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The US has a shortage of 6.8 million affordable housing units for extremely low-income renters, according to the 2021 Gap Report from the National Low Income Housing Coalition (NLIHC). In the report, an extremely low-income household is one below the poverty line, or below 30% of the median area income.
- For every 100 renter households that meet this description, there are only 37 affordable homes available in the US.
- The situation is even more challenging in metropolitan areas, where the availability of affordable housing is as low as 16 units for every 100 renter households.
With affordable homes, the main challenge is making the projects financially viable for developers. Since rental rates are limited by low income, affordable housing projects often rely on grants, tax incentives, and low-interest financing.
The COVID-19 pandemic has deepened the US housing crisis. According to The Century Foundation, 25% of US workers have relied on unemployment benefits since the pandemic started, and more than one million workers have filed new applications each week, for 52 consecutive weeks.
The Importance of Affordable Housing Credits
The Low-Income Housing Tax Credit (LIHTC) has played a fundamental role in affordable housing projects in the US. This is a dollar-for-dollar credit that is given to developers and investors for affordable housing projects:
- Between 1987 and 2018, the program helped build 3.23 million affordable homes.
- The program has also enabled over $190 billion in private investments.
- Aware of the need for affordable homes, President Biden announced a direct investment of $640 billion for housing during his campaign, combined with $10 billion for the LIHTC program.
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According to David J. Wilk, director of the Temple University Real Estate Program, an affordable housing unit has the same cost as a normal house, but recovering the investment with rent alone is often unfeasible. As a result, affordable housing projects depend on a combination of funding sources to be viable. Robert Likes, president of the Key Community Development Corporation, mentions how tax credits represent the largest equity component in these projects.
The Affordable Housing Credit Improvement Act is promising for the sector, since it would increase credits by 50% if approved. According to consulting firm Novogradac, the act will be likely introduced during the week of April 12.
How The American Jobs Plan Helps the Affordable Housing Sector
President Biden presented the American Jobs Plan on March 31, and he discussed many weak areas of the US economy, including affordable housing. The plan involves a total investment of over $2 trillion by the end of the decade, and there is a budget of $213 to build and repair more than two million affordable homes. These funds will reach projects though several programs, including tax credits and grants. At the same time, tenants will get rental assistance.
- The plan also includes the Neighborhood Homes Investment Act (NHIA), which will deliver 500,000 new and renovated homes, focusing on the low- and middle-income markets.
- Tax credits are an important element of the NHIA, and a total of $20 billion will be offered during a five-year period.
- The plan also includes a direct investment of $40 billion in public housing infrastructure, and a $27 billion clean energy fund to develop housing and commercial projects that are also sustainable.
Through the American Jobs Plan, the Biden Administration will also work to eliminate zoning resolutions and land use policies that limit affordable housing projects. The plan also includes weatherization assistance programs, which deliver critical home upgrades that provide shelter from extreme weather.
President Biden clearly stated that his infrastructure plan will focus on creating union jobs, which could limit private participation in these projects. Also, construction material costs have been steadily increasing, and the high demand caused by the American Jobs Plan could drive these prices even higher. However, developers could also benefit from the combination of tax credits, grants and more favorable zoning laws.
