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If Enacted, Neighborhood Homes Tax Credit Could Provide Opportunities for Affordable Housing

Published by Peter Lawrence on Wednesday, December 20, 2023 - 10:57AM

Enacting the Neighborhood Homes Investment Act (NHIA), which would establish the neighborhood homes tax credit (NHTC), was a top priority discussed at a recent seminar hosted by Urban Institute and the National Community Stabilization Trust. 

During the seminar titled, “Challenges and Policy Responses to the Affordable Single-Family Housing Supply Problem,” the Urban Institute’s Laurie Goodman provided insight into the state of the current housing market and two sets of panelists discussed the lack of affordable owner-occupied housing. 

Background

The Harvard Joint Center for Housing Studies reports that the cost of purchasing a home and obtaining a mortgage has risen drastically over recent years with many Americans feeling that they are being priced out of the homeownership market altogether. One potential solution would be the passing the NHIA, H.R. 3940/S. 657. Inspired by the low-income housing tax credit (LIHTC), the NHTC would cover the gap between the cost of building or renovating a home and the price for which the home can be sold. The NHTC would allocate $2.4 billion to $3.1 billion in tax credits annually over the next decade, for a 10-year total of $27.9 billion and is estimated to finance 500,000 homes, according to the Neighborhood Homes Coalition. 

The Current State of the Affordable Housing Crisis

Goodman began the seminar by describing the current state of the housing market, especially regarding the supply of affordable owner-occupied housing. She said that the country has a shortage of 3.8 million homes as of 2020, according to Freddie Mac, and that the country needs to make up for a decade of underbuilding that has contributed to robust single-family housing price increases, particularly at the lower end of the market. The value of the lowest priced tier of single-family housing has increased considerably in recent years, which has greatly diminished the available supply of affordable owner-occupied homes. According to Goodman, only 20% of single-family homes sell for less than $200,000 thus far in 2023, dropping from around 45% in 2014. She also said the sale of new single-family homes account for only about 15% of total home sales as they tend to be more expensive than existing single-family homes. 

Blog Graphic: U.S. Housing Stock Distribution by Year Built, Single-Family Properties

Goodman said land price appreciation has begun to soar above structure and home price appreciation, meaning that the value of the land has grown proportionally larger than the value of actual homes. This makes exclusionary zoning laws much more significant because they limit the types of housing that can be built on the land, such as duplexes or multifamily housing. Goodman shared a graphic illustrating how land price appreciation has grown around 300% from 2012-2021, while structure price appreciation has grown over 125% and home price appreciation has grown around 200%. Goodman also elaborated that regulatory costs of building a home account for 23.8% of the total price and creating high quality affordable housing means that regulations will become more costly as well. She said that home price appreciation can be defined as the weighted average between the structure price appreciation and the land price appreciation.

Currently, states and localities are looking into fixing zoning regulations and building codes so that the housing supply can be increased, and the federal government is looking into financing rehabilitation of aging housing and more affordable dwelling units (ADUs). Goodman said land use policies facilitating ADUs have recently been approved in California and Oregon, and those states have shown increases in ADU permits after the policy change. Additionally, California also completely eliminated exclusive single-family housing  in September 2021.  In 2018, the city of Minneapolis implemented the same policy due to the fact that 70% of their total land area in the city was exclusively zoned for single-family housing.  Infill zoning, or the development of unused land in urban areas, has been utilized in cities such as Los Angeles to speed up the process of increasing the housing supply. 

Local Perspectives and Solutions

During the seminar’s first panel, in which participants discussed their personal experiences with single-family affordable housing in their communities, Sasha-Gaye Angus, president and CEO of MANNA Inc., said the number one action Congress could take to address the lack of affordable owner-occupied homes is to pass the NHIA and encourage the creation of more homeowners. After surveying her community, she said she found that many people want a forever home, a place they can live in for the rest of their lives, but struggle to achieve this goal due to high costs. While different models of housing such as shared equity or land trusts work well for some, many seek sole ownership of their house, but lack the means to do so, Angus said.  

Anthony Simpkins, seminar panelist and president and CEO of Neighborhood Housing Services of Chicago, agreed that there are not enough resources that focus on affordable housing for homeowners. He praised the new markets tax credit (NMTC) for expanding investment in vulnerable communities, but overall emphasized that federal resources for home ownership needs improvement. He also said that inflation has had a drastic impact on the housing market, as average single-family homes before the pandemic in Chicago sold for around $250,000, but are now sell for $450,000, and it costs $500,000 to build a new single-family home. Simpkins said that giving everyday people better opportunities to be able to become homeowners would help solve racial disparities and wealth inequality and would bring back communities that have been ripped apart by the foreclosure crisis.  

Marcos Morales, seminar panelist and the executive director of Hogar Hispano Inc., expressed concerns regarding institutional investors in his community and said the American dream of becoming a homeowner is becoming a nightmare for lower-income Americans due to the lack of supply. While LIHTC developments have been beneficial in creating more affordable rental housing, he said enough attention isn’t paid to incentivizing affordable homeownership for low- and moderate-income households.  

Policy Reforms to Increase Affordable Supply, Address Displacement, Racial Disparities and Climate Issues

During the seminar panelists discussed how policy reforms could increase the affordable housing supply. Matthew Josephs, senior vice president for policy at the Local Initiatives Support Corporation, discussed how the NHIA could prevent displacement and address the rising costs of construction and labor. The NHIA would target investment in communities with high poverty, low income and low home value, which helps to avoid investments into gentrified areas. The NHIA legislation includes exceptions that would allow rural communities that may not meet all three of these characteristics to be eligible so that these communities are not excluded from coverage. 

Laura Arce, senior vice president for economic initiatives at UnidosUS, emphasized the importance of homeownership in building generational wealth, family and stability, and said that the lack of housing supply is a civil rights issue. Historic income gaps and unequal access to employment opportunities were major hurdles for Latinos looking to build wealth, and discriminatory zoning regulations amplified these difficulties, according to Arce. 

David Sanchez, a special policy advisor from the Federal Housing Administration at the U.S. Department of Housing and Urban Development (HUD), said improving construction standards could help build resiliency in housing when it comes to climate change. However, these construction standards increase already expensive construction costs. According to a previous Novogradac blog, creating the NHTC would help to finance some of these construction costs, which will help prepare for the worsening climate crisis.  Sanchez concluded by stating that driving investment into communities that already exist can help to revitalize them and close the racial disparity gap by increasing the housing supply owned by people of color.

The Future of the Neighborhood Homes Investment Act

The Urban Institute’s seminar panelists said passing this bill could help to close the wealth gap, lower racial disparities and even help invest in natural disaster prevention. The NHIA could potentially be included in a “year-end” tax bill, which could be considered when the current continuing resolution (CR) funding HUD and several other federal agencies expires Jan. 19, 2024, followed by the CR funding the rest of the federal government that expires February 2. 

To learn more about the NHIA, and how it and the NHTC can be implemented by states once the legislation is enacted, consider joining Novogradac’s Neighborhood Homes Tax Credit Working Group (NHTC Working Group). The NHTC Working Group advises members on technical and administrative issues regarding the NHTC. Broader housing information will be covered during the  Novogradac 2024 Affordable Housing Developers Conference Jan. 18-19, 2024, in Fort Lauderdale, Florida. The conference will provide an opportunity for housing stakeholders to share their expertise on the housing development industry along with networking opportunities for housing investors, developers, consultants and other community development professionals.

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