The low-income housing tax credit (LIHTC) market has shifted from one extreme to the other in two short years.
It’s been doom or joy, dearth or excess.
In 2009, there wasn’t enough investor capital, which raised industry concerns that deals wouldn’t get done. Today, the situation is reversed, with a strong flow of equity raising fears that every deal, no matter how strong or weak, will get done and deal terms will be relaxed.
So, what does a balanced market look like, and can it ever be achieved?
“The point in time where there is a balance is a fleeting moment,” said Jeffrey Goldstein, executive vice president and COO of Boston Capital, a longtime LIHTC syndicator. “Any true market experiences cycles and corrections. The right balance is a similar number of buyers and sellers with yields properly risk adjusted for the environment.”
Others paint a similar picture of market equilibrium and its elusiveness.
“The right balance would be a level of pricing that allows deals to fill their funding gaps and results in yields that remain attractive to investors,” said Raoul Moore, senior vice president of syndication at Enterprise Community Investment, Inc. “We’re skeptical that a healthy balance can be achieved given the recent heated marketplace.”
For Todd Crow, executive vice president and manager of tax credit capital at PNC Real Estate, balance comes when there is reasonably matched expectations between developers and investors.
“It can be achieved, although at the moment it appears some investors may be considering their comfort level with low yields at the same time developers in particularly strong states and markets continue to see strong pricing bids,” he said. “There is still significant investor capital in the market.”
Mark Gipner, fund development manager at Community Affordable Housing Equity Corp. in Raleigh, N.C., said he thinks the market neared “somewhat of an equilibrium point in mid- to late 2010.”
“There was strong interest from investors but also an ample supply of transactions,” he said. “It’s tough to stay in a balanced state as investor demand drives the ability to acquire deals at a lower tier.”
There is one key difference between today’s market and the pre-recession market—the absence of Fannie Mae and Freddie Mac, mission-based investors who were not merely motivated by yields, according to Russell Ginise, managing director of tax credit investments at RBC Capital Markets—Tax Credit Equity Group.
“They have been replaced by non-Community Reinvestment Act yield buyers, who will have a higher propensity to exit the market should the quality of the deals and the yields not meet their liking,” he said.
Overall, the average price paid per dollar of credit was about $.80 in the second quarter, according to preliminary results from an Affordable Housing Finance survey of national and regional syndicators. A year ago, the average was $0.71.
A majority of the LIHTC syndicators surveyed expect LIHTC prices to continue to inch up in the second half of the year but at a much slower rate than they rose in the first half.
Eleven syndicators expect to see further increases while six anticipate prices to stabilize or even decline before the end of the year.
“We predict prices will continue to go up at a slightly slower pace,” said PNC’s Crow. “We are beginning to see some investors resist further yield reductions. However, we see no signs that price and term competition at the project level is abating, particularly in strong markets.”
Those who think prices will fall before the end of the year anticipate some investors to pull back.
Nine LIHTC syndicators also expect the overall market volume level to approach pre-recession levels this year. Five think the overall volume levels will still be lower.