By Gayl Mileszko
Market Commentary
No Place Like Home
With housing prices at all-time highs and mortgage rates at 6.98% it is no wonder that there is widespread talk of the need for affordable housing. From coast to coast, on Capitol Hill, in research centers and housing journals there is a hue and cry for lower priced single-family homes, multi-family apartments, and assisted living communities for the disabled and elderly. There are so many young couples looking for a budget-friendly starter home, lower income families seeking safe rentals near schools and public transportation, and seniors who are simply unable to pay market rates for help with activities of daily living. Our readers include hundreds working in organizations devoted to meeting these needs, but we all know that the red tape and patchwork of financing involved try the patience of even the most committed sponsors, developers, and builders.
Empty Buildings Appear Prime for Conversion to Affordable Housing
Given the high construction, property, and insurance costs, it is not easy to make the numbers work. Often a combination of federal, state, local and private investment is required. And it can take many years to secure the sites, funding, zoning, permits, and prospective residents. At any point in the process, sponsors may encounter opposition from those who say “not in my backyard.” There are plenty of white elephant buildings, however, where unanimous consent for re-use exists. Many appear ripe for conversion to affordable housing for working families and frail seniors: empty schools, downtown office buildings, hotels, and malls, for example. But some buildings are simply not suitable and in some cases the conversion cost would be higher than new construction.
Successes and Challenges
Combinations of historic tax credits, bond financing, low-income housing tax credits, vouchers, and state housing agency mortgages are often used in the development of affordable housing. Projects typically include a mix of market-rate units with a certain set-aside for those with below median incomes. Rents from on-site retail shops and medical offices can provide the additional revenue needed to pay debt service. Among the successful efforts is one that took two years and $64 million to convert Lorton Reformatory in Virginia into the Liberty Crest Apartments. Planning is underway to transform Lafayette Square Mall in Indianapolis into a mixed-use development, with the old Sears Building dedicated to affordable housing, In New London, Connecticut, the old Saint Mary of the Sea Church elementary school was renovated to create 20 affordable apartments. Unfortunately, not all efforts are successful. Some have involved hotel conversions and we are also now seeing an increasing number of impairments and defaults in a number of California workforce housing projects financed with municipal bonds.
The Big Picture
Global attention focused on the aftermath of May 16 Moody’s downgrade of the U.S. sovereign credit rating. This was the third major credit rating agency to highlight our huge debt load, rising interest costs, the tax cut extensions in the works, our divided government, and numerous event risks. Markets were not surprised by anything more than the timing and, after an initial jolt, went back to more timely developments. Foreign and domestic investors also followed all the late night early morning exertions in the committee meeting rooms, corridors and floor if the U.S. House of Representatives last week. The Fiscal Year 2025 budget reconciliation legislation, dubbed by the President as “One Big Beautiful Bill”, finally squeaked through with a 215-214 vote just ahead of the Memorial Day recess. Its reach was far and wide, with tax and spending cuts, Medicaid, food stamp, and clean energy program changes, air traffic system upgrades, new border barriers and immigration detention, and a Golden Dome missile defense initiative. Within the thousand-page bill were four low-income housing tax credit and private activity bond provisions that may help to create more than 525,000 affordable rental homes over the course of the next 10 years. The Senate will amend numerous terms; a House-Senate conference committee will iron out the differences. Leaders aim to send the compromise legislation to the President by July 4.
Investing: The Washington Factor
The U.S. Capitol may be quiet this week but the White House is not. The President is again capturing headlines and stirring markets with his actions on foreign students, public radio, and pardons as well as comments on Fannie Mae and Freddie Mac, Iran nuclear talks, Russia sanctions. Markets were rattled by the prospect of 50 percent tariffs to be imposed on European Union goods and then stocks shot up on news of the delay. Some traders see a pattern in the President’s negotiating style and now execute what they call TACO trades (“Trump Always Chickens Out”), betting that threats of stiff tariffs will soon be followed by pause announcements, producing a relief rally.
