Why this matters:   Access to affordable housing is a nationwide challenge, as interest rates remain higher for longer while rental and for-purchase inventory remains near historical lows. According to the triennial New York City Housing and Vacancy Survey, released in February 2024, the rental vacancy rate fell to a multidecade low of 1.4%, down significantly from 4.5% in 2021 (during the peak of the pandemic) and 3.6% in 2017.

What S&P Global Ratings thinks and why:   New York City's limited affordable housing inventory is unlikely to end soon, particularly as its cost of living is 69% higher than the national average and the forecast for per capita personal income (PCPI) shows a decline to 90% of the nation by 2026. Zoning changes and new incentives for developers may aid in creating new inventory--even if the outcomes are not clear in the near term. In the long term, if the city's low housing inventory leads certain individuals to leave, demographics and economic growth could be at risk.

Chart 1

Housing Affordability Is A National Challenge; It's Worse In New York City

Unsurprisingly, buyers and sellers largely remained on the sidelines in 2023, in the face of conventional mortgage rates peaking at more than 7% for 17 weeks combined with (and contributing to) low single-family housing supply of less than four months' inventory. Together these factors pushed up median home prices and curbed the likelihood that homeowners would move and finance new mortgages, in a phenomenon known as the lock-in effect. Affordability has improved in the months following the Federal Reserve's holding its benchmark interest rate steady and mortgage rates' dropping to less than 7% in December 2023 and January 2024, according to Freddie Mac, but for now New York City appears shut out of the marginal national relief (chart 2).

Chart 2

Highest purchase prices and rental rates nationally.   Median and average single-family home sales prices and rental costs in the Northeast and New York City are the highest in the nation (charts 3 and 4). Higher prices for existing homes reflect lack of available land for new development and the cost of doing business, which includes unionized labor and prevailing wage requirements.

Prevailing wage is the pay rate set by law for work on public projects that applies to all laborers, workers, or mechanics employed under a public work contract. The law is applicable to construction projects paid in whole or in part out of public funds (30% or more of the total project costs) and whose costs exceed $5 million. Typically prevailing wage is not applicable to affordable housing construction projects.

Inflationary pressures and higher building materials and supplies costs compound the issues of doing business. While the Producer Price Index shows that some construction costs have declined since 2022, others remain elevated and could hinder construction and preservation of affordable housing units. (See "Record U.S. Infrastructure Spending Is Colliding With Higher Construction Costs And Other Hurdles," published May 14, 2024.)

Chart 3

Chart 4

Steep closing costs.   Higher-than-average real estate transaction costs in New York City contribute to high sale prices as sellers try to recoup substantial sunk costs. Coupled with the lock-in effect, a seller's transaction costs may be a sufficient disincentive to move, exacerbating low inventory for renters and potential buyers and likely contributing to keeping sales prices nearly 2x the average of those in the Midwest (chart 5).

Chart 5

The table below shows the taxes or fees associated with buying or selling a condominium in New York City. For comparison purposes, average closing costs for sellers in Texas are about 3.5% of the purchase price, or about $28,500 for an average-priced home of $300,000 with the inclusion of 6% real estate agent commission fees. In New York City, the average purchase price is $700,000 and some closing costs are set at a percentage of the purchase price. As a result, buyers face higher purchase prices and closing costs, putting homeownership even more out of reach.

While transaction taxes are high, about one-third of the amount that the state collects provides financial resources for the State of New York Mortgage Authority's mortgage insurance fund. The authority can provide credit enhancement for multifamily and single-family mortgages, assisting in the creation and preservation of affordable housing in the state, with the majority of those mortgages in New York City.

Right to shelter.   New York City's "right to shelter," which emerged as part of a consent decree that the city and state signed in the 1980s following a lawsuit, requires the city to provide shelter to those in need, including migrants and asylum seekers. Since April 2022, more than 197,000 migrants and asylum seekers have come through New York City's intake system, and as of May 16, 2024, the city had more than 65,800 people in its care. Asylum seekers may initially find aid in the form of emergency shelters, but as they obtain work permits and apply for permanent housing, this can exacerbate the need for housing units, particularly those that are considered affordable or income restricted. (See "Migrants And Asylum Seekers Pose Budgetary Challenges In New York City, Chicago, And Denver," published Feb. 13, 2024, on RatingsDirect.)

The Potential Credit Impact: Demographic Shifts And High Service Costs

To avoid being rent burdened (which the U.S. Department of Housing and Urban Development defines as having to pay more than 30% of one's income for housing), New York City residents need to earn more as rents and household costs rise. While incomes can be higher in New York City, as employers recognize the cost of living, chart 6 shows national PCPI beginning to outpace that of the New York City metro area in 2022. Should New York City PCPI continue to lag the national average, as the forecast indicates, the demand for additional affordable housing units will likely increase as more residents become rent burdened with an inability to relocate for lack of financial resources or other reasons.

