HUD’S Latest Income Limits Proposal Still Problematic for Affordable Housing Developers
For the first-time ever, the U.S. Department of Housing and Urban Development has issued advance notice of the changes it expects to make in income limits across the country. This break from tradition comes as HUD struggles to keep income limits from declining drastically in many metro areas. HUD’s income limits, published annually, set boundaries on the families that can be served and the rents that can be charged for Section 8 housing assistance as well as most other federal affordable housing programs. Developers seeking HOME and CDBG funds to build rental housing as well as though working through Rural Housing Service 515 program funds can be impacted by these limits as can the owners of projects financed with Low-Income Housing Tax Credits. If HUD sets income limits too low, it can cause rents in government-assisted properties to fall below operating costs, or restrict eligible residents so severely that vacancy rates become unmanageable.

A Little History

Because HUD publishes income limits by metro area, the official metro definitions published the U.S. Office of Management and Budget (OMB) play an important role in the process. In June 2003, OMB issued a substantially revised list of U.S. metropolitan areas. In addition to incorporating commuting data from the 2000 Census, the revised list employed a new set of definitions, as well as a new criterion for grouping counties together. 

This has a strong potential to adversely affect income limits in some areas. For example, a low-income county can become detached from a high-income metro, a high-income county can be added to a low-income metro, or a county can be moved from a high-income metro into a low-income metro.  Moreover, because of a transition from a town-based system to a county-based system in New England, income limits can fall in only a part of a county in the New England states.

NAHB has been communicating with HUD for years, trying to have an impact on the way it calculates income limits and adopt policies that prevent income limits from declining. HUD refers to these as “hold-harmless” policies.

One result is a HUD policy, adopted, in February, 2003, that prevented income limits from declining as the result of benchmarking to the then newly-available 2000 Census. This helped establish a general hold-harmless approach to income limits, but the process of adjusting to new metro definitions is more complicated and raises some new challenges.

Initially, HUD proposed that 2005 Fair Market Rents (FMRs) be based on the new OMB definitions. This generated so many complaints that it caused HUD to revert to the older definitions when it published the final list of 2005 FMRs. A year later, HUD did decide to base 2006 FMRs on the new metro boundaries, but simultaneously implemented a hold-harmless policy—although one that was more limited than the policy NAHB recommended.

Although many don’t realize this, income limits and FMRs are connected by various technical and legal formulas. This is one reason the process of establishing income limits is so complicated.

The Good News

As mentioned above, when the time to publish 2006 income limits arrived, HUD broke with tradition, published its intentions in advance, and invited comments on them. Given the way income limits cut so broadly across housing programs and the nature of the potential changes, this is to be applauded.

HUD didn’t publish any 2006 income limits in the notice, but instead analyzed what would happen to 2005 limits had the new OMB metro definitions been adopted at the time. The result is a large number of drastic reductions.  In fact, more than 46% of the U.S. population were living in places where income limits would have been at least 1% lower. The 10 most extreme examples (outside of Puerto Rico and the towns in New England) are shown in Table 1.

The good news is that HUD recognized the potential problems, even for programs it does not directly administer. HUD’s analysis indicated that the changes in income limits may have relatively little impact on some programs, but could affect others greatly. According to HUD, “the largest programs affected would be HUD’s Community Development Block Grant and HOME programs, the Department of the Treasury’s Low Income Housing Tax Credit (LIHTC) program, and the Department of Agriculture’s Rural Housing Services’ assisted housing programs…. The major reason for considering a hold-harmless policy is that Low Income Housing Tax Credit projects in areas with income limit decreases automatically have proportional decreases in their maximum allowed rent charges, which can adversely impact their financial viability.”
This reasoning led HUD to consider a particular hold-harmless policy, which it refers to as “primary area hold-harmless.” In the December 16 notice, HUD explained this policy and showed how far it would go toward preventing reductions in income limits. The primary area hold-harmless policy helps considerably, but doesn’t solve the problems in all areas. Some of the larger areas where declining income limits would persist are Bergen-Passaic and Monmouth-Ocean in New Jersey, and Ft. Lauderdale and West Palm Beach-Boca Raton in Florida. HUD also invited  comments on whether it should carve out these areas out specifically for special treatment, rather than let their income limits decline substantially. Multifamily professionals interested in housing programs in these four areas may want to consider submitting comments to HUD supporting that special carve-out.

The Bad News

The main problem with HUD’s proposed hold-harmless policy—even with Bergen-Passaic, Monmouth-Ocean, Ft. Lauderdale, and West Palm Beach-Boca Raton singled out for special treatment—is that it doesn’t go quite far enough. Some parts of the country still are likely to suffer declining income limits.

Many of the most severe examples occur in New England, as a result of the change from town-based to county-based metro areas. The 2005 4-person very-low (based on 50% of Area Family Median) income limit in several Connecticut towns, for example, drops from $46,400 to $39,050 under the new definitions. This is a massive 16% drop that the primary area hold-harmless policy does nothing to address. There are other persistent problem cases as well. Table 2 shows the 10 most extreme cases outside of Puerto Rico and New England. (Keep in mind that HUD is considering a special treatment for the two New Jersey counties that would remove them from this table).

The notice published on December 16 shows that HUD’s proposed hold-harmless policy limits the decline in income-limits to areas that cumulatively house only 2.5% of the U.S. population. However, there’s no persuasive reason that HUD should disproportionately penalize multifamily properties in these small counties.  NAHB has consistently argued that property owners, housing programs, and tenants should be held harmless in all counties, regardless of size.

In addition to the notice in the Federal Register, HUD has provided a complete table of potential income limit changes. Owners and developers of affordable multifamily properties may wish to consult this table for information about income limits in which they have a special interest. In cases where income limits appear likely to decline in spite of the hold-harmless proposal, readers may consider submitting comments to HUD. The deadline is February 14.

As usual in situations like these, NAHB will be submitting its own comments. If you have comments or questions about the potential income limit reductions and NAHB’s response to them, feel free to e-mail Paul Emrath in NAHB’s Housing Policy Department, or call him at 800-368-5242 x8449. 

More Good News

So far, we’ve emphasized the negative effects—cases where reductions in income limits appear likely and call for a policy response from the multifamily industry. But there also are considerable positive effects that result from adopting the new metro definitions—cases where we expect income limits to rise substantially. Increases are quite likely, in fact, in the numerous cases where OMB has added outlying counties to metro areas (and the fact that some outlying counties are becoming integrated into metropolitan housing and labor markets is an important reason for updating the metro area definitions).

Table 3. Counties Where Large Increases in Income Limits Are Likely in 2006 Due to the Adoption of  New Metro Definitions

Table 3 shows the list of counties where we expect rents for tax credit units (2-bedroom units rented to residents with no more than 60% of Area Median Family Income) to increase by at least $150 between 2005 and 2006, based on the HUD proposal for computing income limits. These counties are likely to have expanded potential for affordable multifamily development after the 2006 limits take effect. [ return to top ]