Rising interest rates could be a disaster for investing in affordable housing
The Fed’s quantitative easing policy is coming to an end. Inflation has forced the Fed’s hand, and to curb inflation, it is focusing on tightening the money supply. Late last year, the Federal Reserve’s Open Market Committee announcement that it would reduce asset purchases by $10 billion for Treasuries and $5 billion for agency mortgage-backed securities, essentially doubling the current rate of reduction.
This has set the stage for higher interest rates this year, and higher interest rates could spell disaster for affordable housing investments. The affordable housing crisis has intensified over the past two years, but the silver lining has been increased investment in affordable housing this year. Rising interest rates could derail this activity.
“The current housing crisis has its roots in a number of economic factors and the current low interest rates are the main ones,” Marvin Owens, director of engagement at Impact Shares, told GlobeSt.com. “I think rising interest rates will act as a deterrent in a hot market by making it more expensive for large investors to maintain their pace of acquisitions”
Higher interest rates are affecting a wide range of affordable housing, making everything from home ownership to multi-family investing more expensive. Even LIHTC offers will be impacted. “I expect rising rates to impact the construction of LIHTC projects by creating larger financing gaps, as well as ever-increasing construction costs,” Owens said, adding that rates Interest alone is not the reason affordable housing investors will face challenges.
Tax policy is also an important factor. “Changes in federal tax policy that have had a negative impact on the pricing of tax credits must also be taken into account. This, along with general supply chain issues with materials affecting construction schedules, will slow the process of bringing affordable units online.
The Fed will have to find the right balance. Higher interest rates will make real estate transactions more expensive, but inflation has triggered rapid appreciation in property values, contributing to the affordable housing crisis. While these factors impact affordable housing development and deal flow, the real culprit is the lack of supply. “Pricing and affordability are also influenced by supply,” says Owens. “Even in a period of difficult inflation, increasing supply through tax policy changes should also help affordability.”