Historic Housing Expansion in Reconciliation Act
Since being signed into law on July 4, I have read the "One Big Beautiful Bill" twice, in an effort to determine its impact on housing - especially affordable housing. What follows is my take on the impact of the bill on affordable housing in the United States. The "One Big Beautiful Bill" Reconciliation Act marks the most significant expansion of affordable housing programs in over twenty years, permanently transforming the Low-Income Housing Tax Credit program and delivering the largest housing investment in its 39-year history. Signed into law by President Trump on July 4, 2025, the legislation will fund an estimated 1.22 million additional affordable rental homes over the next decade through improved tax credit provisions and streamlined financing methods. This expansion comes at a critical time when the nation faces a serious affordable housing shortage, with the changes taking effect on January 1, 2026, and offering unprecedented long-term stability for developers and investors. The legislation narrowly passed along party lines 218-214 in the House and 51-50 in the Senate, with Vice President Vance casting the deciding vote as part of a massive $3.4 trillion reconciliation package that reshapes federal fiscal policy across multiple sectors. While the broader bill includes controversial provisions like significant tax cuts and reductions to safety net programs, the housing provisions have received bipartisan praise from industry stakeholders who see them as vital for addressing America s housing crisis. Legislative details and comprehensive scope The One Big Beautiful Bill Act (H.R. 1, P.L. 119-21) originated from the budget reconciliation process as a lengthy 870-1,000 page package that includes broad tax cuts, targeted spending hikes, and social program adjustments. The legislation is estimated to have a fiscal impact of $3.4 trillion over a decade, with housing provisions accounting for $15.7 billion in tax credit expansions. The bill s path through Congress highlighted strong partisan divides, with Democrats consistently opposing the legislation despite backing many of its housing provisions. The reconciliation process allowed Republicans to bypass the Senate filibuster, making it possible to pass the bill with a simple majority. The legislation includes provisions from 11 House committees and 10 Senate committees, showing its wide-ranging scope across federal policy areas. Beyond housing, the act makes the 2017 Tax Cuts and Jobs Act individual tax rates permanent, eliminates taxes on tips and overtime pay, raises the state and local tax deduction cap to $40,000 for earners under $500,000, and allocates $350 billion for border security. However, these benefits come with significant cuts to Medicaid and SNAP programs, creating a complex policy landscape that impacts housing affordability in conflicting ways. Transformative LIHTC program enhancements The legislation provides the most significant Low-Income Housing Tax Credit expansion since the program started in 1986. The main feature is a permanent 12% increase in 9% LIHTC allocations, raising the per-capita allocation from $3.00 to about $3.36 beginning in 2026. Although this percentage increase appears small, it results in an extra $132 million per year in tax credit authority across the country, with proportional increases for the eight states, D.C., and four territories that get small-state minimum allocations. The second major LIHTC change permanently lowers the private activity bond financing threshold from 50% to 25% of total project costs for 4% credit deals. This change fundamentally shifts the economics of affordable housing development by making projects eligible for non-competitive 4% credits with much less bond financing. According to a Novogradac analysis, this single change will enable 1.14 million more affordable rental homes between 2026 and 2035, forming the majority of the legislation s housing production impact. The Congressional Budget Office estimates these LIHTC changes will cost $15.7 billion over 2026-2035, making them highly cost-effective compared to other federal housing programs. The permanent nature of these provisions sets this expansion apart from previous temporary measures, offering unmatched certainty for the affordable housing sector s long-term planning and investments. The legislation initially included extra provisions for rural and tribal communities, but these were removed in the final version. The House bill would have provided an automatic 30% basis boost for properties in rural areas and tribal lands, but these enhancements did not make it through the reconciliation process, marking a significant narrowing of the original scope. Broader affordable housing provisions and opportunity zones Beyond LIHTC, the legislation includes several other housing-related provisions that expand development incentives and homeownership opportunities. The act makes the Opportunity Zones program permanent with enhanced incentives, allowing investors to defer taxation of capital gains from qualified opportunity zone investments until December 31, 2033, and providing a 10% basis increase for investments held five or more years. The legislation requires that 33% of newly designated opportunity zones be in rural areas, with automatic qualification for rural and tribal regions. This geographic focus addresses previous criticisms that opportunity zones mainly benefited already-developing urban areas while overlooking rural communities that could gain the most from investment incentives. The New Markets Tax Credit program has received permanent reauthorization with $5 billion allocated annually, ensuring stability for community development financial institutions and community development entities that fund affordable housing and commercial projects in low-income areas. This permanent setup removes the uncertainty caused by repeated short-term extensions. For homeownership, the legislation reestablishes the tax deduction for mortgage insurance premiums and makes permanent the 20% deduction for qualified business income, which specifically benefits real estate professionals. The act also raises the child tax credit to $2,500 per qualifying child through 2028 and offers various other tax incentives that could indirectly boost homeownership capacity. Market dynamics and development impacts The legislation s housing provisions will fundamentally change affordable housing development patterns and market dynamics. Lowering private activity bond requirements from 50% to 25% for 4% LIHTC deals will shift significant development activity from the competitive 9% credit market to the non-competitive 4% market. This change provides developers with greater certainty and faster project timelines, as 4% credits don t need the lengthy competitive allocation process that characterizes 9% credits. State housing finance agencies will need to modify their allocation strategies to handle increased demand while overseeing their private activity bond capacity. States with oversubscribed multifamily bond programs will benefit most from the 25% threshold reduction, as more projects will become feasible with lower bond financing requirements. The ongoing 12% increase in 9% LIHTC allocations will strengthen