A housing bond is a bond issue that is created by a local housing authority as a means of financing projects related to the ongoing function of the authority. In many cases, the bond is issued as a means of generating funds that are used in the construction of a municipal housing development. It is not unusual for bonds of this type to be secured by tenant or mortgage repayments on properties already owned and operated by the housing authority, a situation that helps to add to the stability of the issued bonds.
As with most types of bond issues, a housing bond is a simple way of generateing the funds needed for housing projects and similar tasks. Proceeds generated by the purchase of the bonds make it possible to begin construction of the new housing sooner rather than later, and also help to avoid the necessity of raising taxes in order to create the funds needed for the project. Often, the idea is to structure the bond so that interest payments do not come due until after the housing is completed, the units occupied, and the tenants paying rent. With this approach, the funds to honor the interest payments at specific points during the bond’s life, or when the bond fully matures, place no additional stress on the financial resources of the municipality.
A housing bond, like most bonds, tends to be an investment that carries a low amount of risk. While the returns are somewhat small, the investor can usually count on receiving that return, as well as the amount of the initial investment, without fail. A housing bond may be structured to provide periodic payments of interest throughout the life of the bond, or provide the investor with both the initial investment and the interest due at the time that the bond reaches full maturity.
While a housing bond does carry a very low degree of risk, there is always the potential for something to occur that would derail the building project and thus threaten the ability of the municipality to honor the terms of the bond. For example, if a natural disaster were to damage the housing project before completion, the municipality may decide to suspend work on the project for an extended period of time. With the project suspended and no tenants to generate revenue that can be used to honor the terms of the bond, the possibility of a default increases significantly. Fortunately, this type of issue occurs very rarely, so investing in a housing bond remains an attractive investment opportunity for even the most conservative of investors.