange. We
currently own 131 manufactured home communities in 10 states with
approximately 24,800 developed home sites. Seven of our communities are
currently located in Opportunity Zones.
UMH Properties has a 53 year history of providing quality
affordable housing in manufactured home communities. Videos of our
communities are available on our website and showcase the high-quality
affordable housing that can be delivered through the investment in
manufactured home communities.
Manufactured housing is the most affordable homeownership option
available for low and moderate income families in America. The average
income of a manufactured home buyer is around $35,000--while the
average income of a home buyer buying a site-built home is over
$100,000. Commonly manufactured homes are less expensive to own than
renting. Moroever, ownership of a manufactured home, with a fixed rate
mortgage, provides protections against the main alternative option of
renting for such families, where apartment rent increases have averaged
almost 20% over the last year.
Manufactured home communities--also known as land-lease
communities--are a critical model for the delivery of affordable
manufactured homes. Thirty-one percent of new manufactured homes are
currently being placed in manufactured home communities. There are more
than 43,000 land-lease communities in the U.S., representing almost 4.3
million home sites. These communities offer sites for families to place
their manufactured homes, with professional management of the community
and amenities that go with it.
One of the greatest challenges facing older manufactured home
communities is the need for an infusion of funds to address neglected
capital improvements like roads, sewer, and water. UMH Properties has
been highly successful in purchasing aging manufactured home
communities in need of significant capital repairs--in order to
modernize them and thereby protect the value of the investments of the
manufactured homeowners living in those communities at affordable land
lease rental rates.
These purchases and improvements of aging communities require
significant investments. UMH Properties has a total market
capitalization of approximately $2 billion, with gross revenue of over
$190 million per year. UMH invests over $70 million a year in new
rental homes and capital improvements to improve our manufactured home
communities. These investments allow us to provide our residents with
the highest quality affordable housing at the most reasonable rates.
However, we could do so much more with enhanced access to investors
that would result from a modest, targeted tweak to the Opportunity Zone
program.
UMH is a strong supporter of Opportunity Zones, and we are pleased
to report that we have secured some investments in Opportunity Zones,
because of the financial investment incentives they offer.
However, the investors we do business with indicate that the
Opportunity Zone requirement that investments be a reinvestment of
funds from a capital gain in the preceding 180 days is a significant
impediment, that narrows access to investments.
Because of the strong economic and social policy benefits of
manufactured home homeownership, we would like to suggest a narrow
targeted exemption from that requirement for investments in
manufactured home communities.
Our suggestion is to allow investments in manufactured housing
communities to have the 10-year step-up basis authorized in the
Opportunity Zone statute--but without the requirement that funds be a
reinvestment of a capital gain in the prior 180 days. Legislatively,
this could be achieved in a simple manner, by creating a short new
subsection in the statute that would grant authority for this.
With this change, we are confident that UMH Properties and other
manufactured home communities nationwide could access significant new
investment funds to help build and modernize communities nationwide
that facilitate the most affordable homeownership option available--
manufactured homes.
This approach is narrow and targeted. It would not facilitate
investments that could be criticized as deviating from the objectives
and intent of the Opportunity Zone program. It is limited to
investments that facilitate affordable manufactured housing
homeownership--a high priority for Congress and the Administration and
an important public policy objective.
Finally, it would not allow investors to access the deferment and
potential permanent elimination for capital gains that have already
taken place. Since the latter is the most costly component of
Opportunity Zone tax treatment and since the proposed flexibility is
narrowly targeted to a specific limited activity, we believe the tax
scoring cost of this provision would be very, very small, while the
societal and economic benefits would be substantial.
In closing, I thank the Committee for the opportunity to submit
this statement and I would be happy to make myself available to
Committee staff to discuss this initiative in more detail.
