The 30-year clock is running out on affordable housing

America’s shortage of affordable housing, which has been mounting for years, will significantly worsen in the months and years to come unless federal policymakers step in to both reform and expand the Low-Income Housing Tax Credit — the nation’s largest affordable rental production program. 

The LIHTC, which was created with bipartisan support under the 1986 Tax Reform Act, has proved a huge success, helping to finance the construction and rehabilitation of about 110,000 affordable rental units a year; more than 3.7 million in total. 

Under the program, the IRS allocates tax credits each year to the states, which then allocate them to developers and investors who use it to lower their federal income taxes. In exchange, developers reserve a set number of units in their properties as affordable housing, and they do so for a set number of years. 

The problem is that LIHTC-financed developments that were built after 1990, when the federal government began to require developers to maintain affordable units for 30 years, are beginning to reach the end of that period. 

When that occurs, landlords can convert their affordable units and charge market rents for them, as some landlords are beginning to do so. That would exacerbate the nationwide affordable housing shortage and potentially subject hundreds of thousands of low-income renters to eviction if they cannot pay market rents. 

Nearly 500,000 LIHTC-financed units, representing nearly a quarter of all such units in place, will reach the end of their 30-year limit by the end of this decade, experts estimate. Unless incentivized to do otherwise, many landlords will likely convert their affordable housing units to market-rate ones with higher rents. 

On average, affordable housing rents are 38 percent lower than market rents, according to a 2018 report from Freddie Mac. Moreover, the asking price for market-rate rents rose a whopping 25 percent just between early 2021 and the summer of 2022, the Wall Street Journal reported, citing the website Apartment List. 

As the Journal wrote in July, “without new subsidies or incentives, building owners will likely take advantage of the recent hot market and raise rents to meet the rising costs of maintenance, insurance and property taxes.” 

To address the coming storm and build on the LIHTC’s successes, policymakers should take two basic steps. 

First, they should extend the time frame for all new LIHTC-financed affordable housing units, requiring that they remain affordable in perpetuity rather than for 30 years. 

The federal government already has moved a bit down this road. LIHTC developments that receive capital from some other federal housing programs are required to meet additional affordability period requirements, which can functionally extend the amount of time they must remain affordable beyond 30 years.  

Some states have gone even further. Vermont requires that LIHTC-financed rental homes remain affordable in perpetuity; Utah has a 99-year requirement while California has a 55-year requirement and Nevada rewards developers who commit to up to 50 years of affordability.  

Fortunately, longer periods do not seem to dampen the interest of developers in participating in the LIHTC program. In Los Angeles, “longer covenant terms don’t appear to have hampered affordable housing production,” according to a 2020 report by UCLA’s Lewis Center for Regional Policy Studies. 

When extending the LIHTC’s affordability period, Congress should ensure there is sufficient funding available to repair and rehab aging properties.  

Second, policymakers should expand the LIHTC more broadly. 

For starters, they should increase the size of the credit and the number of credits that states can receive each year. The demand is there: Not only is the nation’s affordable housing shortage growing, but developers typically ask for three times the number of credits that states can provide them. 

Policymakers also should give developers more flexibility to finance the production of affordable housing with private activity bonds, enabling states to produce and preserve more such developments. In addition, preferential tax treatment in the form of a 50 percent “basis boost” should be given to those developments that serve “extremely low-income” households in a portion of their apartments. 

The Affordable Housing Credit Improvement Act (AHCIA), introduced in both the House and the Senate this past May and now enjoying the support of some 180 bipartisan cosponsors, would take these steps and others. It is estimated that enactment of the AHCIA would finance nearly 2 million affordable rental homes over the next 10 years. 

Policymakers recognize that the shortage of affordable rental homes is a serious and growing problem across America and that the LIHTC is a vital tool to help address it. With that in mind, they should reform and expand the credit, which would help make a sizable dent in the problem over the next decade. 

Dennis C. Shea is executive director of the Bipartisan Policy Center’s J. Ronald Terwilliger Center for Housing Policy.