The COVID Housing Economy
By Mark Fogarty
7 min read
NCHMA market analysts discuss pandemic effects
The long arm of the COVID pandemic is not only disrupting 2020 performance in the tax credit industry, but it may have a further impact even after the virus is brought under control.
That’s because there is a three-year lag in one of the indicators the Department of Housing and Urban Development uses in adjusting area median incomes (AMIs), according to a speaker at the recent National Council of Housing Market Analysts 2020 Annual Meeting. So, bad 2020 results could cause a drop in AMIs in 2023.
And that can affect HUD programs, tax-exempt bonds and Low Income Housing Tax Credit activity.
Thomas Stagg, a partner in the Seattle office of Novogradac & Company LLP, told the virtual NCHMA meeting, “When HUD calculates AMI, they start with historical data. They are always using three-year trailing data as they forecast out what their AMI is.” Stagg cautioned he was not speaking about market-rate rents, which he said are calculated differently.
To bring the calculation “forward” three years, HUD uses Consumer Price Index data, according to Stagg.
CPI is a nationwide factor, he said, so “that can be good news if you’re in an area where it is going slower. The national CPI going well may help you go higher. But if you’re going gangbusters that CPI may slow your growth a little bit.”
Overall, that means that for 2020, AMIs have been calculated using data from HUD’s 2017 American Community Survey. So, the ACS data from 2020 will not have an effect on AMIs until three years out, Stagg said, meaning 2023.
“For 2020, HUD took 2017 ACS data, took 2017 Consumer Price Index data, looked at how much that grew to 2020 and used it as a trend factor to grow that forward,” he said. Specifically, for 2020, the calculation is 2017 ACS data times 2020 CPI divided by 2017 CPI.
“National median income has been doing well the past couple of years,” Stagg told the analysts. “Something tells me 2020 is not going to be so good.”
Doing the calculations, Stagg came up with an AMI increase of 0.88 percent for 2021. “Income limits are going to be fairly flat in 2021,” he said. In 2022, the increase is robust, nearly six percent.
But in 2023, “the other shoe drops,” he said.
The Dead Cat Bounce
Stagg used the metaphor of “the dead cat bounce” to describe what may happen. In brief, the metaphor conjures a mistaken belief that a rise after a market hits a bottom is bound to continue, whereas actually, if the rally is lifeless, it will fall again. This could happen in 2023 with AMI.
“Looking forward, make sure you’re aware of the dead cat bounce, really up in 2022, but in 2023 a fairly dramatic decrease,” he said. And, he pointed out, government memory can be short. “Nobody is going to be talking about COVID relief in 2023.”
Stagg briefly considered fair-market rents (FMR) as well. “FMR is a much more difficult calculation. FMR uses five-year ACS data, so 2020 data will stay in system for five years. FMR is a little harder to predict, but I think you’re going to see a similar kind of trend.”
Another speaker on the NCHMA panel, which was entitled “Where Will Rent Grow in 2021? Factors Impacting AMIs, FMRs and Rent Comp Studies,” said this economic downturn is hitting renters harder than homeowners, potentially affecting the LIHTC industry.
Lisa Sturtevant, chief economist at Virginia Realtors, Glen Allen, VA, said the “K” shape of the downturn is affecting service workers, retail and hospitality workers far more negatively than people in manufacturing and professional services.
“The most important point, and it gets missed a lot in the media, is that this downturn is really hitting two different segments of the economy in very different ways,” she said.
“Leisure and hospitality, retail workers, some administrative support and building services workers have been hit hardest, and that’s where people have experienced the greatest job and income losses. This tends to be folks more likely to be renters, lower income, and more likely to be women and people of color,” said Sturtevant.
“There is a disproportionate impact on this community that is more likely to be served by rental housing in general and by affordable renting housing in particular.
Some Relatively Unscathed
“On the other hand, there is a whole segment of the economy that has been relatively unscathed by the downturn. Data suggest they’re saving more and are in a better financial situation now than before the pandemic. Many are professional service workers and many are in advanced manufacturing occupations. They tend to be homeowners, tend to be higher income, tend to be white,” she told the analysts.
Other trends she has seen include:
- Rising home prices have put home-ownership increasingly out of reach for low- to moderate-income households; and
- Rents are softening in some higher cost, urban markets.
The current economy is a story of two separate populations, she said. “It’s important to keep this in mind as we talk about the recovery. The personal savings rate really spiked overall in the second quarter. Folks who fall in this lower income group say they are saving less now than they did in February before the pandemic. On the other hand, a quarter of upper-income households report they are actually saving more than they did before the pandemic hit.”
Low-income people are facing challenges paying rent, and also other bills. Forty-six percent say they’re having trouble paying bills, she said.
“It’s not just by income group. Younger people have bigger challenges paying bills and rent. Blacks and Hispanics have significantly more challenges than people who are white.”
There has been a shift in housing demand, both in renting and homeownership, away from cities, Sturtevant noted.
“In some of the Central Business Districts from Los Angeles to Houston to Boston to San Francisco there’s actually been a decline in asking rents since the peak in March,” she said.
“The places where there’s growth in rent tend to be suburbs and smaller metro areas. That’s likely going to continue,” she said, but for how long is unknown. “I think there’s sort of a wait and see on how much of this movement out of the CBDs is long-term or a near-term phenomenon.”
The Crux is in the Comps
The third speaker on the panel, Jennifer Dionne, president and partner at The Signal Group in South Portland, ME, addressed rent comparability reports.
“The crux of the report is the rent analysis,” Dionne said. “All data must be collected within 90 days. The appraiser or the assistant is required to inspect and independently verify at least five comparables for each unit type.
HUD’s ideal comp “is everybody’s ideal comp,” she said. “It is located in the same market, it has no subsidy or rent restrictions, it is located in a similar neighborhood and it has similar structure, layout, design/appeal, as well as age, size, unit mix, project amenities and utility structure.”
Dionne added, “Of course, if we had five ideal comps there would be no need for analysis.”
Preparing the rent grid on the HUD report needs to be done with care, she told the analysts.
“Every adjustment needs two factors, a why and a how: why the adjustment was made and how the adjustment was derived. Nominal adjustments, five and ten dollar adjustments, typically won’t cause an issue on the review process.
“However, all non-nominal adjustments really need to have a detailed explanation on how that data adjustment was arrived at.”
Once the rent study is completed and submitted to HUD, “HUD will conduct an initial screening, then it moves on to substantive review.”
Dionne shared a couple of red flags she saw for RCS reviews. In the must-avoid category are numerous typos, comp explanations that are not thorough enough and discrepancies on the grid.