______
U.S. Mortgage Insurers
1101 17th Street, NW, Suite 700
Washington, DC 20036
https://www.usmi.org/
July 20, 2022
The Honorable Ron Wyden
Chairman
U.S. Senate
Committee on Finance
221 Dirksen Senate Office Building
Washington, DC 20510
The Honorable Mike Crapo
Ranking Member
U.S. Senate
Committee on Finance
239 Dirksen Senate Office Building
Washington, DC 20510
Dear Chairman Wyden and Ranking Member Crapo:
U.S. Mortgage Insurers (USMI) appreciates the opportunity to submit
this letter for the record for the Committee on Finance's hearing
titled ``The Role of Tax Incentives in Affordable Housing.'' We are
very pleased that the committee held a hearing on this important topic
and USMI believes that there are tax policies that can be improved in
order to help American family achieve the American Dream of
homeownership. More specifically, we strongly support S. 3590, the
Middle Class Mortgage Insurance Premium Act of 2022, a bipartisan bill
introduced by Senators Maggie Hassan and Roy Blunt.
By way of brief background, USMI is a trade association comprised of
the leading private mortgage insurance (MI) companies in the U.S. and
represents an industry dedicated to a housing finance system backed by
private capital that enables access to prudent and affordable mortgage
finance for borrowers while protecting taxpayers.\1\ The private MI
industry is focused on ensuring that homeready borrowers continue to
have access to affordable and sustainable mortgages within a well-
functioning U.S. housing finance system. The private MI industry has a
65-year track record of underwriting and actively managing single
family mortgage credit risk in order to facilitate access to low down
payment conventional mortgages. Since 1957, private MI has helped more
than 37 million families purchase a home or refinance an existing
mortgage, including nearly 2 million families in 2021 alone.
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\1\ USMI membership comprises: Enact Mortgage Insurance; Essent
Guaranty, Inc.; Mortgage Guaranty Insurance Corporation; National
Mortgage Insurance Corporation; and Radian Guaranty, Inc.
Low down payment mortgages are critical for many families, most notably
first-time, lower wealth, and minority homebuyers, to secure mortgage
financing. Affordability remains a persistent barrier to homeownership
across the country and MI helps bridge the down payment gap for
borrowers who lack the resources for large down payments. In 2021
alone, approximately 4.6 million families obtained mortgages with some
form of MI, including nearly 2 million conventional mortgages with
private MI, nearly 1.4 million mortgages insured by the Federal Housing
Administration (FHA), and nearly 1.3 million mortgages guaranteed by
the U.S. Department of Veterans Affairs (VA). Further, the vast
majority of borrowers with MI are first-time homebuyers, traditionally
the driving force of the housing market. For purchase mortgages
originated in 2021, nearly 60% of mortgages with private MI, 85% of
FHA-insured mortgages, and 50% of VA-guaranteed loans went to first-
time homebuyers.\2\
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\2\ GSE aggregate data, VA Lender Loan Volume Reports, and HUD
quarterly reports to Congress on ``Financial Status of the Mutual
Mortgage Insurance Fund.''
In order to make homeownership more affordable, USMI has long supported
the tax provision allowing a deduction for MI premiums paid in
connection with a mortgage on a qualified residence (MI Deduction).
Since 2007, the MI Deduction has been a powerful tool in prudently
promoting homeownership for low- and moderate-income (LMI) families.
The provision has been extended several times with broad bipartisan
support, including most recently in the Further Consolidated
Appropriations Act of 2020. The MI Deduction expired on December 31,
2021 and, absent congressional action, 2022 will be the first time in
more than 15 years that qualifying taxpayers cannot claim a deduction
that has promoted access and affordability in the housing finance
system. During the time period when MI premiums have been deductible,
millions of hardworking LMI households have benefited from the MI
Deduction. For 2019, the most recent tax year for which detailed
Internal Revenue Service (IRS) data is available, approximately 1.4
million households claimed the MI Deduction, for an average tax
deduction of nearly $2,100.\3\ Prior to the doubling of the standard
deduction as part of the Tax Cuts and Jobs Act of 2017, more than 4
million households annually benefitted from the MI Deduction and
utilization will likely return to those levels when the doubling of the
standard deduction expires at the end of 2025.
---------------------------------------------------------------------------
\3\ IRS, Individual Complete Report (Publication 1304), Table 2.1,
Tax Year 2019. Available at https://www.irs.gov/pub/irs-soi/
19in21id.xls.
