On behalf of Enterprise Community Partners, Inc. and Local Initiatives Support Corporation (LISC), the accounting firm Ernst & Young (E&Y) has conducted a major survey entitled “Low-Income Housing Tax Credit Investment Survey” to provide an understanding of the current market environment for the LIHTC as well as investor motivations and investor responses to potential legislative enhancements to the LIHTC Program. E&Y surveyed current, former and potential institutional investors, syndicators and brokers active in the housing credit industry. The report findings are summarized below:
- The composition of the housing tax credit equity market has evolved significantly since the earliest years of the program, from an individual investor base to institutional investors drawn from a range of industries, and finally to the current investor base dominated by very large financial services corporations. As the capital market for housing credits began to mature and become increasingly efficient with increased demand from the late 1990s onward, housing credit prices had reached historic highs, and yields reached corresponding lows, by 2006. Unfortunately, this narrowed investor base, heavily dependent on the GSEs and major banks, left the market for housing tax credits highly vulnerable to the credit crunch observed among financial services companies beginning in 2008. These companies had a precipitous decline in their profitability, one consequence of which was a dramatic decrease in their need for tax shelters including housing credits.
- In 2008, housing credit investment levels fell dramatically from 2007 levels due both to the broader economic conditions, and dislocation in the financial services investor base. Since affordable rental housing development depends on the reliability of capital raised from the syndication of housing credits, the data we have compiled shows that a nationwide inventory of slowed or stalled development has begun to accumulate.
- Based on the data we received, we have no reason to believe that this equity gap can be quickly closed absent legislation designed to stimulate new investment activity. The decline in investment activity is expected to continue absent stimulus for the equity market. Survey respondents predicted a total 2009 equity volume of $4.5 billion absent additional housing credit stimulus legislation, representing a 22.4% decrease from respondents’ 2008 levels, which itself represents a 14.8% decrease from 2007. Our estimates of the overall market size based on data compiled from various sources reflect even more significant declines of 34.5% from 2007 to 2008, compared to the 22.4% reduction reported by the survey respondents. The variance between the industry’s investment volume estimate and survey responses is partially due to the fact that active investors are more likely to respond compared to investors that have permanently exited the market.
- As a sub-set of the total market, tax-exempt bond financed investments have been more adversely affected than those financed with allocated credits, as a majority of the investment decline among survey respondents from 2007 to 2008 appears to have been associated with tax-exempt bond transactions. Survey respondents indicated a 44.4% decline (from $1.575 billion to $876 million) in tax-exempt bond financed investments from 2007 to 2008, which is much more dramatic than the decline in allocated credit investments during the same period.
