San Diego—Prices for low-income housing tax credits (LIHTCs) have dropped from their recent lofty peaks, and they may dip even further, according to speakers at the recent National Council of State Housing Agencies (NCSHA) conference.

One experienced syndicator estimated that prices would drop by yet another four cents over the next year.

This is a shift from recent conditions. For a while now, the market has seen some aggressive investors paying more than a dollar for a dollar’s worth of tax credit. That’s good for developers, who raise equity for their projects through the sale of credits, but the high prices have driven down yields. That’s led some investors to cut back on their buying.

Another issue that bears watching is the possible drop in the number of projects applying for tax credits.

William Pavao, executive director of the California Tax Credit Allocation Committee, noted the change in his state, where 33 out of 55 applicants recently received a LIHTC reservation. That’s down from the days when demand outpaced supply by a 4-to-1 ratio.

As a result, applicants are able to win allocations with less than the perfect scores, which was not true in prior years.

What’s happening in California may not be the trend in other states, but it is a possible sign that deals are getting harder to do.

Pavao noted, however, that there have been very few foreclosures of tax-credit projects.

A study by Ernst & Young’s Tax Credit Investment Advisory Services found that the foreclosure rate on tax credit properties is only about 0.02 percent—much lower than other real estate classes. While the recent data likely understates the number of actual foreclosures, the rate is still very low, said Richard Floreani, senior manager at Ernst & Young.

Cash flow per unit averaged $232 on tax credit properties, and the replacement reserve contribution per unit averaged $258, according to the data.

Even 20 years after it was established, the LIHTC program's survival can’t be taken for granted, according to industry leaders.

NCSHA Executive Director Barbara Thompson said it is important that the rebuilding of the Gulf Coast goes well. The housing tax credit is one of the key tools helping rebuild housing in the hurricane-damaged areas. As a result, it’s an opportunity for the industry to show what the LIHTC program can do, Thompson said.

On the flip side, it’s also a point of exposure, said Anthony Freedman, a partner with Hawkins Delafield & Wood, LLP.

While acknowledging the success of the LIHTC program, speakers cited several challenges, including a potentially vulnerable equity market and rising construction costs.

To help keep the program strong, they emphasized the importance of strong underwriting and best-practice guidelines.

Speakers urged people to share their LIHTC success stories with members of Congress. The industry can do a better job of telling lawmakers and others about the impact of the housing tax credit, said Milroy A. Alexander, executive director of the Colorado Housing and Finance Authority.

HUD duties to go to states?

One conference speaker predicted that most of the federal Department of Housing and Urban Development’s responsibilities will devolve to state agencies within the next four or five years as the department invests a dwindling amount of resources into its mission to provide housing for the poor.

In fact, HUD will eventually become little more than a “check-writing machine” for Community Development Block Grant money and states will have to pick up the slack for residents in need of housing assistance, said David A. Smith, president of Recapitalization Advisors, Inc., a Boston-based affordable housiig consulting firm.

“The refugees are going to ring your doorbell,” he told housing agency representatives attending a panel on the future of federal housing policy.