Rising Interest Rates Could Be a Disaster for Affordable Housing Investment

The Fed’s quantitative easing policy is coming to an end. Inflation has forced the Fed’s hand, and to curb inflation, it is focused on tightening the money supply. At the end of last year, the Federal Reserve Open Market Committee announced that it would reduce asset purchases by $10 billion for Treasurys and $5 billion for agency mortgage-backed securities, essentially doubling the current pace of tapering.

This has cleared the way for interest rates to increase this year, and higher interest rates could spell a disaster for affordable housing investment. The affordable housing crisis has intensified in the last two years, but the silver lining has been increased investment in affordable housing this year. Rising interest rates could derail that activity.

“The current housing crisis has its foundation in a number of economic factors and current low interest rates are chief among them,” Marvin Owens, chief engagement officer at Impact Shares, tells GlobeSt.com. “I believe rising interest rates will have a chilling effect on a hot market by making it more expensive for large investors to maintain their pace of acquisitions”

Higher interest rates affect affordable housing across a wide spectrum, making everything from homeownership to multifamily investment more expensive. Even LIHTC deals will be impacted. “I expect rising rates to impact the construction of LIHTC projects by creating larger funding gaps, along with ever-increasing construction costs,” says Owens, adding that interest rates alone aren’t the reason that affordable housing investors will face challenges.

Tax policy is also an important factor. “Changes in federal tax policy that negatively impacted the pricing of tax credits must also be taken into account. This, as well as general supply chain issues with materials affecting construction schedules, will slow the process of affordable units coming online.”

The Fed will need to strike the right balance. Higher interest rates will make housing deals more expensive, but inflation has triggered rapidly appreciating property values, thereby contributing to the affordable housing crisis with. While these factors impact affordable housing development and deal flow, the real culprit is the lack of supply. “Pricing and affordability are also impacted by supply,” says Owens. “Even in a challenging inflationary period, increasing supply through changes in tax policy should also help with affordability.”