Tax Credit Development: Good for Local Economy, Doesn't Affect Property Values
NAHB’s economic models have conclusively shown over the years that residential building usually pays for itself, generating enough in income and jobs for local residents, as well as revenue for local governments, to more than offset the additional costs imposed on those local governments for education, police and fire protection, and other public services needed to support the new homes and apartments. The most recent update of NAHB’s local economic impact model analyzing the specific impact on local communities of apartment units financed with Low Income Housing Tax Credits has found that, just like other types of properties, tax credit apartments almost always create more benefits than costs. In addition, the model confirms that—contrary to conventional wisdom—tax credit apartments do not have an adverse effect on the value of nearby single family properties. (1)
Income, Jobs, and Taxes Generated
NAHB’s model to estimate the economic benefits of multifamily housing captures the effect of the construction activity itself (Phase I), the ripple impact that occurs when income earned from construction activity is spent and recycles in the local economy (Phase II), and the ongoing impact that results from new apartments becoming occupied by residents who pay taxes and buy locally-produced goods and services (Phase III). 2
The newly-updated model for tax-credit development analyzes a “typical” LIHTC project, based on data provided by developers of 19 specific LIHTC projects. Although the 19 projects don’t constitute a scientifically-designed sample, they do capture data from both high-cost and low-cost areas in several regions of the country.
The “typical” LIHTC project analyzed here is based on data provided by developers of 19 specific LIHTC projects. Although the 19 projects don’t constitute a scientifically designed sample, they do capture data from both high-cost and low-cost areas in several regions of the country.
Also, for purposes of the analysis, the project is assumed to be located in a typical metropolitan area where taxes and other sources of local government revenue (measured as a fraction of personal income) are set equal to national averages.
Under these assumptions, the estimated local one-year impacts (Phases I and II of the NAHB model) of building 100 units in a typical LIHTC project include $7.8 million in local income, $742,000 in taxes and other revenue for local governments, and 149 local jobs. These are one-year impacts that include both the direct and indirect impact of the construction activity itself, and the impact of local residents who earn money from the construction activity spending part of it within the local area.
The additional, recurring impacts of building the 100 apartments in a LIHTC project include $2.2 million in local income, $324,000 in taxes and other revenue for local governments, and 35 local jobs. These are ongoing, annual benefits that result from the new apartments being occupied, and the occupants paying taxes and otherwise participating in the local economy year after year.
Table 1 shows the results in slightly more detail.
The model generates even more detailed estimates, including the impacts on income and employment in each of 16 industries and the local government, as well as information about a wide range of taxes and other types of local government revenue. A longer report containing this level of detail is available on NAHB’s Web site.
Similar results can be produced for a specific local area. In the past, NAHB has applied the local impact model to everything from an individual tax credit project to all affordable housing built within a state. NAHB currently produces customized reports based on its local impact model for a fee. For more information, contact Elliot Eisenberg in NAHB’s Housing Policy Department: 800-368-5242 x8398.
Impact on Property Values
Up until fairly recently, research on the effect of federally subsidized housing on nearby property values focused on non-LIHTC forms of subsidy, most often on public housing. Much of this research found that conventional public housing tended to depress property values. One of the reasons LIHTC-related research is important is specifically to distinguish privately built and operated LIHTC properties from traditional public housing. Although many of the differences are obvious to people with experience in the industry, they often need to be pointed out to the broader public.
More recently, the focus of at least some research has shifted in the direction of LIHTC projects, probably reflecting the tax credit program’s rise to a dominant position among affordable housing subsidies. There is no good national data source that combines information about property subsidies such as tax credits with information about property values in the surrounding neighborhoods. As a result, the research tends to focus on specific cities or metropolitan areas using more specialized data sets.
In 2002, Johnson and Bednarz released a study of LIHTC developments in three cities.3 In all three—Cleveland, Portland, and Seattle—Johnson and Bednarz found a positive effect on property values within 300 meters of LIHTC projects. Beyond 300 meters, they estimated no impacts in Portland and Seattle, and negative impacts under certain circumstances (e.g., if more than a particular number of LIHTC units were to be built) in Cleveland.
Also released in 2002, a study commissioned by the Wisconsin Housing and Economic Development Authority (WHEDA) looked at all tax credit developments built in four counties in the two largest metropolitan areas in Wisconsin (Milwaukee and Madison).4
In two of the counties, there was no evidence that tax credit properties had any impact at all on the rate of appreciation. In one county, the study found a small negative impact on appreciation rates, and in the other property actually appreciated at a somewhat higher rate if it was near an LIHTC project.
A related study was published in 2005 by MIT’s Center for Real Estate.5 Although it doesn’t deal specifically with tax credit properties, the state regulation it examined (Chapter 40B) in Massachusetts has important points in common with the LIHTC program. Chapter 40B is an affordable housing law that allows developers to circumvent local zoning to build affordable housing. Although 40B allows multifamily condominiums as well as rental units to be built, the MIT study looked only at rental properties. As in the LIHTC program, multifamily rental units under Chapter 40B are built, owned, and operated by private firms, and a share of the units must be rented to occupants with incomes below a certain percentage of the area family median. Another similarity is that these projects often are opposed by community organizations who fear, among other things, a negative impact on property values.
The MIT study examined the impacts in the neighborhoods surrounding seven affordable rental housing projects in the Boston metropolitan area. In all seven, they found no impact at all on single family house prices—before, during, or after the time the affordable units were built.
The results of these studies are summarized in Table 2.
*This study is based on affordable multifamily rental projects built under a Massachettes state law, rather than the LIHTC program.
Although each individual study is based on a limited geographic area, together they are consistent in their inability to find evidence that LIHTC projects cause property values to decline in adjacent neighborhoods. The alleged negative impact of affordable, privately-operated rental housing on single family home prices often seems to be a myth.
1 "Confronting the Myths About Apartments with Facts” November 2001; and “Tax-Credit Apartments Benefit Local Economies,” June 2002.
2 In 2002, the model was applied for the first time to a typical LIHTC project, based on information obtained from developers using the tax credit program in several parts of the country. These research results, initially published more than three years ago, have now been updated. Not only have the key inputs been revised based on new information acquired more recently from specific tax credit projects, but the model itself has been recalibrated with newer data from government sources. The most important of these are the National Income and Product Accounts (produced by the U.S. Bureau of Economic Analysis), the Consumer Expenditure Survey (U.S. Bureau of Labor Statistics) and the Census of Governments (U.S. Census Bureau). These are the data sources used to generate the official estimates of statistics such as GDP and the overall rate of inflation.
3 Johnson, J., and B. Bednarz. Neighborhood effects of the Low Income Housing Tax Credit Program: final report. U.S. Department of Housing and Urban Development, 2002.
4 Green, Richard; Stephen Malpezzi, and Kiat-Ying Seah. Low Income Housing Tax Credit Housing Developments And Property Values. University of Wisconsin Center for Urban Land Economics Research, commissioned by the Wisconsin Housing and Economic Development Authority, 2002.
5 Pollakowski, Henry; David Ritchay and Zoe Weinrobe. Effects of Mixed-Income Multi-family Rental Housing Developments on Single-Family Housing Values, Center for Real Estate, Massachusetts Institute of Technology, 2005.
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