Tax Policy and Housing

March 12, 2014

Tax policy plays a key role in shaping housing demand, determining business conditions and deterring or fostering economic growth. Housing-related tax policy is of such significant importance that it has been selected as a primary issue for NAHB’s 2014 legislative conference, “Bringing Housing Home,” which takes place March 17-21 as home builders and other members of the residential construction industry meet federal lawmakers. As part of this event, yesterday we examined labor issues and tomorrow we will look at the future of the housing finance system.

The mortgage interest deduction (MID) is a cornerstone of housing tax policy. Deductions for mortgage interest have been permitted since the establishment of the income tax in 1913. Broadly claimed, the deduction facilitates homeownership by reducing the after-tax of purchasing a home with a mortgage. The MID also creates parity with other forms of investment for which interest expense is deductible.

MID_200K (2)

According to 2012 data from Congress:

  • The MID benefitted 34.1 million homeowning households for a total savings of $68.2 billion in that year alone
  • Two-thirds of the tax benefit was collected by households earning less than $200,000 in economic income
  • For households earning between $100,000 and $200,000 (e.g. married couple each earning $55,000), the average tax savings was more than $2,000 for just a single year

Historically more than 85% of mortgage interest paid is claimed as a deduction on Schedule A. That is, most people paying a mortgage are in fact itemizing taxpayers. And the largest benefits as a share of household income, are typically for younger households, who are paying mostly interest in the early years of a mortgage.

The rules for second homes are also critically important for homeowners who change principal residences within a tax year, traditional seasonal residence markets, and custom home construction in which the eventual homeowner takes out a construction loan. This broad use of the second home MID rules is illustrated by examining the geographic distribution of the second home housing stock.


Public opinion polling consistently reports that homeowners and renters – prospective homebuyers – favor retaining present law rules concerning the MID and defending our nation’s commitment to homeownership. For example, a 2013 United Technologies/National Journal Congressional Connection Poll asked respondents to rate the importance of various tax rules. The results indicated that 61% of respondents said that it was ”very important” to keep the MID, with 86% of individuals saying it was either “very important” or “important.” This placed the MID second in their list, falling behind only tax preferred retirement accounts, such as 401(k)s, which scored a 63% “very important” ranking.

Recent economic research has linked the use of the MID with intergenerational income mobility. And macroeconomic modeling by the Tax Foundation found that repealing the MID to lower-income tax rates would reduce GDP growth.

Another important tax program on the rental housing side of the industry is the affordable housing credit or LIHTC. Created as part of the last major tax reform effort in 1986, the Low-Income Housing Tax Credit (LIHTC) replaced previous policies with a successful private-public partnership that ensures the development of housing for low- and moderate-income Americans. Since its inception, the program has financed the construction of more than 2.5 million affordable homes.

The LIHTC allows equity investments to be raised at lower cost, which makes the production of affordable housing possible. The LIHTC sustains 95,000 new full time jobs per year across all U.S. industries—generating $2 billion in federal tax revenue. No other housing program has been as successful as the LIHTC in producing safe, high quality, affordable rental housing. While the program has been producing approximately 75,000 new homes a year, the need for affordable housing remains strong given rent burden levels across the nation.

Rent Burden

For these reasons noted above, the future of the MID, the LIHTC, and other housing related tax provisions should be watched carefully in any future tax reform effort. A recent discussion draft of a comprehensive tax reform proposal from House Ways and Means Chairman Dave Camp would, for example, make significant changes to these and other tax rules.

Apartment Construction Continues to Improve

March 8, 2013

Completions of unfurnished apartments for rent or sale in 5+ unit properties climbed to more than 30,000 units during the third quarter of 2012, a 20% increase versus the third quarter of 2011. The Survey of Market Absorption of Apartments (SOMA) tracks completions and market absorption rates (units rented or sold after construction of the property is complete) for apartments sold or rented in 5+ unit properties. The three-month absorption rate of unfurnished apartments declined during the fourth quarter of 2012, slipping four percentage points to 64%. The absorption rate has averaged just above 60% during the last four quarters.


Absorption rates for condo and co-op units have improved compared to the numbers observed in the post-bubble aftermath. For those units completed during the third quarter and sold during the fourth quarter of 2012, the 3-month absorption rate dropped to 57% (from 66%), which is identical to the rate averaged over the past four quarters. Even though absorption rates have trended higher from their cyclical lows, the volume of condos and co-ops being built and sold remains incredibly weak. During the third quarter of 2012, a total of 1,700 condos and co-ops were completed—29% below year-ago levels. Moreover, completions are down 94% compared to the peak levels observed at the end of 2006. The forecast calls for condo/co-op construction to continue rising, but we expect their share of overall multifamily housing production to see only modest increases going forward.


