Above photo: Highland Terrace Apartments, which Enterprise Community Partners helped to fund, opened on Oct. 4, 2024 in Richmond, Virginia. Enterprise Community Partners / Stephen Bobb Photography.
Here’s How To Start.
Housing affordability is solvable. We have the land and the money. What we lack is imagination.
I used to think climate change was the crisis we would solve last, if at all. But seeing the affordable housing crisis up close has changed my mind.
Unless we find a reservoir of will to tap the oceans of money we are swimming in and the mountains of land we are sitting on, we may never solve this crisis. Instead, our country will be left with the challenges we at Enterprise Community Partners, the national affordable housing nonprofit that I help lead, push up against every day:
Special interests that carve up the already-small pie of public funding into incoherent slices that don’t scale. The technocracy of building codes, zoning and regulation that has vexed basic home construction with a cipher so complex that you need a PhD to make sense of it. The not-in-my-backyard mentality that prevails, despite a raft of evidence that disproves the negative stereotypes fueling NIMBYism. The misconception that the relationship between landlord and resident must be zero-sum. The plain reality that most people’s real wages have been frozen in place for the past 50 years. The cocktail party view that homelessness is caused primarily by mental illness and addiction, when the leading cause of homelessness is shouting at us: The 771,480 people living on our streets can’t afford to live anywhere else.
But like a new parent who discovers a whole part of our heart, a whole store of love for our children that we never knew we had, we can find that reservoir of will – because it’s already there. The affordable housing crisis is something we have power over, if we would only think differently and use that power.
To radically change the reality in this country, policy makers, investors and everyday people first have to change their thinking. Questioning long-held beliefs is the precondition to solving our affordable housing crisis. Here is a start.
History Is Not Inevitable. It’s Made By Us.
Change begins with the belief that our nation’s affordable housing crisis is not, in fact, inevitable. It is manmade. And it can be solved by us.
That was the feeling I had when I worked as a solar builder in the renewable energy industry. The climate crisis felt solvable, not inevitable. There are of course miles to go, but there was and remains a movement on the march – a flood of imagination, money, talent and, critically, a mindset to turn over long-held beliefs to prevent our manmade extinction.
When I got to the affordable housing industry, that movement-on-the-march feeling felt faded. The crisis too complex, too ingrained, too out of our control. As if we had been drained of the most sacred thing that makes us us: Free will. Power.
But that’s exactly what is needed to fight this existential threat of unaffordability. Not existential in the sense of species-level extinction, but the extinction of a good life. Not some commercialized, over-sold American dream with an Instagram shine. But a good life. Because an affordable home is bedrock. To put food on the table, go to a good school, and save some money for when it pours. For a chance to breathe. For the dignity of “somebodiness.” For grace. Without an affordable home, the good life is just a tease.
Yet the United States has never had fewer affordable homes – 7.3 million fewer than needed. The U.S. Census tells us that the average number of people per renter household is 2.33, which means that 17 million Americans are living without one, nearly the entire population of New York State. This scarcity has left more people sleeping on our streets than ever before. Those lucky enough to be off the streets are saddled with rent payments that soak up most of their paycheck, leaving little for anything else in their life. Just to have a life.
It is a drain. It is a crisis. And it is pervasive. It is in all 50 states, in our cities, our suburbs and our vast stretches of fruited plain.
It is also fixable. Enterprise just partnered to build our one millionth affordable rental home. We are not the government. We are not a bank or private equity. We are one nonprofit, and we are proof that history is not inevitable. That is the first change in thinking required.
We Already Have The Resources Needed To Solve This Crisis.
Consider that out of the entire $6.5 trillion annual federal budget, less than 1% goes to affordable rental housing. That number barely grazes 3% when excluding spending on defense, social security, Medicare, Medicaid, and debt service.
