A 2023 Reduction in Income Limits is Possible

The Census Bureau has announced that it will not release a one-year American Community Survey (ACS) for 2020. Without this survey, the Department of Housing & Urban Development (HUD) will almost certainly be restricted to the use of the five-year ACS data to determine income limits.

Novogradac, an Accounting and Consulting firm, conducted research that indicates the change from the one-year to the five-year ACS will result in area median income limits (AMI) that average 3.5% lower than they would be under the one-year ACS.

This reduction is a result of the income calculation methodology used by HUD. HUD generally uses the ACS data from three years prior to the income limit year. They then combine this with data from the Consumer Price Index (CPI) to trend ACS data for the appropriate income year. For example, the 2022 income limits will use 2019 ACS data. However, the 2020 ACS data will be used for the 2023 limits.

Since HUD will not have access to 2020 ACS one-year data, the Agency will use the five-year ACS. All data collected during the five-year period will be given the same weight, so the five-year ACS data for 2020 will cover the period from 2016 – 2020. It is likely that the five-year ACS will be less than the one-year ACS.

As part of their study, Novogradac examined the historical variance between the one-year and five-year ACS for all metropolitan statistical areas (MSAs) in the country for ACS years ending in 2017 – 2019 (2019 is the most recent ACS year available).

On average, the one-year ACS was 3.71% higher than the five-year ACS. In 82% of areas, the one-year result was higher than the five-year.

The impact of the five-year average is more striking in larger MSAs. Of the 30 largest MSAs (including all those with a population of more than 2.1 million), none had a one-year ACS that was lower than the five-year ACS.  For these areas, the one-year ACS was on average 4.92% higher than the five-year ACS and was 5.44% higher in 2019.

The eight areas with a population of more than five million had a one-year ACS higher than the five-year ACS in each of the three years included in the sample.

Novogradac is clear in their findings that incomes will not necessarily be 3.5% lower on average than they will be in 2022. It means that limits will grow 3.5% slower than they otherwise would have. For example, if an area was projected to have a 5% increase from 2022 to 2023 based on the one-year ACS, the increase would only be 1.5%. Areas projecting less than a 3.5% increase for 2023 can expect actual reductions in income limits. This will have a substantial impact on rents and properties being underwritten for a 2023 placed-in-service date will have to take this into consideration.

This is an important study and owners and agencies should carefully review potential impacts in planning for 2023.