Housing USA: The Economic Growth that Drives Texas LIHTC

6 min read

Affordable housing production is needed in markets with high job growth, in order to accommodate the increased demand from inbound workers. Texas is one such example: the state economy has grown rapidly in the past decades, particularly the “Texas Triangle,” which is the nation’s foremost boom area, encompassing the “Big 4” metros of Dallas, Houston, Austin and San Antonio. Yet Texas has managed to stay affordable. Low Income Housing Tax Credit developers say that their projects have been an important factor in that affordability, and have been made possible both by the state’s residential demand, and its ease of doing business for tax credit investors.

Throughout the 21st century, Texas has been great at creating jobs. In the seven years during and after the Great Recession, the state accounted for all the net new jobs created in America, and the strong performance mostly continued through the Trump years. Even during the pandemic, Texas lost jobs at a slower pace than most of the country. Along with traditional industries, like energy and trade with Mexico, a strong driver of Texas’ job growth has been corporate relocation. It now ranks third among the 50 states in Fortune 500 headquarters, trailing only New York and California. The main employers range from manufacturers, such as Foxconn, to retailers like Pizza Hut, to homegrown tech companies like Dell (recent corporate relocation examples include Oracle and Tesla). The state also leads a key indicator of small business growth. Projected job growth for 2021 is expected to be the highest in over 80 years.

Population has grown along with jobs (or it may be vice versa; this has always been a chicken-and-egg question). Of America’s 30 largest metros, Texas has four of the five fastest-growing ones (again, the “Big 4”). Overall, the state has added 4 million people since 2010, far more than any other state. Even in 2020, the state grew by 1.29 percent. In North Texas alone, during 2020, 373,000 new residents were counted, according to Darren Smith, head of development for the southwest region at MVAH Partners. This seems plausible based on my recent trip there. Northern Dallas suburbs, like Plano and Frisco, have now morphed into full-fledged cities, while large new planned communities continue to arise beyond that, nearly to the Oklahoma border.

All this growth in turn results in more housing demand, and unlike elsewhere in America, the Texas metros actually allow it to be built. According to numbers I crunched for Market Urbanism Report, the Big 4 were all top 12 among the 50 largest metros for 2020 home permit rates (with Austin at number one).

The state still has a low cost of living relative to much of the country, such as the Northeast and West Coast. Houston, despite having the second highest net population growth of any metro from 2010 to 2020, still has a cost of living eight percent cheaper than the national average. Its median rent of $1,139 is cheaper than New York, Los Angeles and Boston.

Still, affordable housing advocates remain concerned about housing access. The Texas Affiliation of Affordable Housing Providers notes that rents are rising faster than incomes in the state and that the general atmosphere of job and population growth has spurred an increase in demand for and allocation of credits.

Texas boasts a nine percent allocation for LIHTC projects and a four percent credit for properties financed through multifamily bonds that foot half or more of land and structure costs. As discussed in our June issue, the Texas Department of Housing and Community Affairs has a strict set of criteria for scoring eligibility for LIHTC credits, following litigation that showed locating affordable projects far from opportunity areas has a “disparate impact” on low-income renters. So, the more desirable a development is (locationally or otherwise), the likelier it is to win credits.

Lora Myrick, president of the affordable housing consultancy BETCO Housing Lab, says that LIHTC construction has increased in tandem with migration to the state. On average, LIHTC financing is about $83 million annually according to Myrick; 2018 saw $76.6 million in allocation by the state. However, the value of projects being proposed is about double the rate of financing made available, speaking to the competition for LIHTC in Texas.

“The applicant with the most points wins,” says Myrick. “We have a very robust economy, we’re very friendly for business…a large allocation of housing tax credits and other sources of funds…as a consultant, I have calls coming from all over the country to do business in Texas.”

The process is also transparent: the state housing authority posts all applications on its website, allowing prospective competitors to observe what conditions other applicants are able to meet or not. This allows applicants to make informed business decisions. According to Myrick, this kind of transparency is not common across other states.

Another helpful aspect is that Texas cities, generally speaking, have more land-use freedom than other high-demand markets. The Wharton Index, which measures housing regulatory burdens by metro, shows that Dallas and Houston do not have even half the burden as New York and San Francisco.

But Texas is not immune to NIMBY opposition, particularly for affordable developments. Both Smith and Myrick stress that negative perceptions remain a barrier.

“There’s also challenges for getting land zoned for multifamily,” Smith says. Another issue is that the scoring criteria, for all its efforts to avoid “disparate impact” and place affordable housing in nice areas, limits the land available for development.

“We often joke we’re all gunning for the same ten-acre property,” Myrick says.

Another possible flaw that comes with such competition is the over-emphasis on aesthetic and comfort features within apartments. Myrick says developers often “over-amenitize” projects to score higher on the ranking – although that can also temper community opposition. This means the housing does not necessarily serve the lowest end of the market. In fact, the need for housing targeting the 60 to 80 percent area media income (AMI) level “has grown immensely,” says Smith. Unlike some other states, Texas does not have a separate financing category known as “workforce housing;” only supportive housing (targeted at the homeless) and elderly housing have their own classification. Smith says that of the ten most populated states, Texas—which is second in the country for population growth—is the only state without any dedicated funds to assist in developing affordable housing.

Texas, given its job growth, inbound population figures and looser land-use regulation is an attractive market for LIHTC investors. The Texas Triangle, in particular, has evolved into one of the heartbeats of America; a place where low- and middle-income people migrate to live their version of the American dream.

But investors and developers should be aware that Texas is competitive, with some constraints that limit where LIHTC projects can be built. Still, investors can expect a steady revenue stream from tenants moving in to take advantage of the state’s opportunities.

This article featured additional reporting from Market Urbanism Report content staffer Ethan Finlan.