CHAPTER TEN

URBAN AND SUBURBAN INFILL

Sudden leap in gas prices gives impetus to new urbanism concepts; Much woe to new developments on the fringe

 

 

Back in late 2007 when I was organizing this book, I decided to add a chapter on urban infill. This is a concept that came to life in the 1980s and then gathered momentum behind a couple of intellectual movements in the 1990s called new urbanism and smart growth.

My sense at the time was that while infill development in urban locations had definitely picked up steam during the past decade, in some ways the low- or no-down mortgage rate phenomenon had actually worked against it, promoting instead cheap single-family development further out on the exurban fringe.

By 2008, as I was in the throes of writing the book, events actually overtook me in regard to the whole patchwork of development called urban infill. The difference between late 2007 and mid-year 2008 was the rapid rise in the price of gasoline. From June 2007 to June 2008, gasoline prices climbed 26 percent and the average price of gasoline hit $4 a gallon for the first time in the country’s history.¹

Gasoline prices had been climbing steadily for decades. In 2004 prices at the pump passed the $2 a gallon level. The cost then accelerated until 2008 when the speed of price increases moved forward faster than we could stuff our wallets with greenbacks. It seemed unheard of that the price of crude oil would reach $100 a barrel, but in mid-year 2008 crude was trading at over $140 a barrel.

The general feeling among economists was that Americans might have reached the tipping point in regard to making lifestyle adjustments to the high cost of fuel. The term tipping point was much publicized by journalist Malcolm Gladwell in his book of the same name, which essentially means the moment when a slow gradual change becomes irreversible and then quickens.

Economists were predicting that the high cost of gasoline had finally reached a point where it would change our driving habits and that eventually Americans would factor in the cost of commutation when considering where they might live in the future. In other words, new developments on greenfield sites, further out farm-lands, and open ranges would become less desirable, while denser infill developments would attract tomorrow’s homeowners.

All this will take time to happen.

“Faced with higher gas costs, people will change their behavior. That is the easiest thing to do in the short term,” notes Gary Engelhardt, an economic professor at Syracuse University’s Center for Policy Research and author of the 2006 research paper “Study of Housing Trends among Baby Boomers.” “They will change their driving patterns, car pool, drive less or buy a hybrid instead of an SUV. These decisions will happen at a higher frequency than changing home buying decisions.”

Back in 2006, Engelhardt’s study exploded a myth that baby boomers were moving back to urban cores in large numbers. As he says, “In fact, baby boomers were just as likely to move to another suburb as they were to move back to an urban area.”

Just two years later, Engelhardt says, “All bets are off.”

Baby boomers haven’t changed their attitude about urban living, he says, but there is a new reality in higher gas prices and that will change everyone’s attitude to where they live. “We are going to have denser cities,” he predicts. “With no prospects of gas prices falling, this will signal the demise of the bedroom community where people are commuting long distances. You will see denser metro areas around employment centers.”

Engelhardt wasn’t just talking about city centers. The new urbanism of today is not just urban infill, but suburban infill, mixed-use redevelopment of existing structures surrounded by huge surface parking lots, transit hub development, and the development of new communities that will have retail, office, and residential all planned together.

Where We Were

“The new urbanism and smart growth movement started in the early 1990s in terms of people coming together to articulate some alternatives to the sprawl that had gotten out of control by the 1980s and early 1990s,” recalls David Goldberg, communications director for Smart Growth America. “We were consuming land at the rate of three times the population growth.”

The idea behind new urbanism was to reexamine how we develop, to figure out where population growth was moving, and to some extent control what was to be built. Eventually, new urbanism got confused with no-growth and anti-growth efforts, but that was not what the concept was all about, so a new theory emerged called Smart Growth.

“This came out of a difference impulse,” says Goldberg, “which was, let’s assume the growth is going to happen, but instead of stopping it, let’s try to shape it more consciously and involve the communities in thinking about how things should look, what landscape needs to be conserved, where infrastructure should be built.”

All these concepts got an added boost by two unrelated factors. First, the Generation X cohort made a difference. Unlike the baby boomers, many Gen Xers delayed having children, delayed getting married, were strongly work oriented, but they also sought exciting lifestyles such as cities offered.

While population movements appear abstract, they actually are reflected in our cultural pastimes. For example, during the 1950s and 1960s when families embraced the suburban ethic, popular television shows like “Leave It to Beaver,” “Donna Reed Show,” “Ozzie & Harriet,” “Father Knows Best,” and many others were located in some amorphous suburban locale, but starting in the 1990s and into this first decade of the twenty-first century, popular and/or cutting edge shows such as “Cheers,” “Friends,” “Seinfeld,” and “Sex in the City” were all about the city life.

