Tax Laws, Loan Rates Buoy Building Surge

The 51.8% January surge in apartment construction reported last week by the Commerce Department stems from 1981 tax law revisions as well as stability of interest rates.

Housing starts in the multifamily sector set a hot pace, getting the new year off to a surprising 14.9% increase in all housing starts, the best since May, 1983, even as start-ups for single-family homes dropped by 4%.

Large apartment construction projects benefit most from tax breaks created four years ago.

In 1980, for instance, private multifamily rental housing construction produced only 95,000 units nationwide; by 1984, the 15-year accelerated cost recovery system established in 1981 resulted in an increase of almost four times that number of apartment units.

The current stability of construction financing, reflecting recent drops in the prime lending rate and 12%-13% range for conventional home loans--and less for adjusted and variable loans--are pluses for consumer confidence and activity in the marketplace.

If home prices start to edge upward, interest rates are not expected to increase, if at all, until later in the year. But as the housing industry’s cyclical history has shown, such predictions usually are preceded by continued construction and more home purchases as both builders and consumers try to avoid escalation of rates and prices.

Historically, apartment occupancy has been very high when home prices are high. When the rental gets close to what corresponds to a monthly payment on a house, home buying increases. The recent era of high prices for homes and high interest rates increased apartment construction, aided by the 1981 tax breaks. If Congress doesn’t tinker with those tax incentives, in all likelihood construction of new apartment complexes, particularly in California, should continue at an active pace.

During the same trying times of high costs, those who wanted to move to another house, for various reasons--and just could not afford it--had to accept the old bromide of not moving but staying put and improving.

That sequence of events has resulted in a vast change in the home-remodeling industry. Those who decided to improve and not move have helped bring about new records yearly in the dollars spent in remodeling and renovating the old homestead.

Estimates vary on how much was spent last year, but the National Assn. of the Remodeling Industry expects the 1984 figure to exceed $67 billion on a seasonally adjusted rate; it was $49.3 billion in 1983. That includes a lot of added-on bathrooms, bedrooms, dens, second floors, new floors and ceilings, closets, skylights, carports and expanded garages. Of course, that doesn’t include all the bootlegging that goes on in home alterations.

The present combination of rate stability and existing tax incentives are the best of both worlds for apartment builders/investors, according to the National Leased Housing Assn. of Washington, D.C.

Regardless of what happens to interest rates, however, tax incentives for construction must remain in effect if the nation’s low and moderate income families are to be housed properly. That is the association’s position as it lobbies against changes. It says:

“Little, if any, multifamily rental housing would have been constructed in recent years if the tax code had not allowed investors to reduce or defer taxes on other income as a result of tax losses associated with the ownership of rental real estate. The tax benefits available to investors in rental housing under current law are absolutely indispensable and result in rents far lower than would be necessary to cover the cost of construction, financing and operation of rental housing without such tax incentives.