Housing Authority Bonds

Housing authority bonds (housing bonds) are municipal securities issued by state or local agencies to finance the construction, rehabilitation, or acquisition of affordable rental and owner-occupied housing. Investors receive interest that is generally exempt from federal income tax and, in many cases, exempt from state and local income taxes.

Key points

• Issued by state or local housing authorities to fund affordable rental housing, multifamily and senior housing projects, and sometimes low-cost mortgages for eligible homebuyers.
• Typically structured as revenue bonds (a form of private activity bond) and repaid from project revenues—often pledged mortgage repayments—rather than from general tax revenues.
• Interest is normally tax-exempt at the federal level and sometimes at the state and local level, making these bonds attractive to investors in higher tax brackets.
• Bonds can have fixed rates or be issued as variable-rate demand obligations (VRDOs). They generally offer lower interest rates in exchange for tax advantages.

How they work

Municipal governments issue two broad types of bonds:
* General obligation (GO) bonds: backed by the issuer’s full faith and credit and often supported by taxing power.
* Revenue bonds: repaid from revenues generated by the financed project.

Housing bonds are typically revenue bonds and may be issued as private activity bonds (PABs) on behalf of qualified nonprofit or for‑profit developers. Proceeds are used to finance low‑income multifamily housing, senior housing, rehabilitation projects, or to provide low-cost mortgage financing to first-time homebuyers who meet income and purchase-price limits.

Mortgage payments from borrowers are collected by a trustee and invested short-term until interest and principal payments are due to bondholders. Thus, bond payments are primarily backed by the timely repayment of the underlying mortgages and investment earnings.

Tax treatment and investor considerations

• Interest from housing authority bonds is usually exempt from federal income tax and may be exempt from state and local taxes, increasing their after-tax yield for investors in higher tax brackets.
• Investors subject to the alternative minimum tax (AMT) may face different tax treatment for certain bonds.
• Because tax exemption reduces the stated interest rate, buyers should compare tax-equivalent yields against taxable alternatives.
• Housing bonds provide low-cost capital to governments and developers while offering tax-advantaged income to investors.

Other financing tools and public approval

Federal low-income housing tax credits are another common source of capital for affordable housing projects and are often used alongside or instead of housing bonds. Because issuing government debt can entail public financial commitments, some bond sales require voter approval; for example, California voters approved a measure in 2018 authorizing $4 billion in housing bonds to fund programs for low-income residents, veterans, and farm workers.

Conclusion

Housing authority bonds are a specialized type of municipal revenue bond used to finance affordable housing initiatives. They offer tax-exempt interest and relatively low borrowing costs for housing projects, while repayment depends largely on the cash flow from the financed mortgages or project revenues. Investors should weigh the tax benefits, interest-rate structure, and any AMT exposure when evaluating these bonds.