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How the Five-Year ACS Data Impacts Novogradac’s Estimate of 2023 Income Limits

Published by Thomas Stagg on Friday, July 8, 2022 - 12:00AM

The Novogradac 2023 Rent and Income Limit Estimator ©, now available, can provide a better understanding of how income limits will change in future years, which will enable developers, investors and lenders to better underwrite low-income housing tax credit (LIHTC) properties.

What sets 2023 apart from previous years is that Novogradac has completed the estimator using the five-year American Community Survey (ACS) data.

As has been covered in a previous blog post, due to issues with data collections, the Census Bureau will not release a one-year ACS for 2020. It is still unclear what data the U.S. Department of Housing and Urban Development (HUD) will use to calculate income limits for 2023, however, historically when the one-year ACS is not available HUD has defaulted to the five-year ACS. this first look at income estimates for 2023 based on 2020 five-year ACS, which gives a baseline for income growth for 2023.

Previous research by Novogradac’s Income Limit Working Group shows that FY 2023 income limits calculated by HUD will be on average 3.5% lower if calculated using the five-year ACS data than they would be under the one-year ACS data. The estimates for 2023 based on 2020 five-year ACS show much lower income growth than 2022 reflecting the slowdown caused by the 2020 five-year ACS.  However, there are certain factors that even with a headwind of the ACS issue slowing growth, result in income limits still generally trending up (at a slower rate than previous years) as opposed to declining.

Impact of Inflation on Income Limits

Inflation will continue to be a driver of income limit increases for 2023. Because HUD uses the historical ACS when calculating income limits, it uses a consumer price index (CPI) trend factor to grow income limits from the historical ACS year to the income limit year.

Inflation is projected to continue to grow during 2022 and 2023. The most recent Congressional Budget Office (CBO) estimates show that CPI will be 294.5 for 2023. This continues the rapid increase in inflation that has occurred over the last couple of years. This will result in an inflating trend factor of around 1.138 compared to 1.112 for 2022. This means that if an area had flat ACS, then the income limit would go up by about 2.3% based on the CPI adjuster alone.

Using the national median income as an example can show how inflation will impact the 2023 estimate.

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Although the ACS decreased by 1% due to the shift from the one-year data used for 2022 to the five-year data used 2023, the national median income still grew by 1.22% due to the inflation factor.

Impact of Caps on Income Limits

In determining very low-income limits (VLI), which are used by LIHTC, tax-exempt bond developments and many HUD programs, HUD has certain adjustments that impact income limits. One of the adjustments is the cap on year over year changes. The increase is capped at the great or 5%, or two times the change in national median income. In 2022, HUD tweaked its cap methodology resulting in more than 50% of areas having incomes that were capped.

The cap will help lessen the decline in income limits from 2022 to 2023. Consider these examples.

Jackson, Michigan

In Jackson, Michigan, the uncapped VLI grew from $32,400 to $42,150 (30%) from 2021 to 2022.  However, due to HUD’s cap policy, the VLI was limited to $36,250. When shifting from the one-year ACS used in 2022 to the five-year ACS for 2023, the VLI is estimated to be $38,000. Although this is an increase over the capped amount in 2022, it is still significantly lower than that uncapped $42,150. If there was no cap in 2022, this area would have an almost 10% decrease in income limits from 2022 to 2023. However, the VLI for 2023 will reflect an increase of almost 5% to $38,000 over 2022’s capped VLI of $36,250.

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The chart above shows how the cap impacts the limit, but it also highlights the fact that this area will not reach the uncapped amount ($42,150) from 2022 in 2023, and therefore, that amount is lost. In other words, the uncapped high of $42,150 is not carried over to the next year, the area is not held harmless at that amount or automatically increased to that amount.

However, just because an area was capped in 2022 does not mean it will be spared from decreases in 2023. 

Sebring, Florida

Sebring, Florida, was also capped in 2022, but the cap was not as dramatic as Jackson.  Without the cap, Sebring would have grown by about 14.5% from 2021 to 2022, but the increase was capped at 11.89%. However, with the shift from the one-year to five-year ACS, the estimated VLI for Sebring is showing a large decrease. After applying the inflation factor to the ACS, this results a 4.4% decrease in VLI for Sebring.

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As shown in the chart above, the area will not be held harmless at the uncapped VLI of $31,750. The $31,750 is not carried forward to the following year in any way. However, developments that were in service prior to the release of the 2023 income limits would be held harmless at the HUD published capped VLI of $30,950. Therefore, existing developments will continue to use the $30.950 income limits and new developments placed in service will have to use $29,650.

Both of these examples are preliminary estimates for illustrative purposes. There may be other adjustments that impact the final income limits.

2023 Income Limit Estimates

As mentioned before, the 2023 estimates are based on the 2020 five-year ACS. To estimate the trend factor Novogradac is using the CBO estimate of 2023 inflation. Novogradac is currently able to estimate more than 2,600 counties. Novogradac is unable to estimate limits for areas that are impacted by the high housing cost adjustment or state non-metro adjustment.

As shown above, the estimated change in national median income will be right around 1%, meaning the cap on increases for 2023 will be 5%. It is important to note that the national median income increase for 2022 was not capped since HUD only caps its VLI figures, and therefore, is not impacted by any carryforward caps.

The average change in income limits is estimated to be 3.11%, this is a drastic decrease from 2022 where the average increase was 10.5%, however, the increase in 2023 is much higher than was anticipated. As mentioned above, the overall increase is influenced heavily by the number of areas that were capped in 2022 and the general impact of inflation.

The relatively good news for LIHTC developments is that less than 6% of all areas are estimated to have a decrease and only 1.4% of areas are estimated to have a decrease of greater than 2%.

Surprisingly, 44% of areas are estimated to have an increase of greater than 4% and around 25% of areas are estimated to be subject to the 5% cap.

See below for a distribution of the estimated change in VLI.

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