Income Limits Could Be 3.5% Lower in 2023

Published by Thomas Stagg on Monday, October 25, 2021 - 12:00am

As discussed in a recent Tax Credit Tuesday podcast, the Census Bureau announced it will not release a one-year American Community Survey (ACS) for 2020. As a result, the U.S. Department of Housing and Urban Development (HUD) will likely use the five-year ACS data to calculate income limits.

Research conducted by Novogradac on behalf of the Income Limit Working Group shows that changing from the one-year to five-year ACS would result in area median income (AMI) limits that are on average 3.5% lower than they would be under the one-year ACS.

Income Limit Calculation

When calculating AMI, HUD uses ACS data. Due to the timing of the release of the ACS data and the release of the HUD income limits, HUD uses the ACS data from three years prior to the income limit year and then uses consumer price index (CPI) to trend ACS data to the income year. For example, the 2021 income limits used the 2018 ACS data. The 2020 ACS data will be used for HUD fiscal year (FY) 2023 income limits.

HUD typically uses the one-ACS data. However, when HUD does not have access to the reliable one-year ACS, they default to the five-year ACS. When calculating a five-year ACS, all data collected in the five-year window is given the same weight. For example, the five-year ACS data for 2020 will cover the period from 2016 to 2020 and include all responses received in that period. In a period when where income limits have been increasing, the five-year ACS will be lower than the one-year ACS. 

To test this hypothesis and quantify the variance, Novogradac examined the historical variance between the one-year and five-year ACS for all metropolitan statistical areas (MSAs) in the country for ACS years ending in 2017 to 2019 (2019 is the most recent ACS year available). The initial analysis focused on MSAs as this covers more than 75% of the population of the United States and smaller counties are more likely to not have a reliable one-year ACS estimate. As mentioned previously, when there is not a reliable one-year ACS estimate, HUD uses the five-year estimate.

Summary of Findings

There are 330 MSAs in Novogradac’s sample. Across all years, on average, the one-year ACS was 3.71% higher than the five-year ACS for MSAs. In 82% of areas, the one-year is higher than the five-year ACS data.

The effect of the five-year average is felt more heavily in larger areas. Of the 30 largest areas, which include all MSAs with a population of more than 2.1 million no areas in the three years sampled had a one-year ACS that was lower than the five-year ACS. For these areas with population greater than 2.1 million, the one-year ACS, across the three sample years, was on average 4.92% higher than the five-year ACS (5.44% higher in 2019).

All eight areas with a population of more than 5 million had a one-year ACS higher than the five-years ACS for all three years.

Effect on Income Limits and Rent

This analysis does not mean that incomes will be 3.5% lower on average than they were in 2022, it means that limits will grow 3.5% slower than they otherwise would have. If an area was projecting to have a 5% increase in 2023 based on the one-year ACS, this area would still have an increase over 2022 but the increase would only be 1.5% (5%-3.5%) because of the use of the five-year ACS. For an area that was projecting a 2% increase, this change would result in a decline in median income over 2022 of -1.5% (2%-3.5%).

To examine what this might mean for rent, consider an area with a median income of $100,000 based on the one-year ACS. Under the five-year ACS, median income would be $97,500. In this hypothetical area, two-bedroom 60% rent would change from $1,350 to $1,303 – a $47 decrease. 

Largest Changes

A positive variance denotes the one-year was greater than the five-year and negative denotes the five-year was greater than the one-year. If an area has a positive variance of 5% then the limit using the one-year ACS was 5% higher than the limit using the five-year ACS. If the five-year ACS was used instead in this example the income limit would have decreased by 5%.

The following are the 10 areas with the largest positive variance for 2019 ACS.

Blog Graphic: Ten Areas With the Largest Positive Variance for 2019 ACS
Click to Enlarge

 

The following are the five areas with the largest negative variance for 2019 ACS:

Blog Graphic: Five Areas With the Largest Negative Variance for 2019 ACS
Click to Enlarge

 

The following is the variance for the 10 largest areas based on population.

Blog Graphic: Variance for the Ten Largest Areas Based on Population
Click to Enlarge

 

In the 10 largest MSAs, the AMI would have decreased by 5% on average if the five-year ACS data was used.

About this Analysis

This analysis was done on an MSA level; when calculating income limits, HUD will often divide MSAs into smaller areas called HUD Metropolitan Fair Market Rent Areas (HMFAs).  Due to this subdivision of areas, this analysis will not directly line up with actual median income for HMFAs, however, the overall percentages and variance would likely not be statistically significant on a global level.

Also, again, the analysis above is for AMI, which is the amount HUD starts with when calculating very low-income limits (VLI), which are the income limits used for the Low-Income Housing Tax Credit incentive. HUD applies varies adjustments when arriving at VLI. Please see this blog post for more information about the adjustments. 

Conclusion and Next Steps

Based on the historical years sampled, it appears that using the five-year average will cause a large decline in median income. 

Novogradac founded a working group to help underwrite the research Novogradac is undertaking related to this issue. The membership fee helps cover the cost of running various calculations, studying HUD policy, and other valuable research. Members also have the opportunity to participate in calls and emails that help determine the direction of the analysis, help craft alternative solutions, and access the calculations Novogradac performs. For example, existing Income Limit Working Group members were provided with a spreadsheet containing the detail of all 330 MSAs referenced in this analysis. If you are interested in joining the group, please complete this form.

To hear more about this topic and what it might mean for the LIHTC community, tune in to the recent Tax Credit Tuesday podcast in which Michael Novogradac, CPA, and I discuss how these changes will affect LIHTC properties and what property owners should do.