March 2026 – Affordable Munis

The recent New York City election has pushed the affordable housing issue back into focus as a full-blown crisis. Federal, state, and local governments are responding, but municipal bonds have been helping address this issue since the 1970s. Whether it is with State HFAs or Affordable Housing bonds, Munis will be a big part of the solution and will provide investors strong principal protection and high tax-exempt income. A sleep well at night investment. That means MainLine West is on it!

After a strong start to the year, it only took two difficult weeks to send Munis back to trailing the fixed income field. The uncertainty tied to the Iran war in a technically weak time of year was enough to create some pressure, but fundamentals are still in place for Munis to recover when things settle down.  Also, in March, the all-time steep yield curve in mid-February has finally been noticed and has flattened by 25 to 30 bps.?

Muni Market Review

The municipal market’s strong start to the year ran into a few bad days in March and now find themselves trailing the fixed income field. Munis underperformed, down -2.32% in March, YTD -.18% versus US Treasuries down -.1.66% for the month, YTD +.01% and US Corporates down -1.73% in March, down -.07% YTD (Bloomberg Composite Indices).  The Iraq war has introduced some uncertainty and March/April is a tough time of year with supply and demand technicals. So it is not a surprise that Munis struggled in March.

Additional March highlights:

  • The Muni yield curve flattened, with yields higher 57 to 30 bps as investors started moving out the curve realizing its value.
  • Taxables flattened a bit with the curve higher 40 to 25 bps.
  • Year-to-date inflows continue to track among the three highest levels for year-to-date, but the last week of March saw some outflows.
  • Supply remains above 2025’s record totals by 6.4% and 19% over a five-year average. The month of March set a record at $48 billion. Some analysts have lowered their expectations for the year given elevated rate levels, but we are still on track for $600 billion, which would be another new issuance record.
  • The Iran war has caused an increase in the Muni fear index, which over the last two weeks has impacted the Muni market, resulting in outflows and underperformance.

The fundamentals remain in place for Munis to get back on track in the next 30 to 90 days to catch the fixed income pack and possibly even take the lead.

MainLine West has liquidated over 90% of Fund V and distributions are being sent out.  There remain two more investments to sell. MainLine is waiting for the muni market to get back on stride and anticipate the final bonds sells will be in the next 60 to 90 days.

Market News & Credit Update:

  • In a recent podcast with Tom Doe, founder of Municipal Market Analytics, he suggested that predictive markets will change Muni finance and credit research. Why? Ratings are an estimate on credit paying ability and prediction markets are an estimate on an event happening. Politics and weather are big markets in predictive betting, which both have an impact on Muni credit quality. The impact of weather focuses on infrastructure and climate change, and politics can range from the probability of a bond referendum being passed, or changes in policies that can impact a bond issue. Predictive markets can become a new tool for credit research providing insight into the probability of these events and possible financial outcomes.
  • Bloomberg Intelligence ran a study showing how tight state bond spreads are now versus the index. High tax states like California, New York, New Jersey are all at their tightest since pre-COVID days. Why? Partly due to the fiscal health of the states, but mainly due to the increase in the SALT exemption from $10,000 to $40,000. If you are not a resident of these states, it does not make sense to buy bonds issued there, as there are too many other states you can pick up income from and not pay for the in-state exempt income benefit.

Affordable Munis

Introduction:

The election of New York City Mayor Zohran Mamdani has thrust the affordable housing crisis back into the national spotlight. Approximately 30% of U.S. households, (between 35 and 40 million) are considered cost-burdened, meaning they spend more than 30% of their income on housing. One-third of those households are severely burdened, dedicating more than 50% of their income to housing costs. Goldman Sachs estimates that 3 to 4 million additional homes are needed to meaningfully address the shortage.

The municipal bond market has been tackling this issue since 1978. To date, an estimated $60 billion in bonds have been issued, providing approximately 3.6 million lower-income families with stable housing. Mayor Mamdani’s election has now helped elevate the crisis to the federal level, prompting calls for national action. It should come as no surprise that the largest municipality in the United States is leading the charge. New York City has long been at the forefront of advocating for its residents and the public good.

Background:

What has caused this crisis?

  • Supply constraints:
    • Decades of underbuilding of entry level for sale housing.
    • Restrictive zoning for single-family homes.
    • High construction and land costs.
  • Demand shifts:
    • Population growth in certain metros, preference for urban living, and investors buying properties has placed additional pressure on supply in certain areas and not others.
  • Income and wealth trends, as wage growth for lower income households has not kept pace with housing costs.
  • A reduction in the federal government’s role in providing funding through housing programs.
  • Higher interest rates and insurance costs have increased the cost of buying and owning a house.

