The Handbook of Municipal Bonds

CHAPTER 54

Multifamily Bonds

Kurt van Kuller, CFA Portfolio Manager 1861 Capital Management

 

 

 

The multifamily bond sector is one of the most diverse and innovative in the municipal market in terms of credit types and bond structures. It is an immensely fertile field for sophisticated investors to uncover undervalued bonds with value-added research. For the naive investor, however, caution should be exercised in navigating these waters. In this chapter, we will review the dimensions of this unique market, the characteristics of its main project types and credit structures, and special risks such as extraordinary redemptions.

MULTIFAMILY BOND MARKET PARAMETERS

Housing bond new issuance rose 27% in 2006 to $31.0 billion (including short-term debt of $1.2 billion). This can be see in Exhibit 54.1. This is the second highest annual total ever, exceeded only by $37.9 billion in 1985. However, the boom in 2006 was due entirely to a record amount of single-family mortgage revenue bonds, which surged to a record $24.8 billion sold. This was offset by a 24% decline in multifamily bonds in 2006. Volume of $6.2 billion was only half the total sold in 2003. Multifamily bonds fell to 20% of housing bonds, matching a historic low.

Multifamily bonds have accounted for 34% of the $516 billion housing bonds sold from 1980 to 2006. They peaked in 1985 at 55%, due to a rush to market to beat the effective date of the Tax Reform Act of 1986. That legislation fundamentally altered the landscape ...