states ability to fund competitive projects, potentially lowering the oversubscription ratios that make 9% credits highly competitive. However, the effectiveness of these changes depends largely on the availability of gap financing sources, since LIHTC generally covers only 60-70% of development costs. This could become a critical issue since the Administration s 2026 budget proposal calls for the elimination of the HOME and CDBG programs. Construction capacity and workforce availability pose significant challenges to implementation. The U.S. construction industry faces major labor shortages, and the possibility of adding over one million new housing units could strain existing resources. Material costs might also increase due to new tariffs announced by the administration, potentially reducing some of the financial advantages of the increased tax credit provisions. Stakeholder reactions reveal sharp divisions The housing provisions have received enthusiastic support from industry groups despite opposition to the broader legislation. The National Association of Home Builders described the act as "the first time in a long time" that housing has been prioritized, while the National Association of Realtors commended the achievement of their "top 5 priorities," including permanent lower tax rates and improved business income deductions. The Mortgage Bankers Association emphasized that the legislation preserves "pro-housing and pro-economic growth tax provisions," especially highlighting the permanent mortgage interest deduction and the reestablished mortgage insurance premium deduction. These industry groups see the legislation as offering crucial long-term certainty for housing investment and development. However, housing advocacy organizations offer a more nuanced view. The National Low Income Housing Coalition supports expanding the LIHTC but strongly opposes the broader legislation s cuts to Medicaid and SNAP programs. Executive Director Kim Johnson stated that "while LIHTC is an important program, LIHTC units are rarely affordable enough for households with the lowest incomes," who will be most affected by safety net reductions. The National Housing Conference praised the legislation, with President David Dworkin calling the housing provisions "the most consequential and positive housing legislation in decades." This highlights the industry s focus on production capacity rather than broader affordability issues. Implementation timeline and administrative challenges The legislation s housing provisions take effect on January 1, 2026, with state housing agencies already preparing for implementation. States will receive their enhanced LIHTC allocations starting with the 2026 allocation year, requiring updates to Qualified Allocation Plans and application processes to handle the increased volume. The Treasury Department and IRS need to develop regulatory guidance for the new private activity bond threshold calculations and basis boost provisions. State housing finance agencies are updating their technology systems and training staff for the expected increase in application volume, with some smaller states worrying about their ability to handle the expanded program scale. The Congressional Budget Office estimates that the housing provisions will cut the primary deficit by $85 billion through economic growth effects, indicating that increased housing production will generate enough economic activity to partly offset the legislation s fiscal costs. However, this estimate relies on successful implementation and full use of the expanded credit authority. Rural and tribal communities face specific implementation challenges because these areas often lack the developer capacity and technical expertise needed to fully utilize LIHTC programs. The legislation provides for enhanced technical assistance, but successful implementation will require ongoing efforts to build local capacity and expertise. Comparison to previous housing policy initiatives The One Big Beautiful Bill Act represents the largest federal housing investment since the Housing and Economic Recovery Act of 2008, but it has fundamentally different characteristics. While HERA provided temporary expansions in response to the financial crisis, the current legislation implements permanent program improvements that offer long-term stability. The 2008 legislation included a temporary 10% increase in LIHTC allocations and established the 9% minimum credit rate, but these provisions were meant as crisis response measures. The permanent nature of the current expansion sets it apart from earlier temporary initiatives and offers unmatched certainty for industry planning. Compared to Obama-era housing initiatives, the current legislation adopts a supply-side approach that emphasizes tax incentives rather than direct spending programs. The Obama administration focused on foreclosure prevention, GSE reform, and crisis response, while the current strategy prioritizes increasing production capacity through enhanced tax credits and development incentives. The 2018 Consolidated Appropriations Act increased LIHTC allocations by 12.5% for 2018-2021, but this temporary boost expired and required yearly congressional approval. The current legislation s permanent structure removes this uncertainty and allows the industry to plan for the long term. Conclusion and long-term implications The One Big Beautiful Bill Act s housing provisions mark a historic expansion of federal affordable housing programs, with the potential to significantly increase housing production over the next decade. The legislation s permanent improvements to the LIHTC program offer unprecedented stability and certainty for the affordable housing industry, while the enhanced financing mechanisms are expected to streamline development processes and shorten project timelines. However, the overall impact of the legislation on housing affordability remains complex and potentially contradictory. While the supply-side provisions are expected to increase the production of affordable housing, the simultaneous cuts to Medicaid and SNAP programs could lower housing purchasing power for the lowest-income households. The Congressional Budget Office estimates that the lowest-income households will lose an average of $1,600 per year, while higher-income households will gain $12,000 annually, indicating that the benefits may mainly go to higher-income groups. The success of these provisions ultimately depends on effective implementation, sufficient construction capacity, and the availability of additional financing sources. The legislation sets the framework for significant increases in housing production, but turning this potential into actual affordable housing units will require coordinated efforts from federal agencies, state housing finance agencies, and private sector developers. For housing policy analysts and practitioners, the legislation presents both significant opportunities and notable challenges. The permanence of key provisions offers stability for long-term planning, while the scale of potential production increases demands substantial capacity building and system adaptation. The coming years will reveal whether this historic expansion leads to meaningful progress on America s affordable housing crisis.
