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.

Vacancy_cty_totals2

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 Absorption Rates Remain High

March 12, 2014

Absorption rates for new rental and for-sale multifamily homes remained near post-recession highs in the fourth quarter of 2013.

According to data from the Survey of Market Absorption of Apartments (SOMA), completions of privately financed, unsubsidized, unfurnished rental apartments in buildings with five or more units were up strongly for the four quarter period ending with the third quarter of 2013. A total of 129,200 such apartments were completed for those four quarters, compared to 88,700 a year earlier.

Non-seasonally adjusted three-month absorption rates (units rented after construction of the property is complete) for third quarter completions (rented during the fourth quarter) remained steady at 66% compared to 65% a year earlier. Absorption rates for rental apartments have been generally rising since late 2008 as rental demand increased as a result of the housing downturn.

Apts_4q rentals

In contrast, condo and co-op completions remain at historically low levels, with 1,700 for-sale multifamily homes completed during the third quarter. While construction remains at low levels, the 3-month absorption rate for for-sale multifamily has improved significantly, reaching 90% for third quarter completions.

Condos_4q sales

The SOMA data also reveal that for properties with five or more units approximately 10,900 Low-Income Housing Tax Credit or other federally subsidized units were completed in the third quarter of 2013. This is down slightly from the 11,600 affordable units estimated completed during same quarter in 2012. The affordable share, LIHTC and other subsidized units, of multifamily completions was 19% for the third quarter.

3q completions by type


Average Size of New Multifamily Units Rose at End of 2013

March 5, 2014

After rising during the boom years and falling during the Great Recession, the average size of newly built, multifamily units remains close to levels seen a decade ago. As multifamily developers build more for-sale housing units in the years ahead, the average size of multifamily units is likely to rise.

According to fourth quarter data from the Census Bureau, the average square footage of multifamily housing construction starts was 1,225. The median was 1,131.

MF size_4q13

Because the quarterly data are volatile, it is worth examining the numbers on a one-year moving average basis. For the third quarter, the one-year moving average for the multifamily size average was 1,181 square feet, while the median was 1,104. These measures are both approximately 5% higher than cycle lows.

However, these current metrics are very close to the typical data from the 2001-2003 period, when the average was 1,180 and the median was 1,093.

The typical size of a new multifamily unit is well below the averages/medians recorded during the boom years, when the share of for-sale multifamily was considerably higher. The share of multifamily housing starts built for-rent fell to a historical low of 47% during the third quarter of 2005. It is currently (90%) above the approximate 80% share recorded during the 1980-2002 period due to the rise in rental demand following the housing crisis.

MF built for rent_4q13

Thus, the reason for some of the recent change in multifamily average size is due to market mix. Renters tend toward smaller units than owner-occupiers. In 2012, for example, the median size of all multifamily units completed was 1,098 square feet. However, for rental apartments the median was 1,081, while it was a larger 1,466 for condos.

As the for-sale share of multifamily returns back to historical norms in the years ahead, the size of a typical newly built multifamily housing unit will rise as well.


Developer Confidence in Multifamily Market Shows Slight Decline in Fourth Quarter

February 27, 2014

The NAHB Multifamily Production Index (MPI) showed a slight weakening as the index declined four points to 50 in the fourth quarter of 2013. It is, however, the eight consecutive reading of 50 or above.

The MPI measures builder and developer sentiment about current conditions in the apartment and condominium market on a scale of 0 to 100. The index and all of its components are scaled so that a number of 50 indicates that the same number of respondents report conditions are improving as report conditions are getting worse.

Slide1

The MPI provides a composite measure of three key elements of the multifamily housing market: construction of low-rent units, market-rate rental units and “for-sale” units, or condominiums. The MPI component tracking builder and developer perceptions of market-rate rental properties has been the strongest of the components recently, remaining above 50 for 13 straight quarters, but dipped four points in the fourth quarter to 60; while the component for low-rent units fell three points to 47; and for-sale units declined four points to 46.

The Multifamily Vacancy Index (MVI), which measures the multifamily housing industry’s perception of vacancies, dropped two points to 38, with lower numbers indicating fewer vacancies. After peaking at 70 in the second quarter of 2009, the MVI improved consistently through 2010 and has been fairly stable since 2011.

Slide2

This quarter’s MPI results are in line with NAHB’s forecast that calls for increased production of new apartments in 2014, but at a slower pace than last year. The results are also in line with recent downturns in other economic indicators, due to unusually severe weather in parts of the country that disrupted supply chains and affected confidence in several sectors of the economy.

Historically, the MPI and MVI have performed well as leading indicators of U.S. Census figures for multifamily starts and vacancy rates, providing information on likely movement in the Census figures one to three quarters in advance.


Residential Construction Spending Increased 18.3% in 2013

February 3, 2014

Total private residential construction spending increased in December for the second consecutive month to a seasonally adjusted annual rate of $352.6 billion according to Census estimates. The current reading is a 2.6% increase above the revised November figures and 18.3% higher than one year ago.