Chart 6

Demographic and economic trends.   Higher salary requirements and housing costs, along with other cost-of-living strains (including local and state income taxes), could lead to demographic pressures for the city in the long term. We have historically raised the social capital risks that we embed in our analysis for New York City, as population trends have remained relatively stable but somewhat declined as recently as the peak of the pandemic, when individuals and families moved out but remained in the region. (See our report published March 21, 2024.) Although the city has shouldered high service costs associated with receiving migrants and asylum seekers, a positive outcome is the potential for population and economic growth as these individuals remain in the city to work or to be close to family members. Conversely, this could stress the city's low housing supply, underpinning the need to bridge the affordable housing gap.

The initial findings from the 2023 New York City housing and vacancy survey show that rental units are more available at higher household income levels (chart 7). The tight market for units at lower-income thresholds could accelerate shifts in the city's demographic and economic strength, particularly as the city's PCPI was around $65,000 in January 2023. Residential churn may not affect sales tax revenue from tourism and social and cultural activities to the same extent as it affects income tax revenue. However, should the city undergo meaningful and permanent population dislocation, this could lead to financial and economic decline and potentially reduce resources available to address income inequality and affordability challenges.

Chart 7

High service costs could crowd out other financial obligations.   New York City has historically been a high-service government, particularly for at-risk populations. For example, asylum-seeker-related spending totaled $1.45 billion (or 1.4% of total general fund expenditures) in fiscal 2023, with the majority going toward emergency shelters through the Department of Homeless Services/Department of Social Services and toward the city's Humanitarian Emergency Response and Relief Centers through NYC Health + Hospitals.

Potential Solutions Will Likely Include Collaboration

We observe that successful execution of key policy initiatives typically reflects collaboration at all levels of government, particularly if a state prioritizes funding or programs that support local governments or entities and their implementation plans. New York State's fiscal 2025 budget and housing plan that passed the legislature includes several incentives for developers of affordable housing:

• Extension of the construction completion time frame of vested projects under the expired 421-a tax abatement to June 2031 from June 2026;
• Addition of an abatement for projects that have 100 units or more and that adhere to certain income restrictions (replacing the expiration of the 421-a abatement);
• Lifting of a density cap in New York City, particularly if a developer adds 20% more units to a building dedicated to tenants who are at 60% of the area median income limit; and
• New incentives to support office-to-residential conversions.

Following the expiration of the 421-a abatement in 2022, housing development in New York City slowed to only 9,900 proposed units in 2023 from more than 45,000 in 2022. In our view, New York City may benefit from these incentives and support the mayor's plan for the creation of 58,000 to 109,000 housing units by 2039. Under the mayor's plan, a portion of the units are designated as affordable (9,200 to 22,000) and accessory dwelling units (ADUs; 27,000 to 40,000), which would allow for multigenerational housing opportunities.

The city and New York City Housing Development Corp. are key partners

Key partners in the delivery of affordable housing units in New York City are New York City Housing Development Corp. (the nation's largest housing finance agency), the New York City Department of Housing Preservation and Community Development, and the New York City Housing Authority (the largest public housing authority in the U.S.). These entities are important players in the city's affordable housing plans and together, through public and private partnerships, have significantly affected the city's affordable housing supply. For example, by the end of 2021 HPD and HDC achieved the goal, ahead of schedule, of creating or preserving 200,000 affordable homes, in accordance with the de Blasio Administration's 2014 Housing New York 10-year plan. These entities will remain integral to the mayor's new plan to preserve and add affordable housing throughout the city.

However, constraints on development--including volume cap limitations and higher borrowing costs from rising interest rates--can dampen the use of traditional bond funding to execute NYCHDC's affordable housing strategy. Chart 8 shows NYCHDC's success in developing affordable housing units as it strives to innovate and to fulfill its mission.

Chart 8

Other strategies

Reduction of development barriers, including rethinking of zoning laws and permitting regulations.   Zoning reform, which is one aspect identified in New York State's housing plan and the mayor's "City of Yes" program, has shown signs of success in some communities that are struggling to meet affordable housing goals. Cambridge, Mass., used this tactic beginning in 2020 and found that the change helped facilitate the development of 727 units across eight construction projects (against a goal of producing 3,175 units in 2018 to 2030). The mayor's program, which is under a review process, would provide a universal affordability preference and allow developers to add 20% more units if said units were dedicated to households earning 60% of the area median income on average. Giving developers more flexibility could facilitate affordable housing throughout every neighborhood in New York City.

More options for owners to use untapped space.   ADUs are another way to increase housing options and supply in an area with little developable land, such as New York City. ADUs are included in the mayor's housing plan as part of the overall strategy, and can also provide owners with supplemental income, enhance property values, and support multigenerational living arrangements.

Alternate financing options.   Complex issues often need various and creative solutions, including alternative partners or funding mechanisms. In some cases, developers of affordable housing have sought private equity partners to help bridge funding while units are under construction. More recently, we've observed developers considering Transportation Infrastructure Finance and Innovation Act (TIFIA) loans to facilitate affordable housing within a larger transit-oriented development, as allowed by expansion of this program under the Fixing America's Surface Transportation (FAST) Act in 2022. The addition of TIFIA loans to the capital stack for affordable housing can lower the cost of funds, as these loans are usually provided below the U.S. Treasury rate. The first loan provided under this program, for $26.8 million, carried an interest rate of 2.5%.