Construction of Affordable Rental Housing under the USDA 538 Program


A recent NAHB study based on new data from the U.S. Department of Agriculture (USDA) shows that, in 2014, $93 million in loans were closed and used to finance the construction of 77 new multifamily projects, under USDA’s Multifamily Housing Loan Guarantee Program (also known as the 538 Guaranteed Rural Rental Housing program).

The data were provided by USDA in support of the White House’s Open Government Initiative and contain information on loans obligated under the 538 program from fiscal year 1996 through the first nine months of fiscal year 2016 (the information for 2015 and 2016 is partial, because some of the loans obligated in those then have not yet closed).


The dollar value of guaranteed loans was on an upward trend between 1996 and 2010 and loan volume for new construction projects was the leading component during this period. In 1996, guaranteed loans in the program totaled $3 million and reached $121 million by 2010. However, since 2010, loan volume has been volatile from year-to-year, but lower than its peak 2010 level. The annual volatility since 2010 largely reflects the volume of closed loans for rehab and repair projects. At the same time, the volume of closed new construction loans since 2010 has been less than levels seen in the 2003 to 2010 period. However, a recovery in this segment of the program has been underway since 2010.


Average rent prices vary by unit size, the number of bedrooms in the unit, but are low relative to market-rate rent. As of 2014, the average rent on a two bedroom unit after adjusting for the overall price level was $581. In contrast median asking rent for a new unsubsidized apartments has been running above $1,400.

Over the 2002 to 2011 period, real rents across all apartment sizes were on a downward trend. However, only one bedroom apartments, which accounted for 22 percent of all apartments in 2014, recorded an average real rent in 2014 that was below its level in 2011. Larger-sized and comparatively higher rent apartments recorded real rents in 2014 that exceeded their 2011 level.


Similarly, average gross potential rent as a share of total development costs, a measure of a project’s potential capitalization rate, has steadily declined over much of the period. Between 1996 and 2012, the cap rate fell from 8.3 percent to 3.2 percent, with some variation in select years. However, in recent years the cap rate has risen as the average development cost has fallen and real average rents across the majority of apartments have been higher.

The rate measured for the 538 program presumes that each apartment will be occupied. Even if there were no vacancies, the rate under the 538 program is less than that obtained from market rate apartment buildings. By comparison, the Rental Housing Finance Survey (RHFS) a survey administered by the U.S. Census Bureau and the U.S. Department of Housing and Urban Development that is designed to collect data on rental properties nationwide, indicates that the average, expressed as median, cap rate for all properties in its survey is 6.0 percent indicating that the return on market rate apartments exceeds that of the projects constructed under the 538 program.

From the perspective of federal government finance, the 538 program is a cost-effective way to encourage the production of affordable housing. The average guaranteed closed loan accounts for only 20 percent of a new project’s total development cost. At the same time, the Budget of the U.S. Government records the subsidy rate on the 538 program as -0.19 percent in 2014 as the loan default rate of 7.93 percent was more than offset by a fees and other collections rate of 8.12 percent. The negative subsidy rate has grown larger in recent years to -1.27 percent in 2015 and -2.97 percent in 2016.


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