Research & Review:

Solving the affordable housing crisis will require a coordinated effort across federal, state, and local levels of government. There is no single fix and the scale of the problem demands a multi-pronged approach that draws on public resources, private investment, and policy reform. Here is a look at the various strategies currently being pursued. 

How is Mamdani looking to fix the NYC crisis?

  • Plans to triple the city’s production of publicly subsidized, permanently affordable rent stabilized homes.
  • Assist and accelerate the public review of city property to build affordable housing and encourage the use of ADU’s (ancillary dwelling units).
  • Goal is to provide over 200,000 new affordable homes over the next ten years. 

What is the Federal government doing to fix the crisis?

  • Passed the 21st century ROAD to housing Act March 2026
  • Bans large investors (owning +350 homes) from buying single family homes. This potentially decreases demand and therefore prices.
  • Boosts housing supply with the Neighborhood Homes Investment Act that aims to build and rehabilitate 500,000 homes over the next ten years.
  • Provides federal grants to state and local government to remove barriers and accelerate new construction.
  • Freezes rental cost in high-cost areas.

What are states and cities doing to fix the crisis?

  • Rezoning to allow for more housing in high density areas, duplexes/multiplexes in single family areas and ADU’s (ancillary dwelling units)
  • Increasing the use of subsidies and low-cost financing to develop homes and make them more affordable.
  • Public-Private partnership for development.
  • Supporting lower cost construction methods and ways to help lower insurance costs.

Munis and the Affordable Housing Crisis:

Munis have been helping make home ownership more affordable for years. State Housing Finance Authorities (HFAs) have issued bonds to provide financing to qualified first-time buyers, making home ownership more affordable. The affordable housing we are highlighting this month is different than this first-time buyer program. State HFA can also issue affordable housing bonds, but other government localities can too. State HFA bonds are typically paid from the program revenues (mortgage payments, rents) and other pledge revenues. Each bond is part of the credit quality of the whole state agency. Affordable housing bonds repayment depends on the projects’ cashflow which could be rent, mortgage payments or other revenue streams from just that project. This makes the credit process different and requires a review of each affordable housing bond issue.

The Housing sector represents 7% of the Muni market at an estimate of over $300 billion in outstanding high-quality bonds. Affordable housing is a sub-sector of the housing market and is estimated to be $60 billion outstanding.

Housing has been a growing municipal sector and will continue given the need for affordable homes. For example, NYC plans to use $70 billion in affordable housing municipal bonds over the next 10 years. This adds on to the $30 billion the city has already issued for this purpose, bringing it to $100 billion in affordable housing support. This is 15% of what the Federal government is looking to do.

How are these bonds structured and protected?

  • Credit quality depends on the details of the project as there is no taxing power. Demographics, costs, demand (occupancy rates), and subsidy programs all factor into the credit analysis. True underlying credit quality comes from the mortgages that are pledged to bondholders and mostly insured by HUD/FHA, USDA, FNMA/GNMA or the State HFA. This gives most of the bonds high credit ratings at AAA to AA.
  • Bond deals are usually termed out from 4 to 30 years, with 80% to 90% of the bonds due 20 years and longer to match the life of the asset.
  • Provide additional yield of 60 bps on average versus an AAA-rated general obligation bond.
  • Who are the big issuers aside from NYC? You guessed it, the big state issuers: California, Texas, Massachusetts, Illinois, and Florida to name a few.

Conclusions:

  • This is an instance where I could take a shot at the Federal government for doing a whole lot of nothing to help solve the crisis. In truth, MainLine likes the burden being placed on the municipalities. They have the expertise in what is needed and where, as it is “infrastructure “to help provide an essential service to its residents.
  • Municipal bonds are well-suited to play a meaningful role in addressing the housing crisis by offering lower borrowing costs through tax-exempt financing, financial accountability, and demographic expertise. These initiatives also provide cities with opportunities to revitalize aging and underutilized infrastructure.
  • Muni bonds will need to play a significant role in solving the affordable housing crisis. The federal government has committed funding for approximately 500,000 homes, leaving a gap of roughly 3 million additional homes still needed. Mainline estimates that closing that gap would require approximately $1 trillion in new municipal bond issuance, along with a meaningful increase in local taxes and fees. While Munis can shoulder a portion of this burden, solving the crisis will ultimately require greater support from the federal government.
  • How about a federal program that helps municipalities raise money? Dust off the Build American Bond program from the 2008 banking crisis, but with a few changes to help keep DC from changing the rules ten years later. It would provide a subsidy to save the municipalities money, and attract international and local investors
  • Finally, MainLine has always been a big advocate of State HFA bonds and will also be a big supporter of affordable housing bonds. The additional yield, strong principal protection, and an essential service for a state or city, labels it as a true SWAN – a Sleep Well At Night investment. MainLine is making Munis affordable!