Single-family spending registered a healthy increase of 3.4% for the month, while the multifamily category saw a more modest increase of 0.5%. The home improvement category saw an increase of nearly 2.0% for the month.

ConstructionSpendingJanuary

Spending in all categories continued to experience significant improvements from December of last year. On a 3-month moving average basis, single-family construction spending increased by 20.0%, multifamily increased by 34.5%, and remodeling increased by 14.0%.

Although spending continues to improve for all categories, it remains well below their respective peaks. Since market low points, total private residential construction spending is up 54.3%, single-family 99.4%, multifamily 172.5%, and improvement-related spending 29.7%.

The data show significant improvements in residential construction spending for all categories from the prior month and last year. The year-over-year increase in multi-family construction spending was large (34.5%) and is reflective of developers moving to meet an increase in the demand rental units. Rental vacancy is currently at a 12 year low.


Average Size of New Multifamily Units is Rising

January 14, 2014

After rising during the boom years and falling during the Great Recession, the average size of newly built, multifamily units remains close to levels seen a decade ago. As multifamily developers build more for-sale housing units in the years ahead, the average size of multifamily units is likely to rise.

According to third quarter data from the Census Bureau, the average square footage of multifamily housing construction starts was 1,210. The median was 1,085.

MF size_3q13

Because the quarterly data are volatile, it is worth examining the numbers on a one-year moving average basis. For the third quarter, the one-year moving average for the multifamily size average was 1,177 square feet, while the median was 1,104. These measures are both approximately 5% higher than cycle lows.

However, these measures remain just slightly below the average sizes seen during the 2001-2003 period, when the average was 1,180 and the median was 1,093.

The typical size of a new multifamily unit is well below the averages/medians recorded during the boom years, when the share of for-sale multifamily was considerably higher. The share of multifamily housing starts built for-rent fell to a historical low of 47% during the third quarter of 2005. It is currently (92%) above the approximate 80% share recorded during the 1980-2002 period due to the rise in rental demand following the housing crisis.

MF built for rent_3q_13

Thus, the reason for some of the recent change in multifamily average size is due to market mix. Renters tend toward smaller units than owner-occupiers. In 2012, for example, the median size of all multifamily units completed was 1,098 square feet. However, for rental apartments the median was 1,081, while it was a larger 1,466 for condos.

As the for-sale share of multifamily returns back to historical norms in the years ahead, the size of a typical newly built multifamily housing unit will rise as well.


What Multifamily Properties Are Most Expensive to Maintain?

January 13, 2014

Trying to fill the void that was created in 2001 when the Residential Finance Survey (RFS) was discontinued, the US Census Bureau started collecting data on financial, physical and other characteristics of multifamily rental housing properties through its newly designed Rental Housing Finance Survey (RHFS). The first survey took place in 2012. The estimates are still under review by the Census Bureau and HUD. NAHB Economics has been evaluating the new data as well.

Unlike in all other existing housing surveys, the unit of reference in the RHFS is not a housing unit or person but rather a multifamily rental property. Almost two-thirds of these properties have only one building, the rest have two buildings or more. The RHFS separately identifies expenses on property maintenance and repair and capital expenses. The survey also reveals a year the oldest building was constructed and thus allows comparing expenses by property age.

Looking at properties with five or more units, the average spending on maintenance and repair in 2011 was $50,802. However, this average is skewed by a few large properties with much higher expenses. The median spending only reaches $11,559, meaning that half of all properties with 5+ units spend less than that amount. The capital expenses are even more influenced by a few outliers. The 2010-2011 average spending per property exceeds $152,000 but the median only reaches $14,800.

Since spending on maintenance and repair and capital expenses are highly influenced by the size of a property, it is more meaningful to compare these expenses on a per unit basis. Managers of properties with oldest buildings constructed in the 1920-30s report some of the highest annual spending on maintenance and repair per unit, close to $1,300 in 2011. Properties with oldest building constructed in the 1960s and before 1920 register maintenance spending that on average exceed $1,100 per unit. Newer properties with buildings constructed in the 2000s report lowest annual spending on maintenance and repair, around $500 per unit.

Slide1
Comparing annual spending on maintenance and repair with the total rent collected during the same year delivers a slightly different ranking. Properties with the oldest buildings constructed in the 1970s register the highest maintenance and repair spending relative to rent, $229 per $1,000 of rent, on average. Properties with buildings built in the 1920-30s are close second with $220. As before, newer properties built in the 2000s report the lowest maintenance and repair spending relative to rent, $58 per $1,000 of collected rent, on average.

Slide2
It might seem surprising that properties with oldest buildings constructed in the 1940-50s have maintenance expenses lower than properties with newer buildings constructed in the 1960s and 1970s. One possible explanation is that these properties have already undergone major capital renovations thus resulting in lower annual maintenance cost.


Apartment Absorption Rates Rise

December 19, 2013

Absorption rates for new rental and for-sale multifamily units continued to improve during the third quarter of 2013, consistent with the positive trends that been in place since the end of the Great Recession.

