Can anybody in the industry comment on how they forecast the LIHTC market during the next recession. I feel like the last recession isn't the best comparison because banks' financial structures are stronger now. Any insights?
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Not just an indirect "lowering value of the credit"--literally, less actual need for the credit. We saw this happen in 2008/2009 when bank profits declined. When their profits declined their purchases of LIHTCs declined markedly.
LIHTCs aren't going away, but it's a contracting market with the lowering corporate income tax rate. Add in the fact that LIHTCs are very much cyclical with the economy (i.e. recession = much less demand) and I see it as a contracting market--less demand in a strong market (with lower tax rates) and markedly less demand during a recession.
Also, LIHTCs are an incredibly inefficient--and even immoral--way of developing housing (my boss is on the board of directors of a senior AH housing complex, which is getting LIHTCs to renovate their space; the developer is taking zero risk and is walking away with a $4M developer fee, paid for by the tax payers of the United States--it's grotesque). So I've got an economic problem with the industry and a moral problem with it.
This is silly. No one would build affordable housing without being incentivized to do it, and since it isn't a profit center, you need to pay developer fees (which rarely exceed ~13%). And affordable housing is a public good.
If anything, LIHTCs are an expansionary market. Yes, the price for each individual credit is going to decline a bit (though, lets see how long corporate tax cuts hold up). But that doesn't mean there won't be an increasing demand for affordable housing, and as long as that exists, it will get funded, perhaps even more so than it is today.
And I cannot speak for the country at large, but in NYC and the surrounding area, the recession did nothing to abate demand for tax credits. For one, it would take a TON of LIHTCs to wipe out a bank's profit margin, so even with a recession and lower incomes, there is still demand. Also, remember that banks are still required to abide by the CRA, which often means huge investments into LIHTCs.
Your entire comment sounds like someone familiar with basic economic theory, but not the underlying reality of how the LIHTC market works. There was an 18% reduction in the number of LIHTC units that were placed in service between 2008 and 2009, and a 40% increase in units placed in service between 2010 and 2011. Which means that in the bottom of the recession in 2008/2009, more LIHTC units were being developed or in predevelopment than in previous years. Its only when the economy turns around that substantially fewer units are developed. Which is because affordable housing is a counter-cyclical market, which is why it's such a good one to be in. When times are bad (2008-2010) you see traditional developers flocking to the LIHTC space, and the credit committees at banks being more comfortable lending to easily-leased income restricted units. When times get good and credit and capital flow more easily, developers go back to market rate housing. HUDs data (or the published data I could find) onyl goes to 2015, but I have no doubt you'd see a increase in units placed in service in 2016 and 2017, as an overheated market again drove for profit developers into the affordable space in search of deals that weren't crazily overpriced.
I hate arguing from authority here, but I was Freddie Mac's personal AH underwriting analyst (I served all of the underwriters), and an offshoot of my present company is one of the largest AH developers in the Mid-Atlantic. When I was a lender, I saw the personal financials of the CEO of the District of Columbia's largest AH developer, and he is incredibly wealthy. The CEO of a small, local Arlington, VA AH developer lives in a gated community. I know the LIHTC development industry quite well. Yes, affordable housing IS a profit center. For those who specialize in it, it is a highly profitable business that requires very little risk.
Very debatable. When I used to inspect affordable housing complexes, I would see more luxury cars than at my condo building (which is in a prestigious, wealthy community). Affordable housing, paradoxically, doesn't really create affordable housing. It just reduces the supply of housing for the middle class (through increased costs, etc.). Like most welfare programs (that's what it is, a welfare program), there are winners and losers. In this case, the big winners are the developers, with a second place being those who basically win the lottery and can live in a subsidized unit.
Sure, as long as there are people like you who uncritically view "affordable housing" as a public good, then there will always be political pressure to expand.
New York City is a such a different market that Fannie Mae and Freddie Mac have their own departments that literally just serve New York City. The idea that you could take New York City and expand out your experience to the rest of the country is laughable. It's utterly laughable.
