As home sales have decreased, and foreclosures and job losses have increased, the demand for affordable housing has grown tremendously. In spite of this, many affordable housing construction projects are currently on hold, as developers find themselves unable to raise funds from investors to continue construction. Affordable housing projects are usually financed by investors through the builders’ receipt and resale of federal tax credits. But as investors’ profits have shrunk in the current recession, their need for tax credits to cover profit taxes has evaporated. Meanwhile, the newly poor will find low-cost housing harder to find.

first tuesday take: Builders and syndicators who package the construction or rehabilitation of low income housing projects obtain tax credits in a sort of lottery with the state of California, which receives them from the IRS. In turn, the builders and syndicators “sell” these state allocations to investors who have taxes to pay and can use the tax credits (since they are in essence prepaid taxes for the recipient).

With neither profits nor earnings to pay taxes on, and thus no taxes to be offset by tax credits, investors in low-income housing projects in California have literally disappeared. Without tax incentives from the federal government to induce investors to do what the government wants done as a matter of public policy, the low income stuff goes nowhere.

But the juice is the offsetting of income taxes due on income and profits which the recession has taken away, and the corresponding drop in low income housing starts.

Re: “Still another big housing gap”, from Minneapolis Star Tribune