The Spring Street Brief

Episode 100: Fed Rate Hike Risk and the LIHTC Development Outlook

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Bond markets have shifted from pricing in Fed rate cuts to assigning greater-than-even odds to a rate hike — a reversal with direct consequences for LIHTC developers, syndicators, and lenders. With core inflation at a three-year high of 3.3%, headline CPI at 3.8%, and the two-year Treasury up more than 70 basis points since March, the rate environment for affordable housing finance has materially tightened. This episode breaks down the macro forces behind the shift and what they mean for deals in the pipeline today.

Key Takeaways:

  • The two-year Treasury has risen more than 70 basis points since March, reflecting a bond market repricing from easing to potential tightening.
  • Core PCE inflation is running at 3.3% — a three-year high and well above the Fed's 2% target — eliminating near-term justification for rate cuts.
  • Headline CPI reached 3.8% year-over-year, also a three-year high, driven in part by energy and commodity prices tied to the Iran conflict and lingering tariff impacts.
  • Q1 and Q4 2025 GDP averaged just 1% annualized growth, while the personal saving rate fell to 2.6% — the lowest since June 2022 — signaling household financial stress relevant to rental demand underwriting.
  • Single-family built-for-rent starts fell 26% on a four-quarter basis to 62,000 homes, reflecting broad developer caution that should be mirrored in affordable pipeline assumptions.
  • Mortgage rates are expected to remain above 6% through 2026, keeping pressure on 4% LIHTC bond pricing and debt service coverage in new construction deals.
  • Residential construction added only 900 jobs in May, led by remodeling — a signal of constrained new-build capacity that affects affordable housing timelines and labor cost assumptions.

    • The rate environment has changed faster than many pipeline deals were underwritten to handle. With no credible near-term catalyst for Fed easing and geopolitical uncertainty keeping inflation elevated, LIE-tek developers and their capital partners should be revisiting interest rate stress tests before commitment, not after. A resolution of the Iran conflict remains the most plausible inflation relief valve, but the timeline is unpredictable. Deals that are thin at today's rates deserve a hard look now.

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    The Spring Street BriefBy Spring Street Management Group