America’s housing affordability crisis is an equal-opportunity phenomenon. Nowhere is this more painfully clear than in the nation’s rural communities, which quietly confront a deepening affordability gap. Financing challenges unique to rural areas pursuing affordable housing development exacerbate a growing imbalance.
A new Redfin study notes that home prices in rural communities have increased faster than those in urban and suburban areas since the pandemic. Rural homebuyers now need to earn $75,000 to afford the typical home, more than twice the $36,000 required before the pandemic.
The median home sale price in rural areas is up 61% since the days before the pandemic, compared with 46% in urban areas and 49% in suburban areas. During the same period, the median household income in rural areas increased by only 33%, compared with 37% in suburban areas and 39% in urban areas.
This begs a couple of questions. How can we build more quality, affordable housing in rural areas? And what potential solutions are in place to increase homeownership?
A panel from the National Housing Conference’s Solutions for Affordable Housing met last week to address these questions. One of the main conclusions was that financing affordable housing in rural areas can be uniquely challenging.
In addition to a lack of available capital, there are also labor constraints, and rural economies are often more unstable.
Drawing on discussions from the NHC’s rural affordable housing panel held last week, this analysis outlines major financing hurdles and examines potential ways to broaden homeownership opportunities in rural communities.
Rural areas have different market dynamics and economies than urban areas
When Tyson Foods announced last month that it plans to close a beef plant in Lexington, Neb., the news made headlines across the country for a good reason.
The plant employs about 3,200 people in a town with a population of just over 10,000. If the plant does close down, the entire community’s economy will be decimated overnight.
While most small towns aren’t reliant on one company as much as Lexington is, rural areas are much more likely to be dependent on just one industry or employer than large metropolitan areas. This can make investing in small towns more complex.
“You have to have local market knowledge, and we lean on our developer sponsors and our local government contacts to help inform us,” said Matt Reilein, President and CEO of National Equity Fund (NEF), a non-profit, affordable real estate investment manager.
Identifying labor sources in certain rural areas can also be a struggle, especially amid a national construction labor shortage. There are simply fewer options to choose from in small towns.
“It becomes difficult sometimes to actually identify the individuals, the organizations that are actually going to build the properties,” Reilein said.
For builders looking to develop rural housing, especially affordable units, partnering with an organization that has local connections and insights is critical.
“You have to have organizations that can get to specific geography and bring that expertise with them. That’s why we lean in a ton on what we refer to as capacity building for our borrowers. Folks come to us, they want to build or preserve affordable housing in a rural place, and we almost always have our loan fund hand them to the capacity training and technical assistance staff first for some work to do there, because we want them to succeed,” said David Lipsetz, President & CEO at the Housing Assistance Council.
Financing affordable rural housing is a challenge
Attracting investment for affordable housing in rural areas can be difficult, in part because lenders often look for larger deals. There are also issues with the Community Reinvestment Act (CRA), which is intended to encourage banks to lend across all communities, including low- to moderate-income neighborhoods, but has traditionally placed less emphasis on rural areas.
“In this capital market, the large allocators of dollars are looking to write significant checks. And whether they’re CRA motivated or economically motivated, it’s sort of the same analysis. They want to be as efficient and effective as they possibly can be, and that necessarily means writing larger checks,” Reilein said.
Reilein provided two examples where NEF worked around this reality. One was in Grant County, Washington, where NEF partnered with Catholic Charities to recapitalize three Low-Income Housing Tax Credit (LIHTC) properties. The three properties have a combined total of 95 units, but each is relatively small on its own.
“You couldn’t raise the capital to do one of those deals in an effective, efficient manner. But working with the sponsor, you’re able to aggregate those, and working with the state and FHA, you can get them under the same allocation of the tax credits. So you start to find those efficiencies,” he said.
NEF also partners with NeighborWorks, a network with nearly 250 nonprofit organizations in all 50 states. NeighborWorks is one of the largest developers and owners of affordable housing nationwide, but most of those partners are relatively small organizations. Many of them only do a deal every few years.
NEF works with NeighborWorks to provide transparent and fair lending for these smaller organizations.
“From a LIHTC perspective, the issue is, if you’re a smaller organization, whether you’re an urban, suburban or rural market, and you’re only doing a deal every 2,3, or 5 years, you don’t have the personnel capacity, you don’t have the market Intel, you don’t have the buying power, you don’t have the relationships with investors to get what I would call a fair and transparent transaction,” Reilein said.
Lipsetz said that Community Development Financial Institutions (CDFIs), such as the Housing Assistance Council, are best positioned to finance rural affordable housing projects.
“You need access to capital that knows where it’s going and is familiar with the geography. CDFIs are the only answer I’ve really seen grow to try to address that,” he claimed.
Bill Bynum, CEO of HOPE, similarly referred to CDFIs as “gap-filling organizations in rural communities”.
Leveraging LIHTC to increase homeownership opportunities
HOPE does a lot of work in impoverished towns in the deep south, in states such as Mississippi and Alabama. Bynum pointed to the LIHTC program as a way to increase homeownership in those areas.
In Mississippi, for example, there’s a provision in the LIHTC program that allows renters to purchase the home in the 16th year. HOME works with enterprises such as Wells Fargo to structure a mortgage comparable to the amount tenants have been paying in rent.
“We generate hundreds of mortgages each year, with low to no down payment. We use non-traditional credit to underwrite the loans, and that’s what is necessary for these LIHTC tenants,” Bynum said. “We use their rental record. If they have been paying that rent for 15 years in a strong way, then we take that as a pretty good indication that they can continue to manage that expense going forward.”
“If you replicate that across the deep south, replicate that across the country, I think it’s an incredible model for helping people become homeowners.”
The road ahead for rural affordable housing
Rural housing faces many challenges, and an ongoing crisis impacting the USDA’s 515 program threatens to worsen the affordable housing picture in rural America. The 515 program provides direct, low-interest loans to developers to develop and preserve affordable multifamily rental housing in rural areas.
The program peaked at 550,000 units, but is now likely below 400,000 units. This is partly because no new construction has been carried out under the program since 2012.
There has also been a recent wave of mortgage maturities and payoffs. When government-backed mortgages financed under the 515 program mature or are prepaid, many owners convert their multifamily properties to market-rate rents or sell them to buyers who will do so.
Lipsetz voiced concern about the declining impact of the 515 program and called for expanding the USDA’s Section 502 Direct Home Loan Program, which provides loans to low-income rural borrowers. He also hopes that new federal funding will be proportionally used to encourage housing supply in rural communities.
Reilein, however, was optimistic for the future of rural housing, noting that LIHTC investors he partners with are increasingly focused on rural areas. As he sees it, the current administration places more emphasis on investing in rural America. Investors may be following the administration’s lead.
“They are actively adjusting their priorities based on current public policy priorities, which is very clearly directing more and more attention to rural markets. And they’ve explicitly said they want to figure out how to do this. Now it’s one thing to say that in a conference room. It is another thing to actually execute on it,” he said. “I think that there is a moment here where some of these huge banks and insurance companies are having to focus on rural markets.”
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