Communities around the nation are grappling with a shortage of affordable housing. In this article, the second in a two-part series, we highlight key ideas from a recent roundtable the New York Fed held with Second District policymakers, bankers, and developers. The discussion centered on factors that are limiting the supply of affordable housing and the possibility that creative financing could spur new affordable developments.
Challenges: Dwindling Supply, Aging Populations
Challenges on the supply side include increasing costs for building new units, as discussed in yesterday’s article. But older housing is also becoming less affordable to purchase, maintain, and operate, roundtable participants said. Among the reasons: Many owners now buy homes to use as short-term vacation rentals, limiting the supply of year-round housing. In the Hudson Valley, an influx of work-at-home transplants during the pandemic drove up prices, while local wages did not keep up, pricing out some long-term residents, roundtable participants said. And higher insurance premiums and energy costs are driving up operating expenses.
An aging population is also complicating supply in some areas, participants said. Some older residents would like to move to smaller homes while staying in their communities. However, a lack of available smaller units means they stay in their current homes, even when those homes may be too large or may have accessibility challenges. These larger homes are then unavailable to families who are seeking more space.
Financing is another challenge. Since 1986, the Low Income Housing Tax Credit (LIHTC), which provides tax breaks to developers, has been the federal government’s most important tool for building affordable rentals. Recent changes to the program have expanded the amount of credits available, pushing down their prices. This has led developers to look elsewhere for grants or other financing to fill the gap.
Solutions: Abatements for Developers, Public Property for Affordable Housing
Two popular financing tools are agreements that give developers property tax abatements, which set developers’ tax rates at a reduced rate for a fixed term, and payments in lieu of taxes, agreements where developers make set payments to a municipality instead of paying standard property taxes. Both methods give developers a way to lock in their municipal expenses at specific, predictable rates that are generally lower than prevailing property taxes. Roundtable participants also discussed density bonuses, which give developers zoning exemptions to construct additional units in exchange for including affordable units or another public benefit.
Finding building sites is another challenge for developers. Some municipalities are making publicly owned sites available for development. For example, New York City is considering building housing on top of public libraries. Office-to-residential conversions are another possible way to add additional housing supply, participants said.
Local governments are trying to speed the development process, since administrative and labor costs accrue during delays. High holding costs and lengthy timelines between starting a deal and earning rental income are major barriers to making projects work financially, developers said. Participants urged local governments to improve clarity and consistency of the terms of development programs and incentives, and to commit to timely approvals of proposed developments.
Participants emphasized the importance of partnerships between developers, local governments, and community members. Developers said it is worth spending time to seek support from neighborhood residents before a project begins, which can help streamline permitting processes.
Read more research and watch past events on affordable housing.
Jonathan Kivell is the Director of Community Investments at the New York Fed. He focuses on issues related to community development finance and household financial well-being.
Maria Carmelita Recto is a community development outreach specialist at the New York Fed. She focuses on issues related to household financial well-being.
Jake Scott is a community development outreach analyst at the New York Fed.
The views expressed in this article are those of the contributing authors and do not necessarily reflect the position of the New York Fed or the Federal Reserve System.