However, two key aspects of the current MI Deduction diminish its
effectiveness: (1) its temporary nature; and (2) its relatively low
Adjusted Gross Income (AGI) phaseout. H.R. 6109 would modify current
law to make the deduction permanent and expand taxpayer eligibility by
raising the income level at which the phaseout begins, specifically
increasing the income phaseout trigger to $200,000 for joint filers and
$100,000 for single filers. This would be the first AGI adjustment for
the MI Deduction since it took effect in 2007 and be a welcome
statutory change to take into account the natural erosion of the value
of the dollar with the passage of time. The MI Deduction is a sound and
targeted tax policy that provides meaningful benefits to hardworking
families across the country and should be a permanent part of the U.S.
tax code. Home ownership remains the primary vehicle for families to
enter the middle class and build long-term generational wealth, and the
MI Deduction is an important tool for policymakers to support
---------------------------------------------------------------------------
homeownership opportunities for more Americans.
S. 3590 is included as Annex A and bipartisan companion legislation,
H.R. 6109, has been introduced by Representatives Ron Kind and Vern
Buchanan. A June 2021 joint letter of support for making the deduction
permanent and entirely eliminating the AGI phaseout from the Mortgage
Bankers Association (MBA), National Association of Home Builders
(NAHB), National Association of Realtors (NAR), National Housing
Conference (NHC), and USMI is attached as Annex B.
USMI thanks you for devoting needed attention to the extremely
important issue of housing, especially around policies that promote
affordable and sustainable homeownership, and stands available as a
resource to the committee. We appreciate the opportunity to discuss the
MI Deduction, a tax policy that has long enjoyed bipartisan support,
and requests for additional information may be directed to Brendan
Kihn, USMI's Senior Director of Government Relations, at [email protected]
or 202-280-1820.
Very truly yours,
Adolfo Marzol
Chairman
_______________________________________________________________________
Annex A
_______________________________________________________________________
117th CONGRESS
2d SESSION
S. 3590
To amend the Internal Revenue Code of 1986 to increase the income cap
with respect to the mortgage insurance premium deduction, and to make
such deduction permanent.
_______________________________________________________________________
IN THE SENATE OF THE UNITED STATES
February 7 (legislative day, February 3), 2022
Ms. HASSAN (for herself and Mr. BLUNT) introduced the following bill;
which was read twice and referred to the Committee on Finance
_______________________________________________________________________
A BILL
To amend the Internal Revenue Code of 1986 to increase the income cap
with respect to the mortgage insurance premium deduction, and
to make such deduction permanent.
Be it enacted by the Senate and House of Representatives of the
United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ``Middle Class Mortgage Insurance
Premium Act of 2022''.
SEC. 2. INCREASING THE INCOME CAP FOR AND MAKING PERMANENT THE MORTGAGE
INSURANCE PREMIUM DEDUCTION.
(a) In General.--(1) Section 163(h)(3)(E) of the Internal Revenue
Code of 1986 is amended--
(1) in clause (ii), by striking ``$100,000 ($50,000'' and
inserting ``$200,000 ($100,000'', and
(2) by striking clause (iv).
(b) Effective Date.--The amendments made by this Act shall apply
to taxable years beginning after December 31, 2021.
_______________________________________________________________________
Annex B
June 17, 2021
The Honorable Ron Wyden
Chairman
U.S. Senate
Committee on Finance
219 Dirksen Senate Office Building
Washington, DC 20510
Dear Chairman Wyden:
The undersigned organizations are writing in regard to the current tax
treatment of mortgage insurance premiums. Our organizations represent a
diverse coalition of stakeholders in the housing finance system,
including lenders, real estate professionals, homebuilders, and
mortgage insurers, and we appreciate the opportunity to provide our
collective perspective on this important tax provision. As explained
further below, to better support existing homeowners and prospective
homebuyers, we urge you to modify current law to make the mortgage
insurance premium tax deduction permanent and to eliminate its income
phaseout.
