ABSTRACT
The capital markets that finance housing construction and state-local capital formation have important characteristics in common. Historically, both have exhibited great sensitivity to credit cycles. Borrowing for this purpose already has had a discernible impact on tax-exempt interest rates paid for traditional municipal investment in public capital facilities. Should future tax-exempt borrowing for housing grow at the rate that presently seems possible, it would add further to the costs of state and local government, while cutting into federal tax revenues. The housing cost savings potentially realizable from tax-exempt borrowing have been alluded to in the discussion of community capital facilities. Income eligibility limits have been relaxed, making the savings from tax-exempt borrowing available to a broad spectrum of middle-income and upper-middle-income homebuyers. The issuance of tax-exempt bonds for housing purposes places pressure on the entire tax-exempt market. To absorb the additional bonds, tax-exempt interest rates must rise relative to taxable rates.