Around the same time, many of America’s cities actually became better managed, were cleaned up, crime was reduced, and redevelopment slowly improved the surroundings and brought housing back to inner cities or near inner cities.

Goldberg uses Atlanta as an example. “No one really lived in downtown Atlanta,” he says. “But, with the advent of the 1996 Summer Olympics, some developers used the Olympic’s financing potential to convert existing commercial buildings to residential. When that proved successful, they started to build new buildings. Then the mid-town district just north of downtown took off like a rocket.”

Using U.S. Bureau of the Census numbers, the Urban Land Institute came up with some interesting statistics. Between 1990 and 2000, most major U.S. cities experienced healthy population increases: New York (+9.4%), Houston (+19.8%), Chicago (+4%), Dallas (+18%), San Francisco (+7.3%), Boston (+2.6%), Memphis (+6.5%), Columbus (+12.4%), and San Antonio (+22.3%). In fact, of America’s top 20 cities by population, only four experienced population loss: Philadelphia (-4.3%), Detroit (-7.5%), Baltimore (-11.5%), and Milwaukee (-5%).²

The urban movement continues unabated, although through the early part of this first decade, a counter drift occurred, mostly fueled by the advent of low interest rates, no-down and low-down mortgage loans and a policy of the federal government and government-sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac to push homeownership. As a result of these factors, builders swept up huge tracts of land beyond the last suburb and began building massive developments.

“With irrationally low interest rates, everyone climbed aboard the homeownership train and infill fell off the radar screen,” observes Douglas Bibby, president of the National Multi Housing Council. “Everyone was trying to get as many people into single-family housing as they possibly could. Policy makers and the media were just beating this drum. Infill fell out of favor and we ended up chewing up more and more green space, pushing the boundaries of our suburbs out as far as they could go and creating isolated communities and very long commutes.”

Where We Are Today

Those long commutes are now coming back to haunt us—and emptying the wallets of those new homeowners who saw cheap housing 40 miles from the big city as a way to live the American dream.

In 1983, the average U.S. commuting distance to work was under nine miles; but by 2001, the distance stretched to 12 miles.³ Increased distances seemed to be acceptable when gasoline was still relatively cheap. Once gas prices jumped to $3 then $4 a gallon, we hit a tipping point. (By the end of 2008, gasoline dramatically declined once again, but the psychology of high energy prices didn’t.) From January 1, 2008, through mid-year 2008, demand for gasoline fell 1 percent, according to the Department of Energy, which indicates 2007 will represent the peak year of gasoline consumption with annual demand dropping in 2008 for the first time in 17 years.⁴

Assuming some of this lack of fuel consumption is due to commuters slacking off on car use, how are they getting to work? Anecdotal evidence shows a number of cities reporting increased use of mass transit. In the Phoenix/Mesa area, where I live, a notoriously sprawling metropolis, ridership on commuter lines rose 8.5 percent in January 2008, 6.8 percent in February, 15.9 percent in March, and 17.9 percent in April.⁵ A headline in a May 30, 2008, issue of the Wall Street Journal screamed, “Riders Swamp Public Transit.”⁶

It’s fortunate the new urbanism concept gained traction in the 1990s, because a number of cities across the country, including Phoenix, have been building up light-rail systems as a means of moving people about without their having to jump into their automobiles and waste energy. If people want to forsake their cars, these cities are ready to transport them.

In regard to real estate, new public commuter trains and light-rail systems engendered a subset of smart growth that called for the construction of denser, mixed-use developments around transportation nodes such as light rail or commuter rail lines. These new developments weren’t aimed for downtowns per se, but near downtown locations and in suburban locations where the rail lines came through. By making these nodes of development denser and mixed-use, more people could reach their basic shopping stores by foot plus commute to employment.

Also in the 1990s, smart developers eschewed the bedroom community (just homes) concept and began to build new communities that included single-family residential, multifamily, retail, and office. The concept proved so successful that owners of shopping malls began rethinking their properties, especially the older malls surrounded by acres of flat parking. By converting these properties to mixed-use developments with the addition of multifamily and small office, they were increasing density, making better use of land and improving the retail efforts.