Affordability remains a persistent barrier to homeownership across the
country and mortgage insurance helps bridge the down payment gap for
borrowers who lack the resources for a 20 percent down payment or have
less than perfect credit. Low down payment mortgages--including
conventional mortgages with private mortgage insurance and loans with
government mortgage insurance and loan guarantees through the Federal
Housing Administration (FHA), U.S. Department of Veterans Affairs (VA),
and U.S. Department of Agriculture Rural Housing Service (RHS)--have
proven critical for many first-time, lower wealth, and minority
homebuyers to secure financing and attain the American Dream of
homeownership. Using low down payment mortgages allows families to buy
home sooner than they otherwise would be able and to reap the benefits
of homeownership, including financial stability and building
intergenerational wealth. In calendar year 2020 alone, nearly 5 million
families obtained mortgages with some form of mortgage insurance,
including more than two million conventional loans with private
mortgage insurance, nearly 1.4 million FHA-insured mortgages, nearly
1.4 million VA-guaranteed mortgages, and more than 140,000 RHS-
guaranteed single-family mortgages.\4\ Further, the vast majority of
borrowers with mortgage insurance are first-time homebuyers,
traditionally the driving force of the housing market. Low down payment
lending options are critical for these first-time homebuyers, as
evidenced by the fact that more than 80 percent of first-time
homebuyers relied on low down payment options to purchase their home in
2020.\5\
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\4\ GSE aggregate data, HUD quarterly reports to Congress on
``Financial Status of the Mutual Mortgage Insurance Fund,'' VA Lender
Loan Volume Reports, and Housing Assistance Council Tabulations of RHS
205 Report Data.
\5\ Enact MI First-Time Homebuyer Market Reports.
Since 2007, the tax code has treated mortgage insurance premiums as
qualified residential mortgage interest and they have been tax
deductible, subject to an income phaseout for taxpayers with adjusted
gross incomes (AGI) over $100,000 ($50,000 if single or married filing
separately).\6\ The mortgage insurance premium tax deduction was
enacted in 2006 to address affordability concerns and has been extended
on several occasions, including most recently by the Further
Consolidated Appropriations Act of 2020.\7\ During the time period that
mortgage insurance premiums have been tax deductible, millions of low-
and moderate-income homeowners have benefited from this provision of
the tax code. Based on publicly available data from the Internal
Revenue Service (IRS), the average deduction for mortgage insurance
premiums has been approximately $1,500.\8\
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\6\ 26 USC 163(h)(3)(E).
\7\ Pub. L. 116-94 (December 20, 2019).
\8\ For example, for tax year 2017 there were 2,285,440 returns
that claimed the mortgage insurance premium deduction for a total
amount of $3.376 billion, with an average deduction of $1,477.
However, two key aspects of the current mortgage insurance premium
deduction hamper its effectiveness: (1) its temporary nature; and (2)
its relatively low AGI phaseout. Further, the mortgage insurance
premium deduction is the only itemized deduction subject to an AGI cap
and/or phaseout. As you know, the Tax Cuts and Jobs Act of 2017 (TCJA)
\9\ modified numerous aspects of the tax code and doubled the standard
deduction. While millions of households still claim this deduction, no
doubt this change, in concert with the current AGI phaseout, has
significantly reduced the number of homeowners who benefit from the
deduction. Prior to the enactment of the TCJA, more than 4 million
taxpayers claimed the deduction each year and estimates indicate that
about 2.4 million taxpayers claim the deduction each year post-TCJA
implementation.\10\ The current AGI phaseout represents a burdensome
eligibility criterion for American families to claim the mortgage
insurance deduction and millions more homeowners would benefit from a
permanent extension that eliminates the AGI phaseout.
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\9\ Pub. L. 115-97 (December 22, 2017).
\10\ Analysis of IRS data for tax years 2012-2018.
Thank you for your consideration of our recommendation that the
mortgage insurance premium tax deduction be made permanent and that the
AGI phaseout be eliminated. We welcome the opportunity to further
engage on this important issue to support access to affordable mortgage
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financing for American families.
Very truly yours,
Mortgage Bankers Association
National Association of Home Builders
National Association of Realtors
National Housing Conference
U.S. Mortgage Insurers
[all]