The same goes for states: Of the median state budget, less than 1% goes to affordable housing. As for the private capital markets, their share of investment in multifamily housing is just 1% of the United States’ GDP. Public pension funds barely even show up: Per one study by the Fed, just 4.4% of public pension fund’s real estate investments are in affordable housing, equating to an estimated 0.46% of the more than $5.3 trillion of U.S. public pension funds’ invested assets.
So this is not a crisis of resources. We have plenty.
This is also not a crisis borne from a shortage of land. The U.S. has more than enough. Consider that even in our cities, just 25% of city land zoned for housing allows for more than one home on it. Changing local zoning laws to allow two homes to be built on the same plot of land instead of one could nearly double the number of affordable homes.
We have the land.
There is no technological breakthrough required – nothing like what I witnessed in renewables with the plunging cost of solar and the exponential increase in efficiency to turn the sun into electrons. No replacement of the internal combustion engine, no artificial intelligence. We don’t need any of those things to solve the affordable housing crisis.
What we need is a change in thinking to allocate that money and that land to homes.
We Can’t Forget About Renters.
A third change in thinking is to shift America’s unique and total focus on homeownership – an object so shiny that it has blinded policymakers from addressing the 35% (and growing) of American households who rent.
While homeownership is an essential piece of the puzzle, critical examination of the policies that incentivize it is too rare. The result is that renters get left behind.
Homeownership has become our country’s only programmatic answer to “wealth-building.” The system is broken when our primary path to wealth is through taking on debt. Put aside that wealth outcomes depend on where, when and what you buy. But if you are lucky and your home value does go up, realizing that appreciation without taking on even more debt requires that you sell – instantly pricing so many out of your neighborhood.
This approach to wealth building carries far greater risks than alternatives and contributes to a system that simply isn’t sustainable. And in the process, perverse incentives find their way into the system. The value of a homeowner’s home goes up only so long as the supply of homes stays down – a dynamic that keeps supply low and drives up home prices, making it harder for everyone not in one to get one.
But say you do manage to buy a home. Left unspoken are the traps of variable interest mortgage rates (recall that 10 million Americans lost their homes following the Great Recession) and the additional costs of property taxes, insurance, brokerage and HOA fees, and that everything that can break in a home usually does and needs to be expensively replaced. These costs, as a recent study estimates, add up to $18,118 per year, or an additional $1,510 per month on top of your mortgage payment.
Despite these realities, of the small proportion of federal spending that does make its way into housing, the vast majority subsidizes homeownership – not helping people afford their rent. For all of those subsidies and federally insured mortgages, the percentage of homeowners today is exactly the same as it was in 1978.
Insanity is doing the same thing over and over again and expecting a different result. Without a change in thinking, renters will continue to be ignored – about 105 million of them. But when money and land are on the table, these are the Americans policymakers continue to leave behind.
Consider that the federal Low Income Housing Tax credit – the main incentive that drives affordable rental construction and preservation – was capped at just $13.5 billion in 2023, regardless of need. This is against $94 billion in annual tax expenditures that go to homeownership. When I worked in the renewable energy industry, the main incentive we leveraged was the federal Investment Tax Credit, which has no cap at all.
Consider also that in 2021, Congress enacted the largest infrastructure bill in our nation’s history and left out the most important piece of infrastructure in our lives: our home, our center of gravity in a world that is pulling us apart. Not one dollar in that $1.2 trillion infrastructure law went directly to building and preserving more affordable rental homes. The $891 billion Inflation Reduction Act of 2022, too, left out the funding for the single-largest contributor to inflation: rent.
All of that money without the change in thinking required to invest it in affordable housing.
Investing In Affordable Homes Is Less Risky Than Investors Think.
The investment community’s distorted view of affordable housing has made the cost of capital for affordable rental homes – particularly the cost of equity – much higher than it should be on a risk-adjusted basis.
Affordable housing is an asset class with sky-high demand, whether the economy is expanding or contracting. It maintains near non-existent vacancy rates and generates steady cash flow. What’s missing is that first-mover mindset to unlock the market forces that will drive down the cost of capital. We can change that.
