Housing-Bond Sales Hit 10-Year High as Mortgage Rates Stay Lofty

State and local governments borrowed nearly $9 billion for affordable housing so far this year — the most for the period in at least a decade — as buying a home in the US remains expensive.

The Michigan State Housing Development Authority’s recent $425 million bond sale is expected to help more than 2,700 families get lower mortgages, said Chief Financial Officer Jeffrey Sykes. Rhode Island Housing sold about $125 million of non-taxable bonds to aid first-time home buyers. Colorado ski town Telluride borrowed $31.8 million, half of which will be used to buy and build affordable rental housing.

The 57% year-over-year jump in issuance of housing bonds coincides with a period of lower borrowing costs in the muni market. The yield on the 10-year AAA benchmark is down 1.1 percentage point since Nov. 1, the start of a prominent rally. Mortgage rates, meanwhile, continue to be twice as high as they were in 2021, before the Federal Reserve started raising interest rates.

While affordable housing has been a priority for state and local governments for years, one of the main drivers of recent debt issuance in the sector has been their eagerness to retain their residents, said Alice Cheng, vice president and municipal credit analyst at Janney Montgomery Scott.

“Cities and states cannot afford to lose their middle-class population to somewhere that’s more affordable,” she said. “It’s kind of an erosion of the resource base and the tech space. So having good, affordable housing for their community is important.”

Borrowing through the tax-exempt market is cheaper and helps these entities underwrite mortgages for middle- and low-income buyers at a lower rate than the mortgages they would get from a traditional broker like a bank. Proceeds from housing bonds can also be used to acquire and construct affordable housing.