Housing affordability is at its lowest level in years, further boxing out families with low and moderate incomes and fueling housing instability.

The Low-Income Housing Tax Credit (LIHTC) program is the largest source of new construction funds for affordable rental housing in the country. State and local agencies allocate about $13.5 billion in credits (PDF) to developers each year to build new rental homes and rehabilitate and preserve existing ones, contributing significantly to the national supply of multifamily housing.

But LIHTC faces a few key challenges:

• To complete projects, developers using LIHTC often rely on multiple other funding sources and subsidies, some of which have shrunk in recent years.
• Because LIHTC relies on private investment, it’s vulnerable to economic crises.
• LIHTC is susceptible to the same volatilities as the overall real estate market, like material and labor shortages, which can increase construction costs and reduce the number of completed units.

How can the federal government work with state and local governments and private lenders to overcome these barriers and more sustainably support affordable rental housing production for the people who need it most?

LIHTC projects require multiple funding sources, but some face cuts

LIHTC is one of many programs the federal government uses to subsidize rental housing construction. The other programs include several from the US Department of Housing and Urban Development (HUD), like Section 8 and HOME, HUD’s public housing program, and US Department of Agriculture (USDA) funds.

Of these programs, LIHTC has been the primary funder of affordable rental housing construction for several decades.

Among the roughly 1 million LIHTC units constructed between 2000 and 2021, only 55 percent had LIHTC as their exclusive funding source. But that figure does not account for LIHTC tenants with low incomes who receive rental assistance from other federal sources like vouchers. It also excludes other nonfederal supports, such as state bond financing and state tax credits, and the Federal Home Loan Bank’s Affordable Housing Program, so it likely overestimates the share of units solely funded by LIHTC.

Thirty-five percent of those newly constructed units were financed by LIHTC and one additional federal project-based subsidy, 9 percent had two additional subsidies, and 1 percent had three or four additional subsidies. After LIHTC, HOME funds supported the next greatest share of newly constructed units (about 20 percent), followed by Federal Housing Administration funds, project-based Section 8 subsidies, state subsidies, and funds from the USDA.

The need to assemble multiple funding sources for LIHTC construction projects is especially challenging given that some resources are shrinking. For example, federal HOME funding has declined since the early 2000s. Further, developers not only have to win LIHTC financing from housing finance agencies, but they also often need to show those agencies that they can qualify for these other, limited sources of support when they’re applying for credits. This can delay project implementation and increase housing costs.

LIHTC is vulnerable to real estate market trends

Because LIHTC projects depend on the broader real estate sector for bank financing, construction labor, and materials, the program has faced challenges during recent economic crises.

During the Great Recession, developers of both market-rate and subsidized housing projects had trouble assembling adequate financing. This resulted in a relatively large number of developers returning credits to state housing agencies because they couldn’t use them. LIHTC’s ability to continue supporting new projects hinged on the passage of the Tax Credit Exchange and Tax Credit Assistance Programs, which allowed states to exchange unused LIHTC credits for grants from the US Treasury and expanded funding from the complementary HOME program, respectively.

Since the Great Recession, the amount of LIHTC allocations has increased nationwide. But in 2021, developers again faced pressure. Like the rest of the building sector, they faced construction labor and material shortages related to the COVID-19 pandemic.

In some cases, state agencies helped fill the gap with additional resources. In other cases, it was impossible to build housing projects as originally planned and submitted for financing, and developers returned their LIHTC credits. Though the returned credits could still be used (states can reissue them later), the projects were delayed.

Steps to increase affordable rental housing construction via LIHTC and beyond

As the largest federal source of financing for new affordable rental housing construction, LIHTC plays a critical role in ensuring millions of families with low incomes have a stable place to call home. Overcoming barriers to its success and ensuring other complementary programs have sufficient support to fill gaps can help the federal government address current needs.

Several policy and program changes that support and expand LIHTC and encourage innovation beyond LIHTC could help address these challenges:

• The federal government could increase available tax credits for LIHTC and funding for other affordable housing subsidy programs. This could be achieved by boosting funding for HUD’s existing programs that support LIHTC, such as HOME; expanding the state volume cap for private activity bonds (PDF), which support 4 percent LIHTC projects; and restoring the 5 percent increase in LIHTC financing capacity, which was implemented from 2018 to 2021.
• Private lenders could change how they finance LIHTC projects. Lenders could offer more favorable financing terms and conditions for what has proven to be a low-risk endeavor.
• State and local governments could consider funding rental housing in different ways, such as using general and surplus revenues or by improving coordination across multiple housing assistance programs.
• Congress could invest more directly in affordable housing construction. Several states and localities are considering implementing new social housing programs that could develop projects independently of the private market, which could save money and meet standards common in countries similar to the US. The federal government could invest in those initiatives as a complement to LIHTC.

Together these strategies could accelerate government-supported production of affordable rental units and help more people with low incomes access stable housing.