FMRs, QCTs, DDAs, and Income Limits: Keeping Up with HUD’s Changing Numbers
Numbers – like speed limits, tax brackets, miles per gallon and the rest – limit and define our actions in dozens, even hundreds of ways every day, drawing boundaries around so many of the things we do. The numbers issued by the Department of Housing and Urban Development (HUD) set boundaries and standards as well, defining the way builders, developers and managers interact with the intricacies of government housing programs.

 HUD’s most recently-released numbers are those in last month’s set of income limits for 2005. Income limits are one of a number of standards used to establish eligibility criteria and the amount of subsidies for government housing programs.  Income limits, and other standards such as Fair Market Rents (FMRs), Qualified Census Tracts (QCTs) and Difficult Development Areas (DDAs), are generated by the Office of Economic Affairs within HUD, although they are approved by policy makers elsewhere in HUD—including the Secretary—before they are published.  These four sets of standards are summarized briefly in Table 1.  

Currently, these standards are in a transition period, with the potential for drastic changes in at least some parts of the county. Not everyone may be aware of this – in part, perhaps, because NAHB has worked hard to minimize the negative impacts. So far, our efforts have meant that the industry has been able to avoid the most significant disruptions.  The transition period is not yet over, however, and some challenges still lie ahead.

The Situation in Brief

The potential changes in housing program standards are triggered largely by HUD adjusting to newly available data, including:

• results from the 2000 Census,
• and new definitions of metropolitan areas published by the U.S. Office of Management and Budget (OMB).

Each decade’s new Census traditionally causes changes in statistical series (the charts and tables that allow us to track movement and trends). When the underlying data are updated only once every ten years, large swings in both directions are inevitable. The first housing program standards to be affected by data from the 2000 Census were the 2003 income limits.

OMB’s definitions of metropolitan areas also play a significant role in setting program standards. HUD generally publishes lists of standards for each of these metropolitan areas, and for individual counties that are not in a metro area. [To the extent that there is an exception, it would be the QCTs, which are lists of particular census tracts¹  in metro areas and nonmetro counties.] 

In June, 2003, OMB issued a revised list of U.S. metropolitan areas. In addition to incorporating commuting data from the 2000 Census, the revised list employed a new set of definitions, as well as a new criterion for grouping counties together. The threat of disruption to housing programs comes largely from changes that cause the measures of housing costs and incomes to fall. There are generally three ways that can happen:

1. A low-income county can become detached from a high-income metro
2. A high-income county can be added to a low-income metro 
3. A county can be moved from a high-income metro into a low-income metro

In New England, the old system of metro areas was based on towns rather than counties. OMB’s new system, on the other hand, is based strictly on counties—so, in the process of transitioning to this new system, income and housing cost measures in New England can fall in only part of a county.

The processes used to establish program standards tend to be complicated, and the maze of even one set of calculations involving Census data and metropolitan boundaries can be bewildering. Nevertheless, from a policy perspective, a comprehensive strategy to deal with all four sets of standards, more or less at once, is needed.

This is largely because of the way they are interrelated. The formula that determines DDAs, for instance, is based on an area’s FMR divided by its income limit. Moreover, FMRs are developed in part through HUD surveys designed for specific geographic areas, and internal quality control prevents HUD from applying the results to anything except those precisely defined areas. Regardless of what the various statutes involved say (another complicating factor that is subject to different interpretations), that alone makes it difficult, as a practical matter, to base FMRs and income limits on conflicting geography. So a stakeholder who cares about income limits (say, a tax credit developer with rents tied to those limits) should also be concerned about how HUD decides to apply metro area definitions to FMRs. 

The Victories So Far

NAHB has worked for many years to improve the administration of housing programs.  That effort includes trying to improve the way program standards are set and applied.  Occasionally this involves legislation, but quite often the key issues are regulatory.  NAHB remains in frequent in contact with staff at HUD, at various levels, communicating industry concerns and suggesting changes designed to make housing programs work more effectively in all parts of the country.

To date, we can report the following success stories:

• In February of 2003, HUD froze income limits at their old levels in cases where the new Census data would otherwise have caused them to decline.

This represented a change in HUD policy for dealing with 10-year Census data, and a major victory for multifamily housing. If income limits decline, so do rents, and so does the pool of eligible tenants for units in projects that operate under government housing programs. Either effect by itself can threaten a project’s economic viability.

• In October 2004, HUD reverted to the old metro area definitions on its list of final 2005 FMRs.

When it published the proposed FMRs for 2005, HUD adopted the new definitions without discretion and introduced a number of methodological changes. Large shifts occurred as a result, and the proposed list showed FMRs falling in more than 750 places.²  NAHB questioned or opposed many aspects of the proposed FMRs.  The final list did not adequately address every one of NAHB’s concerns, but reverting back to the old metros eliminated the largest changes, in both directions, that appeared on the earlier list. Large reductions in FMRs obviously can cause problems for housing programs, but so can large increases—primarily because they drive up the cost of a Section 8 voucher to local housing authorities, who currently face serious funding constraints.

