Affordable Housing

If I told you that I grew up in affordable housing, how might you react?

You might conclude that the government subsidized my childhood home. Buzzwords like housing projects, Section 8 vouchers, and public assistance all likely spring to mind. Follow-on impressions (i.e. judgments) naturally follow, perhaps informed by your partisan leanings, personal upbringing, and connectivity with the topic.

And my, oh my, has the opportunity for connectivity been abundant lately:

1. Ford Foundation Commits $1 Billion from Endowment to Mission-Related Investments
   “Two initial areas of focus are affordable housing in the United States and access to financial services in emerging markets.” 
2. Impact Investing Platforms Create New Equity Streams for Affordable Housing
   “Members of a new generation of ‘social-impact investors’ are eager to place their equity in housing as a platform to address a variety of issues they care about, including economic mobility and disparities in health outcomes and educational attainment.” 
3. Bon Jovi, Chris Paul, Eva Longoria Bring Attention to Affordable Housing
   “Investments in affordable housing are generally pretty dry, or even boring. A recent wave of celebrity investors in affordable housing may help raise the profile of impact-focused, real-estate investing.” 
4. In Silicon Valley, an Innovative Push to Tackle the Housing Crunch
   “As the area’s only CDFI (community development financial institution) solely focused on housing, Housing Trust Silicon Valley exemplifies an exciting trend toward impact investing and public-private partnerships among affordable housing advocates.” 
5. Chan Zuckerberg Initiative Invests in Affordable Housing for Teachers
   “But teachers will have a role [in helping kids learn]…so Zuckerberg’s LLC is making a $5 million investment in Landed to help teachers buy homes in the Bay Area’s high-priced housing market.”

Deep-pocketed foundations, celebrities, and entrepreneurs are entering a world previously dominated by financial institutions, government regulations, and tax credits. Can these nascent impact investors disrupt the affordable housing market?

I certainly hope so, because as this report from the National Low Income Housing Coalition demonstrates, there’s a critical need for inexpensive rental housing within metropolitan areas across the country. Teachers, police officers, firefighters, and a host of other professions are getting priced out of too many markets. This outcome isn’t all that surprising when one examines the beneficiaries of current federal housing expenditures:

The table above, as well as its accompanying study, convincingly demonstrate that federal policy favors owning over renting, as well as higher- over lower-income households. Indeed, 60% of federal housing spending supports households with incomes above $100,000, due primarily to the mortgage interest deduction.

Though rarely described in such language, that mortgage interest write-off is subsidized by the government.

The affordable apartments in which I was raised, however, were not. In fact, my mother would resent the implication that she ever accepted government assistance. As an administrative assistant at a bank, her income typically fell in the low-income range (50-80% of AMI) for Minneapolis. Enough that, in conjunction with her thrifty ways, we could live what I always considered to be a decent lifestyle.

But let me be clear: palatable solutions to her ongoing search for affordable housing were quite elusive back then. The problem has only gotten worse for those in that low-income range. Demand vastly exceeds supply, and the number of cost-burdened renters continues to set records. These outcomes, along with the seeming misalignment of federal tax policy, are two reasons why impact investors are attracted to affordable housing.

I feel uniquely positioned to remind the impact investment community that clarity is critical when seeking social benefits. Just as we should examine the interest rates offered by a lender focused on “financial inclusion,” so too should we ascertain the long-term affordability of any “affordable housing” strategy. This is why we look not only at who the targeted beneficiary of every impact strategy, but also how the investment will generate impact. Is the strategy credible? Endurable? Scalable?

Thus, for housing to be deemed affordable, it ought to be financially accessible to a significant majority of the population. In other words, if “moderate income” households earn between 80% and 120% of an area’s median income (AMI), and the range for “low income” households is 50-80% of AMI, at least half of the units in an “affordable” housing property (or fund) should go toward “low income” households. And, ideally, maybe even some “very low income” households (i.e. those earning less than 50% of AMI). I understand those proportions might not pencil out for some affordable housing developers. My argument, then, is that maybe those properties or funds, geared exclusively toward those earning 80% of AMI and above, shouldn’t carry the “affordable housing” classification. To do otherwise would be impact-cloaked opportunism.

We as an industry need to get a better handle on the nomenclature employed to characterize affordable housing. Case in point, in the fifth news article above, it doesn’t feel right for Impact Alpha to classify Landed — a company that helps teachers purchase single-family homes in Silicon Valley — as an affordable housing financier. To be fair, Landed doesn’t use the term on its website or in its investor presentations to describe their efforts. But there are plenty of others in the marketplace who exploit the expansive definition of affordable housing to attract impact-motivated capital.

Despite its allure to the impact cognoscenti, affordable housing’s amorphous definition could compel a continued decline of both public and private support for those most in need. If investors can both feel good and obtain above-market financial returns, by investing in “affordable” housing properties (where most of the units are actually quite unaffordable), will they still consider below-market offerings that target people like my mother? If the headlines show that Zuck, CP3, and Bon Jovi are already steering capital toward private housing solutions for the poor, will politicians maintain government spending on the issue?

Livin’ on a prayer indeed.

I have extolled the virtues of standardized impact measurement before, and anyone familiar with our work knows the emphasis we place upon it. Affordable housing is yet another theme where context matters. How is affordable defined by the fund manager, project developer, impact promoter, etc.? Are the properties’ rents regulated? If so, how or by whom? If not, are there restrictions that prohibit rent increases in perpetuity? If rent increases have occurred, how many tenants have been displaced? How does that compare to prior periods? For how long will the owner keep the affordable housing asset? What happens when they sell it? This is just a smattering of questions that must be addressed.

Impact cannot be taken at face value. Yes, it’s complicated and messy. But any investor who is trying to make the world a better place ought to be aware of the direct – and indirect – consequences of their capital deployments.