New moves to address the affordable housing crisis

Robert Likes, President, KeyBank Community Development Lending & Investments, October 2022

<p>New moves to address the affordable housing crisis</p>

The fundamental challenge of financing affordable housing is that traditional financing formulas do not “pencil.” We can help.

The need for affordable housing has never been greater, with 30% of Americans paying more than 30% of their monthly income for mortgage or rent payments, according to Habitat for Humanity1. Yet, financing for affordable housing has always been a challenge—and today’s inflation and rising interest rates only exacerbate the need for creative solutions.

The fundamental challenge of financing affordable housing is that traditional financing formulas do not “pencil.” Offering an affordable housing finance product typically means that rents or mortgages will not cover the costs of constructing the property or paying down permanent financing. Affordable housing developers need additional capital sources to fill these construction budget gaps.

As a result, financing structures are often highly complex. In a typical project, for instance, KeyBank Real Estate Capital might provide a bridge loan, followed by construction financing, combined with Low-Income Housing Tax Credits (LIHTC) equity, tax-exempt bond funds and Fannie Mae or Freddie Mac funding. That’s a lot of complexity—but it’s what’s needed to fight the affordable housing crisis.


The need continues to grow

While the financing environment has become very challenging, what has not changed is the overwhelming demand, the need for affordable homes. The nation lacks 3.8 million units of affordable housing, according to Freddie Mac, with the greatest supply shortages at low-income price points2.

Inflation has only increased the pressure on consumer pocketbooks. As the cost of food, transportation, and other essential products and services have risen, rents have risen, too, increasing the burden on housing budgets. Yet, cities across the country lack the funds or the bonding capacity to support housing projects at the scale needed. Adding to the difficulty is the lack of human capital and staffing challenges in the public sector.


How high interest rates affect affordable housing project finance

Higher interest rates mean it’s more expensive to finance affordable housing. Short-term interest rates have risen steadily over the past 12 months, contributing to increased construction costs. The 30-day LIBOR was .08% in September 2021; now it is up more than 300 basis points to 3.1%. Similarly, the 30-day SOFR was 0.05% in September 2021 and was at 2.50% in late September 2022. Long-term mortgage rates have risen as well, tracking the rise in the 10-year Treasury Index from 1.30% 12 months ago to 3.7% in September 2022.

Not surprisingly, residential mortgage rates have doubled over the past 12 months, making homeownership even more unattainable for many consumers. At the end of September 2022, rates had hit 6.7% for a 30-year fixed rate mortgage, a rate not seen since 2009. Rents have risen in most cities during the same time. Unattainable homeownership, in turn, creates pressure on rental markets, contributing to the shortage of affordable rental housing.

The significant jumps in short- and long-term rates enlarge the financing gaps common in affordable housing projects, and therefore project sponsors must secure scarce resources to fill these gaps. Finding capital sources takes times, further adding to the time needed to bring new affordable housing to market. Through inflation and supply chain logjams, project costs have increased about 30% over the past few years. Every delay in financing or construction increases these costs and further exacerbates the crisis. 


More supply is on the horizon

To increase supply, new projects and adaptive re-use approaches are already underway to increase the supply of affordable housing in many markets. In fact, some city governments and residential developers are pursuing creative solutions such as converting motels or vacant office buildings into housing.

While financing hurdles remain, debt capital is readily available for affordable housing projects. In addition, the availability of private activity bonds (PABs) and LIHTCs continue to attract investors to support the acquisition, construction, and rehabilitation of affordable rental housing for low- and moderate-income tenants.

More good news may be on the horizon, too.  As the U.S. Congress considers legislation to help increase the production and preservation of affordable housing, progress is being made. Possibilities on the table include expanding the LIHTC tax credits and making the 12.5% temporary increase on 9% LIHTCs permanent, which would lead to the development of more than two million more affordable housing units over the next 10 years.

Other possibilities include raising the cap on states’ tax-exempt PABs used for housing, and reducing the 50% test for LIHTCs. Under current law, if a developer finances 50% or more of a project with tax-exempt PABs, the owner is generally eligible to claim tax credits that don’t impact an agency’s LIHTC volume cap. Reducing the PAB financing requirement to 25% would free up funding for more affordable housing.


Filling the gaps in the capital stack

Depending on the state, other resources may be available to fill in funding gaps. The 2021 American Rescue Plan Act (ARPA), for example, provided over $40 billion for housing. Some states have significant ARPA funds remaining that could be applied to affordable housing finance.

In addition, some states either have state tax credits or are creating their own state LIHTCs that can be combined with federal LIHTCs, or have other funds available for housing. In some municipalities, officials are taking steps to “recycle” bond funds—redirecting unused funds from previous bond issuances to cover inflation-related cost overruns on housing projects.

Further, in some areas public sector organizations are partnering with private industry to accelerate the process of bringing new affordable housing to market. Public-private partnerships (P3s) have been successfully implemented for a broad range of transportation, social infrastructure and utilities projects—from roads, bridges and wastewater treatment plants to student housing, K-12 schools and detention facilities. As a proven concept, an affordable housing P3 can leverage public and private financing options and private sector expertise to bring new supply to market.


The affordability challenge requires creativity and innovation

Despite the many challenges that the sector faces – from a dearth of supply to significant headwinds in the current economy – a broad group of affordable housing organizations, developers, policymakers, government agencies and lenders have pledged their unwavering commitment to tackling the affordable housing crisis. Participants in the affordable sector are working tirelessly to preserve the current supply and create new units and affordable options in cities and municipalities across the country.

KeyBank, too, is deeply committed to addressing affordable housing. As a leading affordable housing lender, KeyBank has provided innovative and often complex financing solutions for projects in urban and rural communities across all 50 states. For-profit, nonprofit and government agencies nationwide have leveraged our broad, integrated platform to execute complicated projects with many moving parts.

In today’s environment, helping communities thrive requires a passion for overcoming obstacles and exploring every avenue to bring housing projects to life. Challenges abound—but so do opportunities for innovative approaches to delivering access to affordable housing where it is most needed.


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SOURCE: Habitat for Humanity, 2022 State of the Nation’s Housing


This is designed to provide general information only and is not comprehensive nor is it legal, accounting, or tax advice. All credit products are subject to collateral and/or credit approval, terms, conditions, availability and subject to change. is a federally registered service mark of KeyCorp. ©2022 KeyCorp. All rights reserved. 

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