November 18, 2024

By Makenzy Mohrman, Capstone Financial Services analyst

As the political tides shift in Washington—and with that shift, the likely end of many Biden-era housing affordability initiatives—policies to tackle the housing affordability crisis face a critical crossroads. However, we believe emerging legislative battlegrounds present unique openings for bipartisan policy momentum to address the nation’s growing housing crisis.

Over the past four years, the Biden administration has focused on promoting housing affordability and availability, rolling out initiatives to tackle homeownership barriers and rental costs. Regarding homeownership, these measures included lowering Federal Housing Administration (FHA) mortgage insurance premiums, seeking to reduce institutional investor access to single-family homes, and directing regulators to crack down on closing costs such as title insurance and credit reporting fees. To address rental costs, the administration developed a Blueprint for Renters Bill of Rights outlining principles and best practices to ensure tenant protection and fair treatment. While these actions aimed to address downstream housing challenges, it’s important to note that administrative tools to address housing supply are limited, and with tight margins in the House and Senate, Congress has been unable to pass measures to alleviate supply constraints.

We believe emerging legislative battlegrounds present unique openings for bipartisan policy momentum to address the nation’s growing housing crisis.

The red wave resulting from the 2024 election means many policy initiatives pushed forward by the Biden administration will be in policymaker crosshairs and likely sidelined or reversed in the coming years. For example, Project 2025, a potential blueprint for a Republican-dominated government published by the conservative Heritage Foundation, proposes substantially reforming the US Department of Housing and Urban Development (HUD), which administers the nation’s primary housing assistance programs. The document recommends reducing resources and access to many affordable housing programs administered by HUD. The plan has drawn scrutiny from many housing advocates.  Despite the prevailing sentiment, we believe a few important supply-side housing priorities with common ground between parties could emerge and gain momentum in 2025.

An important part of that puzzle will begin with the debate around the Tax Cuts and Jobs Act (TCJA). In 2017, Congress passed the TCJA, which made several changes to the tax code for the years 2018 through 2025. With many tax provisions scheduled to expire after 2025, Congress will spend much of next year battling to extend, sunset, or reform key TCJA tax measures. The TCJA was viewed by many housing advocates as negative to the supply of affordable housing, partly due to its adverse impact on using the Low-Income Housing Tax Credit (LIHTC) Program, the nation’s largest affordable housing construction tax credit program. The program awards developers federal tax credits to offset construction costs in exchange for reserving a portion of affordable units for low-income renters. It has supported the production of over 3.5 million affordable units, nearly 90% of all federally funded housing built since its inception in 1986. Affordable housing advocates largely opposed the TCJA because the reduction in the corporate tax rate reduced financial incentives for corporations to make equity investments in LIHTCs. In 2018, as part of the Consolidated Appropriations Act, Congress increased the amount of LIHTC tax credits available by 12.5% through 2021 to marginally offset the negative impacts that reducing the corporate minimum tax rate and other TCJA provisions had on uptake of the program. Some advocates also criticized the TCJA for limiting home equity interest and property tax deductions and reducing the cap on the size of mortgages eligible for interest deductions, driving concerns that homeowners were losing valuable tax provisions that supported affordability.

Two bills have received substantial bipartisan support that we think could surface in next year’s tax debate: The Affordable Housing Credit Improvement Act of 2023 (H.R. 3238, S. 1557) and the Neighborhood Homes Investment Act (H.R. 3940, S. 657).

While much of the focus by Republicans will be on extending TCJA provisions, we believe there could also be efforts to pass provisions that directly support housing development. Notably, in recent years, two bills have received substantial bipartisan support that we think could surface in next year’s tax debate: The Affordable Housing Credit Improvement Act of 2023 (H.R. 3238, S. 1557) and the Neighborhood Homes Investment Act (H.R. 3940, S. 657). The Affordable Housing Credit Improvement Act would increase LIHTCs available over the next two years by 50% and then reinstate the 12.5% increase that sunset in 2021. The Neighborhood Homes Investment Act would create a federal tax credit covering the cost of building or renovating single-family homes. The bill sponsors estimate the bill would revitalize 500,000 homes and generate $100 billion in development revenue over the next 10 years. While clear political divides exist on demand-side housing policy issues, both bills have overwhelming bipartisan support. We believe the Republican supermajority may minimize housing policy horse trading, allowing these measures to be folded into a reconciliation bill next year.

Importantly, we believe the consequences of enacting tax cuts without addressing housing development could be severe. With the housing supply already constrained, federal inaction could stoke activism among states—particularly in blue states—to reignite the focus on rent control as a downstream means of addressing unaffordability. In the years following the COVID-19 pandemic, rent regulation became a key state-level issue as housing stock was low and demand remained high. While some states, like New York, did pass measures to tighten rent regulation, many other initiatives fizzled as rental unit stock climbed. However, new multifamily construction has notably slowed, with starts and permits at their lowest since 2020, indicating 1) more families locked out of homeownership will remain renters and 2) rental rates will rise given constrained supply.

We are closely following the change in federal political control, the outlook for tax reform next year, and housing supply indicators that will drive interesting state and federal-level policy debates about the best approach to address housing affordability—all of which will have direct implications for developers, homebuilders, property managers, and investors in the coming years.

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