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March 28, 2018

The Cost of Missing Out on LIHTC-Program Rents

Steve Guggenmos
Article By
Steve Guggenmos, VP Research & Modeling

Market rate multifamily rents have been dramatically increasing in recent years as housing demand significantly exceeds available supply. In contrast, during the same period rent growth has been moderate for units with restricted rents, such as those funded by the Low-Income Housing Tax Credit (LIHTC) program.  Because of diverging trends in these two segments of the market some renter households in comparable financial situations are having very different outcomes related to their housing costs.

The LIHTC program has been the key method for getting affordable units built and maintained in recent decades.  At Freddie Mac, we are happy to have recently been allowed by the Federal Housing Finance Agency (FHFA) to invest in LIHTC investments to further support this segment of the market. That drove us in MF research to explore how the program impacts renters, comparing rent level and trends in restricted and market rate units. In multifamily finance, understanding the impact to the renter tends to be interesting … and this is no exception. 

In our analysis we analyzed nine areas.  In 2017, the rent for an average two-bedroom apartment leased by a family in a LIHTC unit was paying 38 percent less than the going market rent. On average, over the nine areas, a LIHTC tenant saved $7,500 per year. The results vary significantly.  In high housing cost areas, the savings were as much as $22,000 per year.

Regrettably, because of high demand and limited supply, the number of restricted-rent units is insufficient for the need.  That makes these results particularly sobering because many households that were eligible for units with restricted rents were not able to obtain one – another household got the unit ahead of them.  Those households that moved into market rate rentals have become increasingly squeezed as their rents have risen.  The rent burden for these families has been climbing while their counterparts in restricted units have had much more stability in their housing costs. 

So how do things look going forward?  We, and other market participants, continue to forecast increasing market rate rents.  In the segment of the market with restricted rents, much can be known about future rents because of HUD-determined formulas setting rent levels.  We were able to project rents for LIHTC units in some areas, and unfortunately, it appears rents in LIHTC units may increase more than they have in the past few years. 

For those households that were unable to move into rent-restricted housing, the substantial market-rate increases since 2012 may be causing serious financial hardship. And although we expect rents for LIHTC units to increase over the next two years, residents in those units will still be paying significantly less in rent in than those in a comparable market rate unit.

For more details, please read my full report.

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