Income Limit Data Tells Important National and Local Stories

Published by H. Blair Kincer on Tuesday, July 24, 2018 - 12:00am

The 2018 income data released by the U.S. Department of Housing and Urban Development (HUD) provide an opportunity to examine trends nationally as well as at the local market level.

Nationally, the income data illustrates a stark contrast in the nation’s economy today as compared to four years ago. Below is the area median income (AMI) map Novogradac published showing the change from 2013 to 2014 (red represents negative income growth while green is positive growth).

 

Blog Map Change in HUD Published AMI
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Compare that to the AMI map below, which shows the change from 2017 to 2018.

Blog Map Change in AMI 2017-2018
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From a Jackson Pollock inspired polychromatic mess to a sea of green! National AMIs are increasing. The continuing national recovery is evident in the above two maps. The national trend in the median income is clear, but the low-income housing tax credit (LIHTC) community knows the local economy is far more impactful upon the performance of a particular property or submarket.

Those shades of green may mean significant rent increases are possible in many markets. Maximum allowable rents will be increasing significantly in many markets from 2017 to 2018, and possibly beyond. The ability of the local market to actually support those possible rent increases is a question that the more localized economy will play a primary role in answering.

The data tells stories about local markets that are useful to those involved in developing housing in those local markets. However, the data can, at times, be misinterpreted and a deeper examination is required. While every single market deserves a close look, we will focus on several specific markets as examples of how a cursory view of the data may be hiding more relevant local factors.

As discussed in previous blog posts, when HUD publishes AMI data it starts with demographic data from the Census Bureau collected through the American Community Survey (ACS). In many cases this data is three years old at the time of publication of the AMI (2018 AMI levels are based on 2011-2015 ACS 5-year estimates). HUD updates the income data with national consumer price index (CPI) estimates (2015-18 escalation for 2018 AMI), correcting for some of the discrepancy. However, applying a national CPI adjustment to local economies may sometimes exacerbate an unavoidable disconnect. Local economies do not necessary move in lock step with the national economy. Further complicating matters is the adjustment process that HUD uses. For instance, there are adjustments of rural communities’ income data to the state non-metro median. HUD also employs income limit floors and caps, to help prevent large swings in income changes from year to year, which also confounds the process.

Fundamentally, three factors must be considered when looking at the current median income data: X, Y and Z. Examining two geographic areas more closely —the upper Midwest and Maine.— and layering in additional economic information extracts some interesting trends.

 

Blog Map Change in HUD Published AMI from 2017-2018
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The brown outlines in the image above are basins of gas and oil production, areas of concentrated fracking efforts. These areas generated many jobs and increases in income between 2009 and 2014. The activity slowed significantly in 2014, when fuel prices dropped to the point that fracking was no longer economically justified. That the underlying data is three years old explains why the northwest portion of North Dakota is deeper green.

 

Blog Map State Non-Metro Adjustments by Municipality 2018 AMI
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The pink counties are those where minimums are set by the state non-metro median income. In North Dakota, it is clear that the growth in non-metro incomes in the fracking basins are increasing the AMI levels for the eastern portion of the state. Wyoming presents a similar story, where the higher income fracking basins are raising the state non-metro median incomes (absent the exaggerated recent growth).

The timing of the data may be causing disconnects in the interpretation of the maps. The data reflects the change in AMI from 2017-2018, but remember this is based upon changes in the ACS data three years prior. The oil and gas industry has changed significantly in the past three years. Therefore, the significant changes in income represented by the bright green must be viewed skeptically. Can properties in those areas really achieve 10 percent rent increases? Are the people who experienced those income increases still there, or did they move on when their jobs disappeared? This story echoes in other fracking economies in West Virginia, Eastern Ohio and Pennsylvania. Detailed interviews with local developers and property managers are a must when viewing markets that are changing rapidly.

Maine

Maine is a state that is changing less rapidly, but that illustrates a similar disconnect between the various rural areas. Maine is a classic example of a bifurcated economy within a state, where non-metro areas within one area significantly affect the statewide AMI levels.

 

Blog Map Change in AMI 2017-2018
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This map is as green as a northern pine forest. What lies beneath the green may be more informative as to how a developed property may react to rent changes. The adjustment map is particularly enlightening.

 

Blog Map State Non-Metro Adjustments by Municipality 2018 AMI (Maine)
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Again, the areas colored pink are adjusted to the higher state non-metro AMI. A familiar pattern emerges. Higher income coastal areas of Maine contribute to statewide median income increases, which precipitate significant AMI increases for portions of the state with very different economic characteristics. The question remains: would a property in Arroostock County (the municipality that looks like a cap on top of the state and is known locally as “the county”) actually be able to achieve the increases allowed by the change in the state non-metro AMI?

Obviously, this discussion focuses on rural areas and few properties are located in the areas discussed. But this pattern is replicated in most states. Maryland has eastern and western non-metro areas similar to Maine. New Hampshire has a similar dichotomy in northern and southern counties. While the dramatic increases in AMI may be welcome to a cash strapped LIHTC property,  many rural properties may not be able to harvest rent increases, as the local economy will dictate what is achievable.

Overall, such increases in max rents have to be balanced against real and localized rent trends. While rent increases may be fruitful to long-term cash flow planning, they have be done carefully and thoughtfully. Each local area has its own story to tell.

Interact with the Novogradac Income Limits Mapping Tool to explore the story in your area.