Municipal bonds are essential to funding affordable housing for those who desperately need it—while offering compelling tax-exempt income to investors seeking to make a difference. That dual role is why we believe muni housing bonds sit at the intersection of policy, community well-being and opportunity.
Muni Markets Tackle Affordable Housing
America’s housing crisis leaves more families with fewer options for decent homes. With demand outrunning supply, rents keep climbing. In most cities, it’s common for lower earners to use half their income solely on housing, leaving little money for food, clothing and other essentials. Moreover, urban redevelopment often removes affordable housing faster than it’s replaced, pricing out longtime residents.
Traditional safety nets are also disappearing, especially from the federal government, as it looks to make cuts to the budget. With less federal support, the problem falls to state and local governments to solve.
That’s where municipal bonds come in. In fact, tax-exempt muni debt is one of few tools that can lower financing costs enough to make housing units more affordable for limited-income households. By reducing borrowing costs, the bonds indirectly narrow the gap between what people can afford to pay and what developers need to charge to make affordable housing projects viable to them.
Cities Incentivize to Expand Multi-Family Housing
Given the severe shortage of affordable housing, tax-exempt muni bonds are more critical than ever. They can be especially useful in supporting housing access for historically marginalized groups or for financing high-demand projects such as multi-family units.
Take the Florida Housing Finance Corporation’s Multifamily Mortgage Revenue Bonds. The agency’s muni bonds fund below-market rate loans to developers who reserve at least 20% of units for families earning less than 50% of the area’s median income, among other criteria. Rent revenues from the housing development pay down the bond debt while investors benefit from tax-free income.
Similar initiatives are underway in Philadelphia, Denver and cities throughout California, whose $10 billion Affordable Housing Bond Act of 2025 is already putting $4 to use for every $1 it invests.
Beyond Property: Munis Target People
Muni bonds focused on affordable housing are also used in conjunction with key federal and state programs with similar aims. For example, the federal 4% Low-Income Housing Tax Credit is paired on the local level with tax-exempt muni bonds to finance the purchase, rehabilitation or construction of rental housing for low- to moderate-income residents.
State and local Housing Finance Agencies (HFAs) issue tax-exempt debt to finance new multi-family homes or maintain existing stock. Similarly, nonprofits can issue 501(c)(3) tax-exempt munis to access capital at lower finance costs than taxable bonds.
Some HFAs also issue munis that underpin first-time homebuyer programs. These single-family bonds help move the affordability needle but carry different risks—such as prepayment risks—than multi-family bond structures.
Another key financing mechanism is workforce housing. This type targets affordable residences for those who are often overlooked: the local economy’s essential workforce of teachers, nurses and first responders. These moderate-income earners typically don’t qualify for housing assistance but still struggle financially as rents soar. Local governments try to help by issuing muni bonds to finance new workforce housing on municipality-owned properties, transforming vacant lots into vital homes right in the workers’ own communities.
Impact + Income: Policy Lifeline and Investment Opportunity
Beyond their social impact and tax-exempt status, muni housing bonds tend to offer wider spreads than other muni sectors with the same credit rating. Multi-family unit bonds, for instance, offer wider spreads due to broad investor caution—despite being stable, in our analysis.
But not all housing bonds are alike, and investors should differentiate among structures and issuers. For example, single-family bonds have greater risk of prepayments, which increase when rates fall and decrease as rates rise—usually resulting in limited upside or mistimed duration, respectively. As a result, many institutional investors avoid the muni housing sector altogether, even though multi-family unit bonds don’t have the same level of prepayment risk. We believe this drives muni housing bonds’ persistent yield premiums.
With rents rising and federal support shrinking, America’s housing crisis could worsen. Municipal housing bonds are becoming a critical level for states and local governments to fund solutions. For investors, that means a rare combination: compelling after-tax yields and the chance to drive meaningful change in communities. Few investments offer both financial reward and social impact at this scale.
- Richard Schwam, CFA
- High Yield Research Analyst—Municipal Credit Research
- Kathleen Dumes, CFA
- Senior Investment Strategist
References to specific securities discussed are for illustrative purposes only and should not to be considered recommendations by AllianceBernstein L.P. It should not be assumed that investments in the securities mentioned have necessarily been or will necessarily be profitable.