What You Need to Know About HUD’s FY 2021 FMRs
Published by Thomas Stagg on Tuesday, August 25, 2020 - 12:00AM
The U.S. Department of Housing and Urban Development (HUD) issued fair market rents (FMRs) for HUD fiscal year (FY) 2021on August 14. This release is more than two weeks earlier than last year and earlier than the required release date of September 1.
The FMRs will be effective Oct. 1 for all areas except any area that requests re-evaluation of their FMRs. FMRs for FY 21 were largely unaffected by COVID-19 with 85 percent of areas showing an increase from FY 20 FMRs. This is a pretty stark contrast to FY 20 where FMRs only increase in 59 percent of the counties and also stands in stark contrast to the current economy. The average change in FMR for FY 21 is an increase of approximately 3.39 percent (the increase for FY 20 was 0.97 percent).
It is important to note that even though it seems odd to have increasing FMRs given what is going on with the economy at large, increasing FMRs may have the benefit of making it easier for Section 8 voucher holders to find housing as their payment standard may be higher.
HUD is required to publish the FMRs at least annually to be effective Oct. 1 of each year. In general, the FMR for an area is an amount that would be needed to pay the rent and utilities of a privately owned, decent and safe rental-housing unit of a modest nature with suitable amenities. FMRs are used to determine payment standards for the Housing Choice Voucher program, initial renewal rents for some expiring project-based Section 8 contracts, initial rent for housing assistance payment contracts in the Moderate Rehabilitation Single Room Occupancy program and rent ceilings in the HOME rental assistance program. In addition, the FMRs influence income and rent limits for the Low-Income Housing Tax Credit (LIHTC) program, tax-exempt bond (TEB) program and other affordable housing programs.
Overview of Changes
As mentioned above, 85 percent of all areas will have an increase in FMRs from FY20 to FY21. Twenty-nine percent of all areas will see an increase of more than 7.5 percent, whereas only 2 percent of areas will see a decrease of greater than 5 percent. As a reminder, HUD caps decreases in FMRs at 10 percent.
See below for the list of FMR increases greater than 10 percent for areas with populations greater than 100,000.
Impact of COVID-19
Similar to income limits, HUD uses historical data when calculating FMRS.
FMRs are generally calculated as follows:
- Adjusted standard quality gross rents are set based on the 2014-2018 five-year American Community Survey (ACS) estimates of two-bedroom adjusted standard quality gross rents.
- HUD calculates a recent-mover adjustment factor and applies this to the five-year base rent estimate.
- Rents are calculated as of 2019 using the relevant (regional or local) change in gross rent Consumer Price Index (CPI) from annual 2018 to annual 2019.
- All estimates are then inflated from 2019 to FY2021 using a trend factor based on the forecast of gross rent changes through FY2021
- FY2021 FMRs are then compared to a State minimum rent, and any area whose preliminary FMR falls below this value is raised to the level of the State minimum.
- FY2021 FMRs may not be less than 90% of FY2020 FMRs.
As you can see, the ACS data being used by HUD is from 2018 and earlier. It is important to note, that this is not due to some fault of HUD, this is the most recent data available from the ACS. Because the ACS data being used was collected well before the COVID outbreak, the ACS data is unaffected by COVID-19.
HUD then is tasked with trending this historical data from 2018 to 2021 amounts. As outlined above, this is done in a two-step process.
First rent data from the ACS survey is trended to FY 2019 using the change in CPI from 2018 (the last year of the ACS data) to 2019. Unlike income limits, however, this CPI trending uses the relevant regional or local CPI as opposed to the national CPI. The CPI facto is unaffected by COVID-19 because it is the CPI for years prior to the pandemic.
Second, estimates are then inflated from 2019-2021 using a trend factor. The new trend factor methodology was launched by HUD with the FY 20 FMRs to improve accuracy of the FMRs. The trend factor for each area is chosen based on which model generates the lowest Root Mean Square Error (RMSE) statistic. HUD states that this will ensure the best performing models are used for the most accurate FMR. The trend factors were selected from a series of models based on national inputs, local inputs and historical values of the predicted series. HUD will hold the model selected constant for five years and will reconsider the selections during the calculation of the FY 2025 FMRs. Even FMR savants are still learning these new trending models.
Other than potentially the final trending factors, none of the data points above are affected by COVID-19. Therefore, even in the midst of the pandemic, FMRs are increasing.
As noted above, increasing FMRs may have the benefit of making it easier for Section 8 voucher holders to find housing as their payment standard will be higher.
Impact to LIHTC Properties Income and Rent Limits
When determining LIHTC income and rent limits, HUD applies a high housing cost adjustment that increases the income limits for areas where the cost of housing is abnormally high compared to the median income for the area. These areas are known as high housing cost areas and the adjustment is based on the two-bedroom FMR as published by HUD.
Based on data from the Novogradac Rent and Income Limit Estimator ©, after applying high housing cost (HHC) adjustment based the 2021 FMR there will be 170 counties that have income limits determined by the HHC adjuster. This number could decrease based on what happens with other HUD adjustments, but if adjusted the limits will be no less than what we are estimating based on the FMRs. In these 170 areas the average increase in income limits due to the HHC is 2.75 percent.
HUD has other adjustments that it applies to income limits that might result in a larger increase than the high housing cost adjustment. However, the high housing cost adjustment does give a floor for what the income limit will be for these areas. For example, if the high housing cost adjustment is showing a 2.5 percent increase, then the FY 2020 limits will have an increase of no less than 5 percent. Said another way, if the high housing cost adjustment shows a 2.5 percent increase, HUD could have another adjustment that increases the income limit for the area to a 3 percent increase, but HUD would not have any adjustments that would lower the increase below 2.5 percent.