Novogradac and Company, a nationally recognized accounting firm in the area of affordable housing, has released a study on potential changes in income limits for 2023. Novogradac completed the estimates using five-year American Community Survey (ACS) data.
When the Department of Housing and Urban Development updates the income limits for various housing programs each year, the agency relies on a combination of one-year ACS data. However, the Census Bureau will not be releasing a one-year ACS for 2020, so HUD will most likely rely on the five-year ACS data.
Previous research by Novogradac has indicated that 2023 income limits calculated by HUD using the five-year data will be 3.5% lower than they would be under the one-year data. The estimates for 2023 based on the 2020 five-year ACS show much lower income growth than 2022. However, the Novogradac study shows that income limits will still trend up, even though the rate will be slower than in previous years. In other words, a national decline in income limits is unlikely.
One of the major reasons for the expected increase in income is inflation which is currently running at levels unseen in 40 years. Because HUD uses the historical ACS when determining income limits, it uses a consumer price index (CPI) trend factor to project income limits from the historical ACS year to the income limit year.
Inflation is expected to continue for the rest of 2022 and well into 2023. The most recent Congressional Budget Office (CBO) estimates show that the CPI will continue to rise rapidly in the upcoming year. Without taking into consideration any other factors, inflation alone will lead to about a 2.34% increase in income limits.
When determining very low-income limits (VLI), which are used by LIHTC, tax-exempt bond developments, and many HUD programs, HUD has certain adjustments that impact income limits. One of the adjustments is the cap on how much change there can be for income limits from one year to the next. The increase is capped at the greater of 5%, or two times the change in national median income. In 2022, HUD revised its cap methodology somewhat, resulting in more than 50% of areas having incomes that were capped. This cap will lessen the impact of any decline in income limits for certain areas.
Using CBO estimates of 2023 inflation, Novogradac was able to estimate income for more than 2,600 counties. They cannot estimate income limits for areas that are impacted by adjustments made by HUD for high housing costs or the state non-metro adjustment.
The estimated change in national median income will be approximately 1%, meaning the cap on increases for 2023 will be 5%. However, the average change in income limits will be 3.11%, which is a major decrease from 2022, when the average was 10.5%. Despite this decrease, the 2023 increase is much higher than was anticipated, thanks mainly to inflation.
The good news for LIHTC developers is that less than 6% of all areas are estimated to have a decrease and only 1.4% of areas are estimated to have a decrease of more than 2%. On the other hand, 44% of areas are expected to have increases of more than 4% and 25% of areas will max out at the 5% cap.
Those wishing to examine the Novogradac study in more detail should go to the Novogradac website – www.novoco.com.