For the past 30 years, corporations would choose a greenfield site somewhere in the exurbs and build a plant, knowing that development would follow. This paradigm doesn’t work well anymore, and it certainly won’t work in the future with the cost of gasoline so uncertain.

“The structural element in the cost of fuel is significant and permanent and this will have an effect on corporate location decisions,” says Jay Biggins, executive managing director of Biggins Lacy Shapiro & Co., a specialty site selection and incentives advisory firm. “In our business, we are already seeing commutation costs as a variable in corporate location decisions.”

Access to the corporate facility has always been a location variable but now it increasingly has become a variable focused on mass transit access. “If companies believe employees might change their behavior in terms of commuting decisions, they will put a plant at a mass transit hub instead of at the intersection of Interstates Y and X, 30 miles outside the city,” says Biggins. “You are going to see more mixed-use developments, more work and play environments. Companies like transit hubs for office locations.”

The two predominant trends during the 1990s and into this first decade of the new century were “edgeless cities”: (1) the urban hub connected by a freeway or high-speed arterial and (2) walkable urban.

Researchers report there is a 50-50 split between those who want drivable suburbs and those who want walkable urban, notes Christopher Leinberger, director of the University of Michigan’s real estate graduate studies and a Visiting Fellow at the Brookings Institution, a Washington, D.C., nonprofit public policy organization.

The problem, Leinberger adds, is that the supply of walkable urban is just 5 to 10 percent of all housing.

“Walkable urban is expensive housing because there is a mismatch between supply and demand,” he explains. “The price premium between walkable urban and drivable suburban is often 40 to 200 percent.”

The difference in price can be laid to a number of infrastructure factors. First, the walkable urban housing is usually high density, which means it is a better built product with reinforced concrete, structural steel, and so on, as opposed to stick-built housing in the suburbs. Secondly, the price of land is more expensive because often there is just not a lot of it available.

This is where the economics of construction go haywire. On a per unit basis, the cost to build out infrastructure is much more expensive in the suburbs. To lay in a sewer line costs relatively the same amount of money whether done in a city or the suburbs. However, the cost in the burbs would be spread out over one or two units per acre, whereas in the city, it would be spread out over 40 to 80 units per acre. Although the infrastructure costs are so much higher in the suburbs for such things as sewer, water, electricity, schools, parks, public safety, and so on, citizens in the city pay the same amount for these government-regulated services as do the folks in the burbs. The folks who live in the suburbs are in effect being subsidized, says Leinberger.

The reasons why housing has gone haywire, says Leinberger, are (1) we have a de facto domestic policy that encourages and mandates low-density, surburban development through subsidies; (2) most jurisdictions have regulations that forbid high-density, walkable developments; and (3) for the last 15 years Wall Street only wanted to finance developers that built drivable suburban product.

Demographics

As with other housing sectors, whether it is second homes or vacation homes, the issue of new urbanism needs to be discussed in the general realm of demographics.

“Back in the 1950s and 1960s, about half of American households had children,” observes Arthur C. Nelson, Presidential Professor at the University of Utah and director of its Center for Metropolitan Research. “That percentage dropped to one-third in the 2000 census and has since come down to a little above 25 percent and has stabilized there. That means that starting in the next decade, three-quarters of households won’t have children.”

That’s because they already raised their children and are living longer or they have not yet raised children. But the majority of housing constructed in America from the 1950s through the 1970s was for households with children.

“The huge cohort called the baby boomers will live longer than prior generations,” says Nelson, “and we know from various residential surveys if the boomers have a choice between near a downtown and the far suburbs, just 19 percent choose suburbs. Suburbs were not designed to cater to their (aging boomers) needs. Surveys show that downtown and closer-in developments are attractive to 50 percent of the baby boomers, while 30 percent prefer planned communities.”

At the other end of the housing spectrum, the next large cohort to come into the market is called the millennials or echo-boomers, who are now coming out of colleges and universities into the job market and will do so for the next 15 to 20 years. The household dynamic will continue to change, says NMHC’s Bibby, with single heads of households, unrelateds living together, and singles living independently. “By 2010,” Bibby adds, “one in five households will be a married couple with children.”

Until 2006 when the housing slump hit, there were two trend lines moving in opposite directions, and one is being played out, avers Smart Growth’s Goldberg. “We had this machine that was revved up for commodity subdivisions on the fringe that was packaged and traded by Wall Street. It was our affordable housing for the last decade. At the same time there were developers trying to figure out how to do profitable infill development. The movement of people who would go out and buy a piece of farmland, with no regulation on it, and carve it into subdivisions is played out due to a conversion of forces.”