According to data from the Survey of Market Absorption of Apartments (SOMA), completions of privately financed, unsubsidized, unfurnished rental apartments were up strongly for the four quarter period ending with the second quarter of 2013. A total of 115,800 such apartments were completed for those four quarters, compared to 82,900 a year earlier.

Non-seasonally adjusted three-month absorption rates (units rented after construction of the property is complete) for second quarter completions (rented during the third quarter) increased to 71% from 62% a quarter prior. Absorption rates for rental apartments have been generally rising since late 2008 as rental demand increased as a result of the housing downturn.

apt absorptions_2q13

In contrast, condo and co-op completions remain at historically low levels, but rose slightly to 3,100 completions, the highest level since the days of the federal homebuyer tax credit. While construction remains at low levels, the 3-month absorption rate for for-sale multifamily has improved significantly, reaching 84% for second completions.

condo absorptions_2q13

The SOMA data also reveal that approximately 7,000 Low-Income Housing Tax Credit or other federally subsidized units were completed in the second quarter of 2013. This is down slightly from the 8,100 affordable units estimated completed during the first quarter. The affordable share, LIHTC and other subsidized units, of multifamily completions was 16% for the second quarter.

apt completions_2q13


Finance Chair Tax Reform Draft: Impacts for Builders and Multifamily

November 22, 2013

This week saw the release of a number of tax reform drafts from Senate Finance Committee Chairman Max Baucus.  Coming after drafts concerning international tax rules and tax administration, the final release of the week involved depreciation and accounting issues.

A number of these proposals would have negative impacts for home building, multifamily, and real estate in general.  It should be noted that, in part, the intent of these proposals is to provide funds to pay for base broadening tax reform, which would lower corporate and individual income tax rates. However, a proposed rate structure has not yet been unveiled.

NAHB’s initial review of the draft proposal flagged the following items that would be of concern for housing and real estate stakeholders:

  • Repeal of the tax rules for like kind exchanges.
  • The depreciation period for structures, residential and commercial, would be extended to 43 years. This marks a large increase for residential rental property, which holds a 27.5 year period under present law. There would also be longer depreciation periods for all other kinds of assets, including building components.
  • The section 179D deduction for energy efficient commercial and multifamily property improvements would be repealed.
  • Recaptured depreciation would no longer be taxed at 25% for some rental property owners, but instead would be taxed at ordinary rates (proposed ordinary rates have not been published).
  • The home construction contract exception, that allows builders to pay income taxes on home sales after the actual sale (the completed contract method) when the construction period spans two or more years, would be repealed. However, builders would still be able to use the completed contract method provided their average annual gross receipts for the prior three years were less than $10 million (indexed to inflation in 2015).
  • Advertising expenses would no longer be immediately deductible as a business expense. Under the proposal, 50% of advertising expenses would be capitalized and claimed over a 5 year period, with the remaining 50% available for immediate write off.

On the positive side, the proposal puts into place a permanent regime of section 179 small business expensing. Business taxpayers could write off immediately up to $1 million of business related tangible personal property, with that limit phasing out beginning at levels of $2 million of business property purchased.  Section 179 expensing is a helpful tax simplification rule.

What happens next?  NAHB will continue to examine the details concerning this proposal and submit comments to the Finance Committee. This proposal represents the first legislative draft in what is expected to be a long process concerning tax reform. The Senate Finance Committee may release additional draft proposals, and it is expected that House Ways and Means Chairman Dave Camp will unveil his own comprehensive tax reform plan in the coming months.

In the meantime, we will continue to review and analyze the legal and economic implications of these tax proposals, with an eye on potential impacts for housing and construction.


Multifamily Market Sentiment Off Recent Peak, But Remains Positive

November 19, 2013

The Multifamily Production Index (MPI) reached 54 in the third quarter, seven points lower than a spike in the second quarter, but the seventh consecutive reading over 50.

The MPI measures builder and developer sentiment about current conditions in the apartment and condominium market on a scale of 0 to 100. The index and all of its components are scaled so that any number over 50 indicates that more respondents report conditions are improving than report conditions are getting worse.

MPI

The MPI provides a composite measure of three key elements of the multifamily housing market: construction of low-rent units, market-rate rental units and “for-sale” units, or condominiums. Although all three components fell from 2013 peaks in the second quarter, all remain above 50.  Most respondents in fact indicated conditions were about the same as in the second quarter. The MPI component tracking builder and developer perceptions of market-rate rental properties dipped three points to 64, remaining above 50 for 12 straight quarters; while the components for low-rent and for-sale units declined from highs in the second quarter, but settled at 50.

The Multifamily Vacancy Index (MVI), which measures the multifamily housing industry’s perception of vacancies, dropped two points to 40. With the MVI, lower numbers indicate fewer vacancies. After peaking at 70 in the second quarter of 2009, the MVI improved consistently through 2010 and has been fairly stable since 2011.

MVI

Historically, the MPI and MVI have performed well as leading indicators of U.S. Census figures for multifamily starts and vacancy rates, providing information on likely movement in the Census figures one to three quarters in advance.


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