Lower Median Incomes May Lead to Rent Drops in Some California Counties

As the economy continues to struggle, you wouldn’t think it surprising that California median income figures have dropped. Actually, only eight of the state’s 58 counties had lower median incomes in the 2010 figures published June 17 by the
Department of Housing and Community Development. The largest drops included Santa Clara County, home to San Jose and much of Silicon Valley, which experienced a 1.9% drop. Monterey County had a 1.8% drop, and San Joaquin County, home to Stockton and other cities hit hard by the housing meltdown, had a 0.8% drop.

And yet this is unusual, because median income figures published by the state and federal governments have not dropped in past years, even during recessions. Under HUD’s “hold harmless” policy, published median incomes were not allowed to drop, and as a result rent limits at affordable housing complexes were also prevented from declining.

HUD abandoned the hold harmless policy this year, allowing published median incomes to decline up to five percent per year. HUD was comfortable doing this in part because the Housing and Economic Recovery Act of 2008 (HERA) adopted a statutory hold harmless policy for existing affordable housing projects which receive Low Income Housing Tax Credits or bond financing. Those existing projects will not see any decreases in allowable rents under the regulatory agreements that accompany those forms of financing.

But that new federal policy does not apply to rent limits set under California redevelopment law or most other municipal programs, which set rent formulas based on current HCD or HUD median incomes. This means that locally imposed rent limits will be dropping in places like San Jose and Stockton, possibly jeopardizing the economics of existing affordable housing projects in those cities that counted on rents never declining. It may also reduce the financing available to new tax credit and bond-financed projects, which may now be underwritten with the assumption that rents will go down before the projects are complete and the federal hold harmless protection begins to apply.

Developers will have a better idea in coming months and years whether drops in median incomes actually threaten the viability of their projects. If they do, there will doubtless be calls for legislative reform, or changes to the way that HCD determines median incomes.

KMTG has prepared printouts of the new California 2010 median income figures, affordable rents and affordable housing costs for a number of California counties. Click here to download a free copy for one or more counties.

By Jon Goetz

KMTG Redevelopment and Housing