Low-income housing tax credit (LIHTC) prices continued to decline in the first half of the year.
The average price paid per dollar of 9% tax credits was 85.3 cents in the second quarter, according to Affordable Housing Finance’s midyear survey of syndicators. That’s down from 87.4 cents a year ago and 88.8 cents in 2023.
Over half of the surveyed syndicators, 55%, expect further declines, while 39% say prices will remain steady, and only 6% foresee an increase in the second half of 2025.
A basic principle of economics is that all markets clear at a price, and right now we’re seeing a growing number of unsecured deals in the market,” says Josh Ghena, interim president of Cinnaire Equity Partners. “In the short term, we believe pricing will need to come down to move this growing list of unsecured deals and restore balance.”
Several syndicators agree a modest decrease may be in store as investors seek greater returns amid perceived risks around Section 8 and other Department of Housing and Urban Development funding.
Yields to investors increased to an average 6.2% in the second quarter, up from 5.77% a year ago, according to the AHF survey.
First-Half Review
Overall, the LIHTC market has felt more challenging compared with last year, adds Ghena.
“We’re seeing a higher number of unsecured deals in the market, and, in many cases, there are more projects seeking equity than there is equity available,” he says. “The fit of the deal matters as well—projects that are either very small or very large are having a harder time attracting capital.”
Many investors appeared to be sitting on the sidelines during this first six months of the year as they sought more clarity on housing legislation and other issues.
“That lack of capital flow translated to lower LIHTC equity pricing in several markets across the country, even in some cases what was once CRA [Community Reinvestment Act] hot markets,” says Jack Kukura, president of Marble Cliff Capital. “Now that the One Big Beautiful Bill (OBBB) has become law, we are hopeful investor activity will pick back up heading into 2026.”
Investor activity seems to be ramping back up toward pre-election levels; however, the economics have changed, according to Tom Pereira, executive vice president at CREA.
“Deals are tighter as they are experiencing unprecedented cost pressures related to construction materials, insurance premiums, and interest rates,” he says. “Investors are also requiring higher rates of return, which is pushing credit prices down and exacerbating the issue.”
On average, pricing decreased roughly 3 to 5 cents over the last 12 months due to the “higher for longer” interest rate environment, tax capacity constraints experienced by some investors, and other factors, adds Ryan Sfreddo, CEO of Red Stone Equity Partners.
Looking ahead, “pricing at the deal level may continue to decline modestly in the second half, but we believe that much of the pain is already priced in based on where prices have come over the last few years,” he says. “There continues to be strong demand for LIHTC product from the LIHTC investment community, including from a few additional non-CRA investors who have recently entered or reentered the market.”
LIHTC Program Expansion
Eyes now turn toward the future and the big changes coming from the OBBB, which brings a permanent 12% housing credit allocation increase beginning next year.
The increase is an overdue expansion of the housing credit, says Jason Gershwin, managing director at R4 Capital, noting that the LIHTC program has been the nation’s most efficient way to finance and deliver affordable housing units.
“It is too early to tell exactly how the increased supply of LIHTCs will impact our market,” he says. “A lot will depend on how quickly states allocate the credits and to what types of affordable projects. Additionally, we need to see what happens with the Executive Order (EO) issued that calls for the review of guidelines for how wind and solar projects are grandfathered for being tax credit eligible. If, as expected, the EO results in only one to two additional years of wind and solar projects qualifying for credits, then we could see the large banks and other corporate investors increase their LIHTC appetite. In the short term, we see a continued efficient market, as there remains significant need for affordable housing and strong investor demand for our funds.”
While the boost in 9% credits is very helpful, the increase in the number of deals and units will likely be muted because part of that bump will be offset by rising costs, notes Steve Kropf, president and CEO of Raymond James Affordable Housing Investments.
“Deals will likely receive larger allocations, which can be a challenge to place as very large credit allocations reduce the prospective investor pool,” he says.
Perhaps, some states will use the additional allocations to provide credits to earlier deals that need gap filler instead of allocating to more new deals at least in the short term, says Tammy Thiessen, managing director, head of originations and syndications at RBC Community Investments.
Several syndicators also voiced concern that the additional credits could create an imbalance in supply and demand, resulting in reduced pricing to developers.
“Hopefully, the new credits hitting the market will be spread out enough that the capital markets can absorb the credits and limit any material pricing impacts,” says Paul Cummings, senior vice president, originations and capital markets, at the National Affordable Housing Trust.
A recent increase in the investment caps for Fannie Mae and Freddie Mac is expected to be a big help in absorbing the additional credits.
That’s an encouraging sign, but the industry will need to attract more capital to balance the supply, says Julie Sharp, executive vice president at Merchants Capital.
“Transactions must be structured to encourage banks and other institutional investors to increase their participation in the market,” she says. “Yields will almost certainly rise, which can attract new investors, and rollbacks of green energy incentives may help shift some buyers back to LIHTC markets.”
Bond Deals
The OBBB also included a reduction in the bond financing threshold test to 25% beginning next year, opening the door for more 4% credit and bond deals to be funded.
“This will allow states that were reaching or exceeding their bond allocation limits to award more deals,” says David Leopold, executive vice president and head of affordable housing at Berkadia. “However, reducing the amount of tax-exempt bonds in transactions may not change the debt sizing needed to finance 4% deals and therefore could lead to more costly taxable debt to bridge the gap during construction, which in the current market could put additional pressure on development budgets.”
Amid inflationary increases in development costs, many 4% credit developments have been challenged to raise enough combined debt and equity to make for a feasible transaction, says Gershwin.
“To take advantage of the increased availability of 4% tax credits, interest rate indexes would need to come down at least enough to offset higher mortgage costs that would come with the blending of taxable mortgage capital,” he says. “From a policy perspective, we hope that states will allocate sufficient private-activity bonds per transaction to fund the projected permanent mortgage amount, since the added cost of permanent taxable debt will reduce feasibility and require greater public capital subsidy.”
The lower bond test is a positive development because existing and future deals with unexpected cost overruns will benefit from this increased cushion, says Catherine Such, managing director, head of Regions Affordable Housing.
“With respect to overall cost of debt—given that states may reduce tax-exempt bond volume cap on a project-by-project basis that will have to be replaced by taxable debt—it is difficult to know the immediate impact,” Such says. “Certainly, some transactions may experience increased permanent loan interest rates, which may in turn create a gap in sources.”
Steps to Prepare
To get ready for an increase in credits and a lower bond threshold test, developers should pay close attention to what the housing finance agencies are saying about their programs.
“Will their qualified allocation plans just expand to include more awards, will they increase the award cap per project, or will they create new set-asides?,” says Catherine Cawthon, president and CEO of OCCH. “How will they handle the potentially large increase in 4% volume? Also, developers will be wise to make conservative assumptions about pricing and appetite—it’s not clear how equity investors will react to a sizable increase in credits on the market. In this environment it would be wise to lean on strong relationships that are more likely to stick with deals when the market moves.”
Deal readiness and the pace of closing will be important, says Mark Gipner, director, fund development, at CAHEC.
“Anticipate generally lower pricing, but the quicker to close the better chance to deal can weather bumps along the way as the market prepares for the changes,” he says.
Continue to move deals forward because the supply is going to continue to increase and provide more, and possibly better, options for investors to choose from, adds John Nunnery, senior vice president at PNC Real Estate.