Also, books have been written on how NYC's housing policies have exacerbated housing costs in NYC. NYC is the poster child for why affordable housing programs are bad public policy and are NOT a public good--they are a PRIVATE good.
In 2009, half of Freddie Mac's affordable housing group was laid off. Its tax credit equity group was shuttered. In 2008, before I joined Freddie Mac, I worked for a national appraisal firm that specializes in affordable housing appraisals. I was laid off for lack of work.
Don't you f*cking talk to me about "theory." Affordable housing is absolutely not counter-cyclical. Deliveries of units means nothing--projects are planned years in advance.
Here is an historical chart for LIHTC pricing. Notice the dip? Funny how that pricing dip matches up with the recession.
https://www.novoco.com/atom/139751
Objectively there's political capital in expanding affordable housing. While the program might reduce middle class housing, the current reality of economic inequality and the hollowing out of the middle class counters this point. There are more poor people who need assistance with housing costs than units supplied. The market rather build high end condos than affordable housing and without incentives there would be an organic imbalance towards high end in development.
Also I don't think the beta of affordable housing and the overall market is strong. It seems that the lihtc market is more closely correlated to bank health. This is why the 2k equity crash didn't effect lihtc as much as the 08 financial crisis.
Lastly, i agree that developers and tenants are the main beneficiaries of this program but I don't think this is immoral. You seem to have a strongly negative experience with the market so I can understand your sentiment but I have no problem with the trade off of unrealized tax gains for affordable housing. In large the program does more good than harm.
Among some blue cities, generally, yes. I don't think this same political capital exists in the red states or areas. But yes, in places like SF and NYC, this rings true.
But this is where your thinking breaks down. Why is it that places with the most extensive AH requirements have out of control housing costs? Because you can't centrally plan affordable housing. Housing becomes attainable to the masses when you reduce regulatory burdens and allow the market to build to meet demand. Cities that focus on centrally planning affordable housing inevitably regulate away supply. But the immutable law of real estate is that what once was a Class A building becomes a Class B building, which becomes a Class C building. In other words, today's luxury units are tomorrow's affordable units.
It's true that LIHTCs are largely purchased by banks, mostly because they are forced to play the CRA racket. I mean, the entire affordable housing industry is a racket based on regulation and manipulation. If the CRA were literally interpreted differently by a letter from the regulator, the entire scheme would collapse. I personally don't want to work in an industry that is one regulator clarification letter away from total collapse.
We just have a fundamentally different philosophy. I have no problem with gov't subsidized AH for the elderly and disabled. However, the vast, vast majority of AH is set aside for able bodied adults. To me, that's grossly immoral.
So your arguing that people who are good at what they do shouldn't get paid? Yes, it's less risky than market rate development, but the returns are very limited. You get a fee. That's it; there is no real promote or back end interest on LIHTC deals. You make your 10-12% and you're done, there isn't the upside you'd see in a luxury rental/condo deal.
I'm not sure why you believe that affordable housing developers don't deserve to be paid. There are plenty of other professions in this world in which people get paid more, for doing less. And before you bring the fact that this is funded by tax dollars - by that logic, anyone accepting ANY government contract shouldn't be wealthy. Why should the CEO of Boeing make anything, given how much of Boeing's profits come from inflated government contracts?
Oh, and mind you, affordable housing Sponsors take on a fair bit of risk - completion guarantees are standard, operating deficit guarantees seem to be standard nationwide (from talking to national developers), and there is tax-credit delivery risk. No, there isn't the same market/lease up risk, but again, there is no back end reward either. You mitigate some risks and take a lower ceiling on your payout. Those wealthy developers you anecdotally know? They were good enough at their jobs to not fall prey and have their guarantees kick in. Saying "developers are paid too much, because I know two successful developers who are worth a lot of money" is ridiculous; they're high net worth because they did their job well
There's a lot in here to dissect. First off, stop propagating this idea of wealthy "welfare queens" who live high hog in affordable housing and have hundreds of thousands of dollars in the bank/of assets. Does it happen? Sure. But people living in LIHTC housing are subject to stringent income verification, so no one living in a 60% of AMI unit is driving a Bentley.