• In early November 2004, HUD changed the effective date for QCTs and DDAs, basing it on the time tax credits are applied for, rather than when they are allocated.

This change has perhaps been under-publicized so far, but it constitutes a major victory for the multifamily industry. Previously, a developer faced the prospect of losing the 30% tax credit boost between the time credits are applied for and the time they are allocated. When that happens, the developer may wind up spending a lot of wasted time and money on items like a market study, financial feasibility analysis, preliminary drawings, an option on land, and securing appropriate zoning and approvals.

A notice published by HUD in the Federal Register  removed this key uncertainty, showing a particularly strong understanding by a federal agency of the way housing programs work in practice.

• Later in November, HUD published a new list of DDAs, still based on the old metropolitan definitions.

Given the change in effective dates noted above, this might not constitute an obvious victory, were it not consistent with a policy of preventing drastic swings in the interrelated FMRs and income limits caused by adopting OMB’s new metro area definitions without discretion. In the absence of a change in metros, there was no new information relevant to the QCTs—and therefore no new list of QCTs. QCTs in 2005 are the same as they were in 2004.

In February 2005, HUD published a new list of income limits, also based on the old metropolitan definitions.

After HUD’s previous decisions on FMRs and DDAs, there was little surprise that it also stuck with the older metropolitan definitions for the 2005 income limits. That policy   prevented the large changes in income limits that adopting OMB’s new classification system would have caused.

For example, the new system moved Bergen and Passaic counties in New Jersey from their own, separate metro area into the New York metro. It also added Washington County in Missouri to the St. Louis metro. Both examples involve large income discrepancies, and together they show how the discrepancies can work in both directions (Table 2).

The Challenges Ahead

The process of adjusting housing program standards to the 2000 Census data is now largely complete, and the worst outcome—income limits that actually decline in some places—has been avoided. HUD’s ultimate decision not to use OMB’s new metro definitions for any of the key 2005 standards also avoided adverse outcomes, but raises questions about what will happen when it becomes time to publish standards for 2006 and 2007.

As long as HUD clings to the older metro definitions, the housing industry will avoid  reductions in income limits like the ones suggested in Table 2 for Bergen and Passaic Counties. But it also will forego increases in places like Washington County, MO. 

And the industry will avoid turnover in the lists of QCTs and DDAs. Some turnover  could be good, if it shifts the tax credit boost into areas of new opportunity from ones where the development potential has been exhausted. In the past, that potential advantage has been outweighed by the prospect of losing QCT or DDA status on a project between the application and allocation dates, but HUD’s November change in policy largely removed that concern. 

NAHB has taken the position that it is critically important to avoid reductions in income limits and large reductions in FMRs caused by nothing other than a change in geographic definitions, and has accepted HUD’s continued use of the older metros as a way to avoid those reductions. NAHB has not advised HUD either to adopt or not adopt OMB’s new metro definitions in any future year, but believes that pressure to switch to the new metros will continue to mount. 

As a result, NAHB is advising HUD that—if and when it does switch over to the new metro definitions—it should carve out exceptions for cases where strict conformance to those definitions would cause income limits or FMRs to fall. For those cases, NAHB is recommending a specific “hold harmless” policy that would freeze limits and FMRs in particular counties (or in New England, parts of counties) at their previous levels. HUD should then maintain separate program standards for those areas until inflation brings them in line with standards computed in the normal way.

In places where the discrepancy is large, it may take quite a while for inflation to bring the standards into line. As project operating costs are unlikely to remain static for very long, this means that a freeze by itself may be insufficient, and it will probably be necessary at some point to pursue operating cost adjustments. So far, NAHB has mentioned this possibility to HUD only briefly, while focusing first on policies that hold tenants, property owners, and developers harmless by not allowing key housing program standards to decline.

As it develops a strategy to deal with these issues, NAHB staff is always interested in the opinions of multifamily members who use government housing programs.   If you have comments or questions about this article, please either e-mail them to Paul Emrath, or call at 800-368-5242 x8449.
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¹   County subdivisions designed by the Census Bureau to capture roughly 4,000 people who are relatively homogenous in terms of economic and housing characteristics.

² Many of the extreme cases involved slices of New England counties. In the part of Bristol County Massachusetts that was moved out of Boston and into the Providence metro area, for example, the two-bedroom FMR declined from $1,419 to $671. The largest change in the other direction was San Benito County California, which was added to the San Jose metro and consequently saw its FMR jump from $864 to  $1,759 on the proposed list.

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