Declining Threat to Tax-Exemption, Uncertain Future for Religious Charter Schools
A huge sigh of relief came from all corners of the municipal bond market last week when H.R. 1 passed without a provision for the elimination of tax-exemption. Lobbying efforts on the part of our industry associations as well as our readers have proved successful so far. Although the major threat appears to have dissipated, our work to preserve this critical financing tool must continue next week when the Senate begins its work. School choice advocates applauded the bill’s inclusion of $5 billion in annual K-12 scholarship tax credits for educational expenses. The charter school community, divided on the issue of religious charter schools and anxious for a clarifying ruling, was surprised by the sudden release of the bare-bones, unsigned Supreme Court per curiam which stated that the justices were equally divided. The 4-4 tie left the Oklahoma high court’s ruling intact, effectively rejecting charter school status for St. Isidore of Seville Catholic Virtual School. The colorless opinion left constitutional questions open, likely to be addressed again in another case to be heard by all nine members.
Big News Weeks All Year Long
Investors have not had a break from breaking news all year long. We should not expect any type of summer break this year as all interests, sides, and parties are gearing up for the mid-term elections in November 2026. So, we adjust to this constant state of trying to digest major policy changes, reversals, legal challenges, overseas reactions, media narratives, stunning developments in AI and cryptocurrencies. In the runup to Memorial Day as families gathered to celebrate graduations and the start to the summer season while honoring those who died in service to our country, big news continued to grab attention of Main Street and Wall Street. The education community came into the spotlight. The U.S. Department of Homeland Security revoked Harvard University’s certification to admit foreign students citing concerns over campus safety, antisemitism, and alleged ties to the Chinese Communist Party. Existing foreign students were directed to transfer or lose their legal status. A U.S. District Court judge in Boston ordered a halt to the Trump Administration’s efforts to downsize and eventually dismantle the Department of Education, ordering the reinstatement of terminated employees. And a U.S. District Court judge in California issued a restraining order blocking the Trump Administration from terminating the immigration status of those foreign students who had their visas revoked earlier this year.
Fiscal Policy Upheaval, Monetary Policy on Pause
Financial markets have been remarkably resilient throughout these first five months of 2025 in spite of the dramatic changes being proposed and implemented by the new Administration. Analysts have been monitoring first quarter corporate earnings releases and forward guidance from CEOs. Amazon reports that it is not seeing reductions in demand or major price increases. Home Depot reveals that it is shifting its sourcing such that no country will represent more than 10% of its purchases. Federal Reserve officials continue to monitor impacts of fiscal policy and tariffs on inflation and the economy in general but, for now, have paused on making any monetary policy changes. There are indications that the economy is slowing: the latest Fed survey of its 12 districts found that 5 reported slow growth, 4 indicated contractions, and 3 were flat. At this writing, futures trading reflects the expectation for quarter point cuts in September and December. We have three weeks to wait for the next Federal Open Market Committee meeting with its economic projections and quarterly dot plot release. In the meantime, investors will be listening closely to the 8 Federal Reserve speakers on the circuit this week, along with corporate earnings from Nvidia, and our 10 Treasury auctions — particularly in light of the weak 20-year auction last Wednesday.
Follow Us: We Are Bullish on Munis
HJ Sims investment bankers, underwriters, trading, sales and analytic teams are bullish on municipal bonds. We believe we are past the dramatic concerns over the elimination of tax-exemption and any major changes to private activity bonds financing our essential public use school, senior living, hospital, utility and student housing projects. Fund flows have been positive for four weeks now, and retail buyers are supercharged by the yield environment. Borrowers are thrilled by favorable technical conditions including the $107 billion of principal and $42 billion of interest payments expected in June, July and August. On June 1, $29.6 billion is expected to hit muni bondholder accounts, ready be put back to work in tax-exempts. There is another $140.6 billion sitting in tax-exempt money market funds ready for deployment and we have a steady flow of new issues to peak buyer interest and borrower confidence.
HJ Sims in the Market This Week
This is a holiday-shortened trading week but we nevertheless expect to see $9.5 billion of muni deals come to market. The calendar features our own $132 million non-rated financing for ISF Potomac Senior Living, a new rental community in the beautiful Washington, D.C. suburb of Potomac, Maryland with 94 new assisted living and memory care homes for seniors. Last week, a $50.9 million non-rated deal for Immanuel Living at Buffalo came through the city of Kalispell, Montana featuring a 2060 final maturity that priced at par to yield 6.00%. And Masonic Villages in Pennsylvania brought a $44.3 million A rated transaction through the Lancaster County Hospital Authority structured with a 10-year final maturity that priced with a 5.00% coupon to yield 4.09%. Please reach out to your HJ Sims representative for more information our large pipeline of senior living and charter school financings as well as our secondary market offerings.