What Are Housing Authority Bonds?
Housing authority bonds, often simply referred to as housing bonds, are issued by state or local government agencies to support the construction or rehabilitation of affordable rental housing. These bonds can also be used to aid low-income individuals in purchasing homes through specific programs. The interest income earned by investors on these bonds is generally exempt from federal taxes and might also be exempt from state and local taxes.
Housing authority bonds have traditionally been considered low-risk investments, similar to other municipal bonds. This is because they are often backed by the federal government, which aims to encourage the development of housing for low-income populations.
Key Takeaways
- Housing authority bonds are issued by state or local governments to finance affordable rental housing projects.
- These bonds are seen as safe investments due to their government backing.
- Moderate to high-income investors benefit from the tax advantages offered by housing authority bonds.
Understanding Housing Authority Bonds
Municipal authorities may issue bonds in two forms: general obligation bonds and revenue bonds. The interest and principal payments of a general obligation bond are sourced from the state or local government’s financial reserves and backed by their credit. In contrast, revenue bonds are supported by the projected income generated from the project for which the bond was issued. Housing bonds are a type of revenue bond specifically designated to fund affordable housing projects.
State and local governments issue housing bonds to support affordable housing developments and pay interest in addition to repaying the bond principal. As private activity bonds (PABs), these housing bonds can be issued for both nonprofit and for-profit developers to finance low-income multifamily and senior housing projects.
Proceeds from housing bonds may also be allocated towards providing low-cost mortgage financing to first-time homebuyers who earn less than the area’s median income. Furthermore, the home purchased under this scheme must be priced below 90% of the area’s average purchase price.
Special Considerations
Housing bonds typically offer low-interest rates and can be issued either as fixed or variable rate demand obligations (VRDO). Bondholder payments—both principal and interest—are made from pledged mortgage repayments and investment proceeds. Mortgage repayments are collected by the bond’s trustee, who invests these funds until it’s time to pay bondholders their due interest.
These bonds provide benefits both to the state and private investors: the government obtains a substantial amount of low-cost financing while investors, particularly those in higher tax brackets, enjoy significant tax exemptions that compensate for the lower interest rates.
For investors, the interest on housing bonds is exempt from federal and sometimes state income tax. This makes the tax exemption more valuable for those in higher tax brackets. Nonetheless, investors subjected to alternative minimum tax (AMT) may still face some tax obligations.
Additionally, federal low-income housing tax credits can also augment or substitute housing bonds to finance affordable housing projects. These tax credits reduce federal income tax owed by qualifying homebuyers.
Since housing authority bonds represent government debt, their issuance might require local voter approval. As a case in point, California voters approved a ballot measure in 2018 to issue $4 billion in housing authority bonds to fund low-income housing programs for residents, veterans, and farm workers.
Housing authority bonds represent an essential financial tool in the broader strategy to ameliorate housing affordability challenges. They offer mutually beneficial prospects for both public authorities seeking to expand affordable housing stock and for investors looking to gain tax-advantaged returns on their investments.
Related Terms: municipal bonds, general obligation bonds, revenue bonds, private activity bonds, fixed-rate bonds, variable rate demand obligations.
References
- National Council of State Housing Agencies. “Tax-Exempt Housing Bonds FAQs”.
- Charles Schwab. “Understanding General Obligation Municipal Bonds”.
- EDUCBA. “Revenue Bonds”.
- National Council of State Housing Agencies. “Housing Bonds”.
- Ballotpedia. “California Proposition 1, Housing Programs and Veterans’ Loans Bond (2018)”.
