Raphael Bostic Publishes Housing Research
The Low-Income Housing Tax Credit (LIHTC) program has provided tax credit incentives for equity investors for the creation and preservation of affordable housing since 1986. Since that time, the program has produced more than 46,500 apartment buildings containing 3.05 million units, or about 90 percent of all subsidized affordable rental units in the United States. According to the National Housing Preservation Database, about 416,000 of these units are in the six states that comprise the Atlanta Fed's district. Although not an explicit goal of the program, about a quarter of all projects contain units affordable to a mix of incomes by providing fully subsidized, income-restricted, and market-rate units.
A number of recent reports have described the positive effects of LIHTC development on surrounding property values.1 Previous studies have also explored the positive impact of intentional mixed-income programs on property values, public safety, and investment.2 However, there has not been an empirical analysis of whether the LIHTC program effectively promotes mixed-income communities. Recent research by Atlanta Fed president and chief executive officer Raphael Bostic and coauthors Andrew Jakabovics, Richard Voith, and Sean Zielenbach explores this question. Mixed-Income LIHTC Developments in Chicago: A First Look at Their Income Characteristics and Spillover Impacts is part of the fifth volume of the Federal Reserve Bank of San Francisco's "What Works" series, to be published as a book of essays in 2020.
As noted previously, the creation of mixed-income communities is not a stated aim of the program itself, although state-specific plans that lay out the priorities for allocating this funding may include provisions for either providing low-income housing in higher-income, amenity-rich neighborhoods or creating developments with both income-restricted and market-rate units. Providing affordable housing in areas of opportunity, rather than in communities struggling with high poverty rates and disinvestment, is fundamental to improving an area's economic mobility outcomes.
Can the LIHTC program create mixed-income housing?
As part of their analysis, Bostic and his coauthors examine the level of income mixing in LIHTC properties developed in Chicago between 1987 and 2016. Out of 430 properties built during this period, roughly one out of five was classified as mixed income (those with five or more market-rate units). Of all the units in these properties, approximately one in four was market rate. Based on interviews with property owners, attracting and retaining moderate-income families who do not need rental assistance is a challenge. Negative connotations, particularly when a complex is part of a public housing project redevelopment, are difficult to overcome. Attracting consistent, high-quality property management may also be a struggle, given low operating budgets.
The authors suggest the strength of the real estate market matters for what type of tenant a LIHTC property is able to attract. Strong markets are better able to attract higher-income tenants, although neighborhood-level income mix is generated through a larger number of subsidized low-income units. Weak markets may struggle to attract higher-income tenants, which may, paradoxically, lead to the affordable units subsidizing the market-rate units.
How do LIHTC properties affect local property values?
In accordance with past studies, the authors found that LIHTC properties in Chicago had a significant and positive impact on surrounding property values, with a 10.8 percentage point boost within one-eighth of a mile of the LIHTC property, relative to county averages. In addition, LIHTC properties with at least five market-rate units were associated with a 4 percentage point higher housing price increase than those properties that were 100 percent subsidized.
But does the impact vary by market? Given the aforementioned differences in what types of income mix can be achieved in weak versus strong real estate markets, the authors examined the relative impacts on property values by income and demographic makeup. Here the authors found that in low-income neighborhoods, 100 percent subsidized developments led to greater increases in property values than mixed-income developments. Furthermore, in high-income neighborhoods, mixed-income developments led to even greater increases in property values. There are a number of explanations offered, including that property values are naturally lower in low-income areas that command a discounted overall price, with less potential for an increase in value. In addition, mixed-income and 100 percent subsidized LIHTC projects tend to be found in different parts of the city, with more affordable units constructed in lower-income areas due to higher demand. During the study period in the Chicago area, submarkets developed and evolved in different ways; accordingly, early LIHTC projects in lower-income areas seem to have contributed more to neighborhood revitalization during this period. There also may be more turnover in lower-income areas, reducing the potential benefits to the community gained through the creation of stable and affordable housing.
While income had a clear impact, differences by race were also apparent. Consequently, 100 percent subsidized LIHTC properties in predominately African-American communities had a stronger positive impact on property values than mixed-income properties. Mixed-income properties in areas with a low concentration of African-American residents had a larger positive impact on property values than 100 percent subsidized properties. Given that Chicago's historic patterns of racial segregation persist and that African-American neighborhoods are relatively low-income, the similar outcomes along racial and income lines are not surprising.
This work provides valuable information about the potential uses of LIHTC to promote mixed-income communities based on findings from Chicago. In short, weak real estate markets are unlikely to attract higher-income renters, as strong markets are able to do. However, each market-rate unit provided in a strong market is one less unit that can provide lower-income families access to high-opportunity neighborhoods. This trade-off in strong markets should be considered by policymakers, particularly given that fully subsidized LIHTC properties have a strong positive impact on property values in weak and strong markets alike.
By Ann Carpenter, CED director of policy and analytics
1 The authors cite a number of sources, including Michael H. Schill et al. "Revitalizing Inner-City Neighborhoods: New York City's Ten-Year Plan," Housing Policy Debate 13, no. 3 (2002), doi: 10.1080/10511482.2002.9521454; Amy Ellen Schwartz et al. "The External Effects of Place-Based Subsidized Housing," working paper 05-02, Furman Center for Real Estate and Urban Policy, 2005; Amy Ellen Schwartz et al. "The Impact of Subsidized Housing Investment on New York City's Neighborhoods," working paper 06-02, Furman Center for Real Estate and Urban Policy, 2006; Amy Armstrong et al. "The Impact of Low Income Tax Credit Housing on Surrounding Neighborhoods: Evidence from New York City," working paper 07-02, Furman Center for Real Estate and Urban Policy, 2007; Ingrid Gould Ellen et al. "Does Federally Subsidized Rental Housing Depress Neighborhood Property Values?" Journal of Policy Analysis and Management 26, no. 2 (2007), doi: 10.1002/pam.20247; Cheryl Young, "There Doesn't Go the Neighborhood: Low-Income Housing Has No Impact on Nearby Home Values," Trulia.com blog, November 16, 2016, https://www.trulia.com/blog/trends/low-income-housing/; and Rebecca Diamond and Timothy McQuade, "Who Wants Affordable Housing in Their Back Yard? An Equilibrium Analysis of Low-Income Property Development," working paper, National Bureau of Economic Research, 2016, RePEc:nbr:nberwo:22204.
2 The authors cite a number of sources, including Mindy Turbov and Valerie Piper, "HOPE VI and Mixed-Finance Redevelopments: A Catalyst for Neighborhood Renewal," discussion paper prepared for the Brookings Institution Metropolitan Policy Program, 2005; Edward Bair and John M. Fitzgerald, "Hedonic Estimation and Policy Significance of the Impact of HOPE VI on Neighborhood Property Values," Review of Policy Research 22, no. 6 (2005); Nina Castells, "HOPE VI Neighborhood Spillover Effects in Baltimore," Cityscape 12, no. 1 (2010), doi: 10.2139/ssrn.1585386; Sean Zielenbach, Richard Voith, and Michael Mariano, "Estimating the Local Economic Impacts of HOPE VI," Housing Policy Debate 20, no. 3 (2010); William Cloud and Susan Roll, "Denver Housing Authority's Park Avenue HOPE VI Project: Community Impact Results," Housing Policy Debate 21, no. 2 (2011), https://doi.org/10.1080/10511482.2011.567288.