The old subdivisions were built for the baby boomers and their children, says Goldberg. “They are no longer looking to harvest another crop of homes in the suburbs. While yes, some may want to retire to a mountaintop, others want to be closer to services.”

Where We Are Headed

For much of the George Bush administration, the emphasis was on homeownership and in some ways the Federal Reserve’s low interest rate policies and the financial system’s engineering of mortgage products all supported the concept. Most of all, the home builders took advantage of all that to buy up huge swatches of land and mass-produce ever more housing.

People who are losing homes today direct their anger at the banks and the governments. Research analysts, university professors, and urban theorists place the blame on the developers and the financial systems that support them. “The people who need to be taught a lesson are the developers,” explains Nelson. “The market is there for a walkable product. They don’t build it because it is more difficult. Unlike drivable suburban where you can build a house and market it, with walkable urban you are building a place that has to be approximate to a rail stop or a Trader Joe’s and with something like a festival that happens every weekend. It’s harder to create that than build a stick-built home in the middle of nowhere.”

One sector of the development industry that seems to have gotten the message is the multifamily builder, who has started to focus less on suburban garden-style apartments and more on downtown mixed-use and transit-oriented products. This isn’t to say that apartment builders are forsaking the suburbs; they aren’t, because there are still a lot of employment bases in the burbs.

“The bottom line is, when you look at your cost to develop a downtown high-rise and transit-oriented product, your construction costs are going to be so much higher versus a suburban stick-built project,” explains Matthew Lawton, senior managing director of the Chicago office of Holliday Fenoglio Fowler LP. “So, the rents you are going to have to achieve to make the return thresholds on urban and transit-oriented are much higher.”

The land for urban and transit-oriented product is more expensive as well, but Lawton predicts that one of the key trends over the next decade will be the tearing down of older apartment complexes constructed in the 1960s and 1970s that are functionally problematic, waste a lot of land, and are relatively close to urban centers.

“We will see a lot of these older, functionally obsolete projects being scrapped and redeveloped into three- and four-story buildings with structured parking, much denser unit count, and more efficient ‘amenitized’ units,” says Lawton. “A lot of these older projects were built 40 years ago on the fringe of the cities or in early suburbs but are now infill.”

Cities will be happy to see this happen, because not only are older, worn-out projects being replaced, but municipal governments, which are always looking for more revenue, will have a property that had been 10 units to an acre and is now 20 to 25 units to an acre that has increased in value, thus creating a larger tax base. In addition, the quality and demographic of the renters change as well.

“Realistically, only about 1 percent of the population wants to live in an urban downtown,” says Nelson, “with 5 percent wanting to be near downtown, accessible to downtown, or near a transit node, and 25 percent preferring a suburban downtown or multiuse planned community.”

“Just to meet the demands of that 30 percent of the population, every single residential unit built between now and 2040 has to be close to or in a downtown or part of a new urbanism suburban location,” says Nelson.

“Of course that won’t happen,” Nelson is quick to add. “We build 1.5 million to 2 million homes a year to keep up with market demand and to replace homes falling out of the market. By 2040 we will have 160 million new housing units, of which 30 percent, or 50 million homes, have to be built to meet the demand for new urbanism.”

Resistance to developing in urban areas remains fairly strong because of higher costs. Yet, the result of such intransigence will be higher demand and that will drive up prices.

“At a time in our history when we need to build on average 1.5 million units a year to keep up with housing formation, no one has figured out how to build that much each year in infill development,” avers John McIlwain, a senior fellow for housing at the Urban Land Institute. “With higher gas prices you will see demand growing faster than supply. Unfortunately, that will push moderate-income, middle-income, and younger people further out.”

It’s a devil’s bargain: The housing further out will be less expensive, but transportation costs are growing.

“We are entering interesting times, not so much because of what is happening in the inner cities, but what is going to happen on the outer edges,” says McIlwain. “What is going to happen to the value of homes in those newer developments where foreclosures are now going on. Will their value recover?”

McIlwain is not optimistic. “Those new developments on the outer edges of suburbia have been hit hard and are troubled. There are a lot of vacancies and growing crimes—all kinds of neighborhood deterioration. That takes a long time to turn around, and we do not have the tools for it, particularly at the outer edges.”

Over the next decade, gasoline prices will continue to go up and down. As noted, at first people will make decisions concerning their vehicles, turning to smaller cars and hybrids. Eventually, a decision will have to be made about their house, too.

