The U.S. Department of Agriculture’s Rural Housing Service (RHS) is tightening requirements for project feasibility under its Section 538 Guaranteed Rural Rental Housing Program (GRRHP). In a newly proposed rule, RHS will require all applicants seeking loan guarantees for new construction to submit a formal market study as part of a complete application.
This may sound like a bureaucratic tweak, but it has real implications for lenders, developers, and rural communities.
Section 538 is the USDA’s flagship loan guarantee program for rural multifamily housing. It backs up to 90% of loans made by private lenders for the construction or rehab of rental housing serving low- and moderate-income households in USDA-defined rural areas.
It’s a public-private partnership model that has delivered thousands of affordable units to small towns that are often overlooked.
Up to now, the rules under 7 CFR part 3565 have encouraged applicants to "demonstrate market feasibility," but have not required any specific documentation to prove it. Some lenders submitted comprehensive market studies; others relied on summaries, broker letters, or hastily compiled spreadsheets.
That inconsistency is what the USDA wants to eliminate.
Under the proposed rule, all new construction applications must include a comprehensive market study. This will:
· Ensure projects are built in markets with demonstrated need;
· Avoid oversaturation and risk to the existing affordable housing stock;
· Align USDA requirements with industry norms (e.g., LIHTC, HUD programs);
· Improve efficiency and uniformity in loan guarantee underwriting.
A professional market study typically includes:
· A demographic and economic profile of the market area;
· Rent comparables and absorption trends;
· An analysis of supply and demand for affordable units;
· Impact projections on existing housing stock;
· Supportable rent and unit mix recommendations.
In short, it’s the backbone of a smart housing investment — and USDA wants it in every file.
· Lenders & Developers: Must budget time and cost for a market study before the USDA will consider a loan guarantee for new construction.
· Property Managers: May see less risk of oversupplied markets hurting occupancy.
· USDA & Taxpayers: Benefit from better quality control and reduced risk of supporting white elephants in underserved areas.
USDA is inviting public comments through August 30, 2025 (60 days from publication). Visit regulations.gov and search Docket No. RHS-24-MFH-0024 or RIN 0575-AD42.
If you have a stake in affordable rural housing, this is your shot to weigh in.
Requiring a market study isn’t red tape—it’s a reality check. The move helps ensure scarce affordable housing dollars are spent where demand is real and sustainable.
For lenders and developers, it’s one more hoop, but also a safeguard. For rural communities, it’s a sign that USDA wants housing investments to be grounded in facts, not optimism.
Smart growth starts with smart data. This rule aims to make sure rural housing does just that.
For more updates on affordable housing policy and compliance, stay connected with A. J. Johnson Consulting Services.
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