By Douglas Smith
The biggest obstacle to overcome in order to build an adequate supply of affordable rental housing is to provide more equity or “equity like” capital. Funding is scarce for many reasons, but among the most important is that housing the working poor requires a subsidy. The economic returns (from purely an investor’s point of view) are insufficient to generate market rate yields. In other words, the capital markets do not support this type of housing because of inadequate return on investment. I beg to differ with this conclusion. The answer of adequate return is dependent upon how return on investment is calculated. Without blaming investors that are simply looking at their cash returns and appreciation, the issue of housing our workforce in safe , secure, and decent homes is too important to simply look at after tax yields and cash on cash calculations. This is because the issue cuts to the long term competitive nature of our workforce and our ability to compete in the world economy.
The benefits to society are significant. A properly housed workforce is the centerpiece of neighborhoods that are strong, safe, and vital. Unless you live in isolation, chances are you have witnessed homes and neighborhoods in disrepair. Poorly maintained housing without an investment to preserve or provide rehabilitation, soon becomes economically and physically obsolete. This housing can serve as a disincentive to residents in the community, who make the decision to leave the community rather than invest in or build it. Housing in disrepair becomes is like a neighborhood cancer, eventually creating environments where nobody wants to live or work.
Residents of high-poverty neighborhoods (1) (neighborhoods with poverty rates of above 30 percent) often fall victim to a host of undesirable outcomes: higher rates of crime, teenage pregnancy, and educational failure; poor health and mental health outcomes, to name several factors. Conversely, residents living in decent and safe housing tend to do better in life, benefiting from lower crime rates; less teenage pregnancy; educational success; better health and mental outcomes.
If the benefits to society of improved properties and enhanced quality of life are so clear, why have we not made the required investments to properly house people? Perhaps the answer can be found in the politics of the “American Dream.” We are taught from an early age to work hard, save and play by the rules. We live in a land of opportunity and if we do these things someday we will own a home with two cars, two and a half kids, a dog, and maybe a hamster. Those that achieve the dream, then perpetuate the dream in their children and their children’s children. We become defenders of the dream as well. We bristle at the notion of the government subsidizing the purchase of housing because after all, we had to work so hard to buy our house. Many of us can point to living in rental housing as a stepping stone to the purchase of our first home. The government did not help us (except for a little thing called the mortgage interest deduction!). Why should I help anyone else?
May I be so bold as to suggest that this type of thinking is myopic at best? The American Dream seems to have had a convenient evolutionary pattern. Since the formative days of this country, our tradition has been one of helping our countrymen. Have we forgotten about barnraisings? Neighbors working together to help a family put up a barn to provide shelter for livestock and crops. Back then, our forefathers knew that helping a neighbor helped to build community. The local storekeeper, doctor, sheriff, teacher, newspaper publisher, saloon owner, train conductor, furniture maker, and blacksmith would take the time to raise a roof, because they knew that without farm crops, dairy products, or meat, they would be a town in trouble.
In addition, the people we are talking about, generally speaking, have embraced personal responsibility as much as anyone else. They tend to work multiple jobs, but in our economy the wages are insufficient to permit the worker to pay for family expenses that many would view as necessities (food, clothing, shelter, transportation, medical care, etc.). The residents we serve in these circumstances are not begging for a housing entitlement, and are content to pay rent. They generally have goals to save and eventually buy a house and/or open a business. They are not lost, but have a plan and a purpose for their life and hopes and dreams for their family members. With the ability to rent a place they can call home and fell good about, they tend to thrive. Without their work, we are worse off in society as we become less competitive.
Without trying to split hairs on semantics, perhaps the best way to describe funding to house the working poor is to call it both subsidy and investment. The reality is that we need more funding for affordable rental housing. While prior to the sub-prime crisis, debt for apartments was plentiful, today debt underwriting is more stringent and the pricing is more expensive. Equity funding is almost non-existent and yet it is the key to long term sustainable capital structures enabling the properties to be operated and maintained for the long term. If we (as a society) are going to fund rental housing with public dollars, then the capital structure must be sustainable through strong and weak leasing markets or else the investment is put in jeopardy. In this way, housing assets can be produced that will serve the public effectively and efficiently for generations.
Let us adopt policies, programs, and funding to subsidize and invest in affordable housing. It is a wise investment in public assets that will benefit our workforce and economy for years to come. Accordingly, it will benefit all of us.
1. Opportunity 08: A project of the Brookings Institution, Rethinking U.S. Rental Policy, 2008
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