MultiFamily Market Outlook - December 31, 1969

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.
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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.

Multifamily Starts Fall, but Rebound Likely

Housing starts in buildings with five or more units fell by more than 11% in October. For the month, the Census Bureau's preliminary (seasonally adjusted annual) starts rate came in at 271,000, compared to 307,000 for September and 319,000 in August. As usual, caveats about reading too much into a one-month change for a series that fluctuates and is subject to revisions apply. The August and September numbers were both revised upward this month, for example, even after the preliminary August figure was revised upward by more than 40,000 apartments last month. Moreover, the last two times we saw double-digit declines, they were followed immediately by double-digit increases the following month.

Source: U.S. Census Bureau; NAHB Economics Group

The Census Bureau so far has maintained that the impacts of Hurricane Katrina are minimal, on both the reliability of its estimates, as well as on the rates of housing starts and permit authorizations it reports. In permit-issuing places that were affected by the damage and could not be contacted, the Census  Bureau assumed no new permits were issued, and that  projects previously authorized had not been started yet. In general, the survey used to generate multifamily starts and other measures of residential construction does not include very many of the places that have experienced severe hurricane damage since August.

Real Rents Advance...Rent Index, Not So Much

In October, real rents recovered a small part of the ground they lost in September, according to Consumer Price Index (CPI) data. The residential rent component of the CPI advanced at a seasonally adjusted annual rate of 5.1%—the largest one-month increase in more than four years, and  generally consistent with recent improvement seen in vacancy and absorption rates. 

Nevertheless, the real rent index (which adjusts for inflation using the overall CPI) only managed to edge up from 106.2 to 106.4. The index was restrained by overall inflation which, although less than the growth in rents, was still significant in October, and for once was broad-based. "Core" inflation (which excludes food and energy) came in at double the rate posted in any of the previous five months, although it was still quite low on a year-over-year basis, and so remains a non-issue for the Federal Reserve as it considers monetary policy decisions.

Good Economic News Now, and Strength in the Coming Decade

Growth of real gross domestic product (GDP) has been revised up to a robust 4.3% annual rate for the third quarter, despite substantial hurricane-related negatives in September. Hours worked in the nonfarm business sector rose only slightly in the third quarter, while productivity (output per hour) grew at an outstanding 4.7% pace. The impacts of the hurricanes on the energy markets have been fading away, removing a key economic stumbling block. GDP growth is slowing to some degree in the fourth quarter (we’re currently estimating 3.4%) and inventory investment will account for a lot of the growth, but economic fundamentals remain quite solid as we approach year-end. The employment report for November showed strong growth in payroll employment and the hurricane-affected estimates for the September-October period were revised upward to some degree. Furthermore, the unemployment rate held at 5%—another sign of a healthy national labor market—and slack in labor markets is likely to shrink a bit further as growth in economic output proceeds.

Minutes from the November 1 meeting of the Federal Open Market Committee (FOMC) suggest that the Fed is approaching the end of the rate-hike process that began in mid-2004. We saw another quarter-point increase at the Dec. 13 FOMC meeting, but monetary policy may hit neutral as Chairman Greenspan leaves office early next year. Signals from the Fed, along with Congressional testimony by the next Fed Chairman (Ben Bernanke), helped calm fixed-income markets in the latter part of November following a substantial upshift in long-term interest rates from mid-September levels. Long-term rates are likely to rise somewhat further in 2006, but the increase will be limited as long as core inflation remains under control. NAHB’s newly revised long-term forecast suggests that sustainable levels of multifamily market activity are not far below recent levels and that the foundations for the next ten years are quite strong—unless immigration policy is tightened considerably in the years ahead.

MFSI Bounces Back

During the month of November the MFSI increased by 95 points, or almost 4%. With this rise, the MFSI is at its second-highest reading of all time, with the record set just four months ago, and is a full 16% higher than it was 12 months ago. During the past month, the S&P 500 (with dividends reinvested) also gained almost 4% and, as a result, finds itself almost 9% above where it was a year ago.

Because the MFSI increased by exactly the same amount as the S&P 500 with dividends during November, the performance gap—or percentage difference—between the two indexes remained unchanged from 132% in October. That level was just 10 percentage points lower than the high-water mark of 142% set in July of this year, and the second-highest level ever recorded. Despite the very strong 62% rise in the S&P 500 since its low point in late 2002, the MFSI has risen a staggering 83% during the same 38 months. In addition, the MFSI continues to dramatically outperform the S&P 500 over longer time periods including the past four, five, and six years. Since December 1998, the MFSI has risen by a whopping 162% while the S&P 500 with dividends reinvested has gained a meager 13%.

During the month of November, the price-to-earnings ratio (P/E) of the MFSI rose slightly to 18.06 while the dividend yield, defined as the total cash dividend payments divided by the current stock price, which moves in the opposite direction, decreased and now stands at 5.28%. The MFSI is an index of 26 publicly traded US headquartered firms, including 22 REITs, principally involved in multifamily ownership and management.