“Buying a new home closer to employment is not a snap decision,” says Engelhardt. “I do not anticipate a near-term change in location behavior—say, over the next two years. But, if I’m looking 5 to 10 years down the line, there will be locational changes. Remember, typical homeowners stay in their homes about seven years. Seven years from now, you will see the changes.”

He adds, “Demand will shift as housing close to employment will come at a premium. You will see prices in those areas rise as prices in bedroom communities decline.”

Here’s one way potential homebuyers who want to live closer to employment or infill areas can pay that premium: They will fork out less money on automobiles. “In this country, 25 to 26 percent of household spending goes to the home and 19 percent to transportation, mainly cars. Europeans spend 13 to 14 percent on transportation. One hundred years ago, Americans only spent 3 percent on transportation,” explains Leinberger. “The average cost to own and operate a mid-sized vehicle is estimated to be about $7,800 a year. If homeowners drop one car and use those dollars for principal and interest on a 30-year mortgage, they can get $150,000 extra in a mortgage.”

Local governments will be changing their perspectives on housing, because they need to. Already, says Nelson, suburban communities that have leaned heavily on single-family detached homes are experiencing declining tax revenues and have to raise property taxes to cover lost revenue. “One suburban county in Virginia has seen a one-third decline in the value of homes in two years,” says Nelson. “They raised the property tax to keep revenues coming in so they can pay police and teachers. It’s happening in other suburban counties as well.”

These counties shouldn’t expect that time will heal these wounds. “The dirty rotten secret is homeowners in these suburban counties won’t ever make money on their homes,” Nelson says.

So, here is the consensus opinion among urban theorists: The second decade of this century will bring wrenching changes to the American landscape, and much of it won’t bode well for those developments planned and zoned on the fringes of metropolitan areas.

“There will be a surplus of large-lot, single-family homes out on the fringe that will become vacant, torn down, or occupied by low-income families,” says Leinberger. “Their value will be far below replacement value. If it costs $100 a foot to build a single-family home on the fringes, you won’t be able to sell it for $100 a foot.”

According to some estimates, of the 57 million large-lot, single-family homes in the country, some 22 million will have a hard time finding buyers in the years ahead.

“In essence, we are at the beginning of a structural change in the housing market,” Leinberger concludes. “We are talking about a structural change where much of the product built on the fringes in the first decade of this century will have a hard time finding buyers. Obviously some home products will do well, but most homeowners will get clobbered.”

Bonus Box

Affordable Housing

Back in 2002, when I first started writing about affordable housing, I was told that the country needed to build 100,000 affordable housing units a year just to maintain stability because about the same number of units bled out of the market every year due to obsolescence.

The trouble is, due to a combination of high development costs and the maintenance of lower than market rate rents, affordable housing doesn’t actually pencil out. So to spur development, back in 1986, Congress, in an unusually wise move, created an incentive program called the Low Income Housing Tax Credit and it has been incredibly successful for over 20 years.

The program worked for a couple of reasons. First, the federal government awarded the tax credits to the states so they could allocate as needed. Second, beyond the tax credits themselves, affordable housing was still left up to private investment. The way it worked was very simple. Developers would bid for the right to receive tax credits, which were then resold (through syndicators) to investors, who could use the tax credits as a direct reduction in federal tax liability over a 10-year period. The proceeds from the sale of tax credits were used to help fund development.

This always seemed to be a very stable market, but like everything else in the world of real estate investment, things got a little out of whack during the first years of the twenty-first century, only to deflate after the subprime debacle of 2007.

Until then, major U.S. corporations—telecommunications, cosmetics, manufacturing, chemical—were all investors in tax credits. But as yields fell and a profound yearning by the GSEs (Fannie Mae and Freddie Mac) and banks for the credits increased, the corporations fell out.

“Early on you had a lot of manufacturing companies that realized a lot of taxable income and were interested in sheltering some of that through tax-advantaged investments so they were buying credits,” explains Tom Booher, executive vice president at PNC Multifamily Capital. “As yields continued to fall to the point starting around 2006 that they were below 5 percent, those companies didn’t see that to be an attractive enough yield to continue to invest. In return, there were a number of banks that had Community Reinvestment Act needs and could meet those by investing in tax credits so they entered the market.”

The result was a lack of diversity, says Bob Moss, a senior vice president and director of origination for Boston Capital Corp., a Boston-based real estate investment company that creates funds to invest in low-income housing tax credits (LIHTCs). The market in recent years has been dominated by the GSEs and banks that were fulfilling their Community Reinvestment Act (CRA) requirements.