And whether or not you think affordable housing is a public good is open to debate, I guess. If you think part of the job of government is to ensure that it's citizens have a clean and safe place to live, regardless of how much they make, then it is unquestionably a public good. But that's a larger political question that I doubt either of us will convince the other of. But as far as "middle class" folks being disadvantaged - well, no one seems to be calling to eliminate the mortgage deduction, so it isn't like there aren't public policies geared towards boosting middle class home ownership.
There are plenty of smart, conscientious people who look at housing policy very critically. To make a blanket statement that LIHTC is an entitlement program with no thought behind it is silly and insulting.
So did you not read the part where I explicitly said I wasn't applying me experience to the entire country, or just choose to ignore it? Obviously every submarket is different, but when you are making federal policy, you have to work on more of a one-size-fits-all basis. Which is why the states get a lot of discretion in how LIHTCs get allocated.
I'd be interested in reading them. And for what it's worth, New York City's housing policy is far broader than just LIHTC development, so please specify. Yes, there is an argument that rent stabilization as a whole isn't good public policy, but it's what is in place right now. 421-a had a lot of problems as well. The world evolves, and pre-existing policies can become obsolete. No one is arguing that. But public policy planners have to work within the framework of the world as it exists.
Ah, I see. My experience is bunk, because it's specialized in one market, but your anecdotal evidence is expansive enough to justify everything you've said? Brilliant. Not sure why I am supposed to be convinced that LIHTCs as a whole are a bad business to be in, because one troubled GSE had layoffs.
National LIHTC pricing did drop starting in late 2008, by a meaningful amount by 2010 (like 15%). And then it recovered. If your argument is that the LIHTC market can be cyclical, than sure, I agree. That isn't exactly rocket science. It took a nosedive in late 2016 in anticipation of corporate tax reform... and now, continues on at relatively stabilized pricing. But guess what? That's real estate. Market rate housing sees much bigger swings, so the argument in favor of being in the LIHTC business, which is (to my mind) that it's a more stable market than market rate rentals/sales, holds.
Once again, either you didn't read the context of my post, or chose to ignore it. Delivery of units should trail motivating factors by ~2 years or so - which is why I was talking about deliveries in 2010 or 2011, and not when those projects which would have been planned in 2008 or 2009.
Whoa, and look at that chart! You know what you ignore (conveniently)? The fact that the pricing dip recovers!
Perhaps "counter-cyclical" was an ill-advised term. But you know what I see? I see a market that isn't nearly as volatile as the national housing market as a whole. National home prices dropped 25% during the recession.
We may not agree on the politics of affordable housing. You seem to have a bootstrapper mentality (or that is how I take your comment about "able bodied adults" not deserving affordable housing), which I don't agree with, but I find it hard to see how you can say the LIHTC business is a bad business to be in.
Since it often gets discussed by people with vast experience within the sector, could any ELI5 (Explain it like I'm 5) how LIHTC works?
PS - If someone's willing, just explain how the whole damn thing works.
BTW - Great discussion so far Ozymandia & @Troll - Aged 18 Years"
There are a ton of online materials on this subject but it would take weeks to read it all. My boss says it takes two years on the job to learn this business, so I'm going to make this simple.
The Developer makes his money on the developer fee (sometimes deferred), incentive management fee, management fee, cash flow over the holding period, operating deficit loans to the partnership, and possibly residual proceeds at sale. Sometimes the developer is the GP, sometimes there are co-GP's, a not-for-profit operator and a developer. Often the developer principals are guarantors on the deal. The ILP takes its credits over ten years. Hopefully this raises more questions :)