The SOMA data also enable one to drill down further into other types of multifamily units completed in a particular quarter. Nearly 12,000 units tied to affordable housing programs such as the Low-Income Housing Tax Credit (LIHTC) were completed during the third quarter, a 9.2% improvement from the prior year. Overall, LIHTC and other affordable housing program apartments accounted for nearly a quarter of all completed units in the third quarter of 2012.


Data Show Continued Growth in Rental Demand

December 7, 2012

The Survey of Market Absorption of Apartments (SOMA) indicated an increase in rentals and sales of newly-built apartments during the third quarter of 2012. The SOMA tracks completions and market absorption rates (units rented or sold after construction of the property is complete) for multifamily rental and for-sale housing in 5+ unit properties. The most recent release of absorption rates covers properties that were completed during the second quarter of 2012.

In terms of unfinished apartments, the three-month absorption rate increased to 70% in 2012Q3 after posting a reading of 59% during the second quarter. Over the past four quarters the absorption rate has averaged nearly 63%–the best performance since mid-2005. Completions picked up significantly from the previous quarter, totaling 26,600 units, which was the highest level of newly-built units since mid-2010.


The condo and co-op sector has seen the 3-month absorption rate trend higher from the cyclical lows observed between late 2008 to mid-2010. The three-month absorption rate for units completed during the second quarter of 2012 and sold during the third quarter inched higher from 65% to 66%. Over the past four quarters the absorption rate has averaged nearly 64%, marking the highest reading in five years. Despite the improved absorption rate, the condo/co-op market continues to struggle as completions reached a new recorded low as only 1,100 units were completed during the second quarter of 2012. This represents a 96% drop in production compared to the peak. Leaner inventories should bolster condo and co-op construction activity going forward, but we expect these units will maintain a diminished share of overall 5+ multifamily production.


In addition to these data, SOMA allows one to track the particular types of multifamily units that are completed in a given quarter. After making up an average of nearly one-third of completions in the previous four quarters, Low-Income Housing Tax Credit (LIHTC) and other types of affordable housing units accounted for approximately 17% of completions during the second quarter.


The SOMA data illustrate the importance of the LIHTC program in terms of supporting multifamily construction activity, job creation, and providing affordable housing during the housing market downturn. Two policy changes helped to ensure that LIHTC-related production did not suffer during 2009 and 2010.

First, the LIHTC exchange program, enacted by the 2009 American Recovery and Reinvestment Act stimulus legislation, ensured equity was available for the LIHTC program. Second, the 2008 Housing and Economic Recovery Act temporarily fixed the LIHTC new construction credit at a 9% rate (absent the legislation, the credit rate would be at approximately 7.4% today, resulting in less affordable housing investment funding).

This second item is important to note because the fixed 9% rate has effectively expired and efforts are underway to ensure that it is extended and prevents a drop-off in LIHTC multifamily construction activity.

Census Data Reveal Geography of Rent Burdened Families

October 25, 2011

New NAHB analysis of data from the Census Bureau’s 2010 American Community Survey (ACS) reveals the state-by-state distribution of rent-burdened households. According to U.S. Department of Housing and Urban Development definitions, a renting household or family is considered “rent-burdened” if they pay more than 30 percent of their household income in gross rent (“severely rent-burdened” if they pay more than 50%).

Nationwide 19.4 million renting households (out of 39.7 million total), or 49%, pay more than 30% of their total income in rent. In fact, 25% of renting households pay more than 50% of their income in rent.

The following map charts by state the share of renting households that are rent-burdened.

The areas with the highest rates of rent burden are a mix of states that are high cost (California, New York, New Jersey, Connecticut) and those that are experiencing economic challenges as a result of the Great Recession (Florida, Michigan, Nevada and California). Florida (at 56%) and California (at 54%) have the two highest rates of rent-burdened households. These rates have grown since 2009, with Florida at 53% and California at 52% according to 2009 ACS data.

The state with the largest share of renting households paying more than 50% of their income in rent is Florida, with 30% of all renters exceeding this level. States with at least 28% of severely rent-burdened households also include California, Michigan and New Jersey.

Wyoming has the lowest rate (34%) of rent burdened households, with North and South Dakota (36% and 37% respectively) also reporting low rates.

Overall, there is a concerning linkage between states with high rates of rent-burdened households and those that are the farthest away from a construction-driven economic recovery. This conclusion indicates the importance of programs like the Low-Income Housing Tax Credit (LIHTC), which establishes a private-public partnership for the financing of affordable housing development across the nation.

And the stock of affordable housing is constantly evolving. According to a 2011 Harvard Joint Center for Housing Studies study, more than 28% of the 1999 affordable housing stock was lost by 2009 through a combination of conversions (rental to owner) and filtering (rents increasing relative to incomes). The same report noted that to develop new affordable housing would require construction costs to be just 28% of their current average.