Unfortunately with the credit crunch and residential housing shakeout, the GSEs and the banks are no longer showing profits and the demand for tax credits has dried up very quickly.

However, in the good old days, back when the GSEs and banks were gobbling up LIHTCs as fast as deals appeared, the demand was so intense that prices were pushed up and yields down.

Generally, a dollar in tax credits sells for $0.80, but in the few years before the subprime crash of mid-year 2007, they were selling in the $0.90 range, very close to $1, says Andrew Weil, executive managing director of Centerline Capital Group, the New York-based subsidiary of Centerline Holding Co., an alternative asset manager focused on real estate funds and financing. In 2008, the tax credits were back selling at about $0.80 and into the $0.70 range.

“At 90 cents on the dollar there were a lot of dumb developers making money,” says Moss. “Tax credits were oversubscribed and any deal, no matter the strength of the general partner or developer, would find an equity source and get syndicated.”

Real estate developments take a long time to get done. Back in 2006 and 2007 many developers were planning on getting close to $1 for every tax credit allocated, but by 2008 when they were ready to begin construction they found out they were only getting $0.80 for allocated tax credits. As a result they could no longer make their projects pencil out.

“The existence of every new developer entity is going to be challenged,” says Moss. “Those developer groups that have sufficient cash flow and lean and mean staffs will focus their attention primarily on their portfolio as opposed to new production.”

As a result of all this turmoil, the affordable housing market looks bleaker than it has over the past 20 years. The big buyers of tax credits, the Fannies, Freddies, and Bank of Americas are losing money so they don’t need tax credits. In fact Fannie and Freddie, which have since been taken over by the federal government, have losses so deep it will take a couple of years even under conservatorship to get out of the muck.

With less bidding on tax credits, developers have turned to individual municipalities to try to cobble deals together. Land and construction costs remain so high that developers cannot build housing, charge submarket rents, and make a profit without a local government helping to buy down the cost of land, offer tax breaks, or use their bonding authority to offer subsidies.

Centerline raises money and equity to invest in tax credit deals, explains Weil. “And from 2004 through 2007, we raised around $1 billion to $1.2 billion each year to invest in deals. We will be under $1 billion in 2008.”

The affordable housing industry is an $8 billion industry, Weil adds. “That’s the amount people would raise annually to invest in affordable housing. In 2008, projections are that the numbers might be down to $4 billion.”

By 2008, several syndicators moved to the sidelines trying to figure out if this was a business in which they still wanted to devote a lot of resources.

PNC’s Booher expected 2008 to be a good year for his company in terms of raising capital. “We will have close to a record year in 2008 in the amount of credits that we are purchasing and syndicating,” he says. “But the number of doors we will actually finance will be off 5 to 10 percent. There are definitely a number of projects that are getting allocated and built. It’s just not the same numbers that we have seen over the past couple of years.”

When will the affordable housing market get back on solid ground again?

“By the end of this decade, we will have cycled through all this and returned to a healthy market,” says Moss. That seems to be the consensus of opinion.

“Not until the next decade,” echoes Michael Novogradac, a managing partner with Novogradac & Company LLP, a San Francisco-based CPA and consulting firm with a specialty in tax-credit-assisted multifamily and affordable housing. (What could change the time frame is a housing stimulus package being tossed around in Congress.)

“To get the affordable housing market stabilized, a couple of infrastructure issues should be settled,” says Novogradac.

First, the state agencies need to get tough. They need to say to developers, “Look, if your project doesn’t work, then give us back the credits.” The state agencies can then reallocate the credits to another developer who can make an investment at a lower credit price. If you structured your deal in 2007 based on tax credits selling for $0.95 and you only get $0.75, your deal won’t work. If you structured your deal today for $0.75 per tax credit, you can get something done.

Second, yields need to rise. “When tax credit prices reached $1 you had people investing at a 4.5 percent yield after tax,” Novogradac says. “From a risk perspective that was way too low. The yield you got on tax credit investing was not much better long term than on a municipal bond, which presumably has AAA guarantees. There was no rhyme or reason why those investments should have been done.”

Finally, investors need to differentiate. LIHTCs were selling like homogeneous hotcakes, but Novogradac stresses, they should sell with yields based on the risk factors of the individual property. Think of it this way: An affordable housing development in San Francisco and a comparable product in rural Indiana probably have a few different risk factors, to say the least.