Put simply, investment managers and public pension funds seek higher-than-justified returns from the affordable homes they invest in. High returns may be necessary to justify what is euphemistically referred to on Wall Street as “value-add” strategies that boast double-digit returns. But these investment strategies also require speculation on residual value, high levels of debt, and a bet on an investor’s ability to push renters out of their homes so they can increase rents above what is affordable.
In fact, if you simplify the investment strategy, do away with the speculation and financial engineering, and place your bet on affordability instead of on how fast you can raise rents, you’d have a pretty boring (in a good way), cash-flowing asset that would justify a much lower return once adjusted for the risk that money takes on.
Investors must think differently about the affordable housing asset class – to reset the market instead of following the herd. This market reset would unleash a flood of cheaper capital that could be the rocket fuel for a new wave of affordable rental home construction and preservation.
That is precisely what investors did in the renewable energy industry. From 2012-2020, around the time I was building solar farms, the cost of equity (calculated as the risk-free rate, such as the 10-year Treasury yield, plus the risk premium investors apply to a particular investment) or, more importantly, the “risk premium” built into the cost of equity (calculated as the cost of equity minus the risk-free rate) plunged by roughly 50% – from around 8% to 4%. In other words, a dramatic drop in the cost of capital.
What changed during that stretch? The performance of the assets didn’t get dramatically better. The technology kinks had already been worked out by then. Interest rates stayed relatively flat (and, besides, risk premium controls for interest rate movements by subtracting the risk-free rate of return). ESG and impact investing hadn’t really become a thing yet. So the dramatic drop in the cost of money wasn’t magic, and it certainly wasn’t inevitable.
What changed was the willingness of investors and credit committees at the big banks and pension funds to take a harder look at the operating history and cash flow characteristics of these renewable energy assets. When they did, they saw that it was a much safer investment than they had been pricing all along. Investors dropped their rate of return and realized that the water was warm in renewables, that their investments did just fine.
Other investors began to feel left out and so they dropped their cost of capital. More followed, until we saw the risk premium for renewables halve, a new flood of capital pour in, and more renewables being built each year in the United States than any other source of electricity.
The same can happen for affordable housing.
Housing Isn’t About Units. It’s About Homes.
You can’t read an article about the affordable housing crisis without it being described in “units” — as if journalists’ stylebook demands the word “home” be replaced by “unit.” But we are not talking about units. We are talking about a family’s home.
In a country where the Golden Rule has ceded ground to the Rule of Gold, affordable rental homes have become commodified – undifferentiated widgets to be gobbled up by private equity companies, to be “securitized” and “leveraged.”
So long as the Rule of Gold is the only rule, the thinking required to end this crisis will remain clouded by a system that equates progress with accumulation. A system where “our scientific power has outrun our spiritual power,” as Dr. King put it. Where progress is measured by the next product, app or service, solving problems we didn’t know we had, instead of progress being measured by human dignity. And where billionaires number in thousands (2,756) and spend their money on four minutes in outer space when millions here on earth can’t find a space to live.
When I was lucky enough to walk one of our solar farms, to see it complete and operating, it was a sight to behold. I watched as the same sun that has been rising for eternity hit a bunch of south-facing polysilicon panels, and without any more effort or noise or smoke, clean electricity was born. Standing there, it felt like a miracle.
What was missing, however, what wasn’t there among all those rows of solar panels, was people. And now when I visit one of our affordable properties, all I see are people. That’s the beauty of it. But that’s also where it gets complicated. Because when you get down to it in this country, where the Rule of Gold is too often the only rule there is, people’s lives start to matter less and less. That is one reason why few things are harder than siting, funding and building an affordable home.
But the tug of self-interest is not at odds with our collective interest. This is a collective problem, requiring collective action, leading to collective benefit. So let’s solve it. Let’s throw off convention and change the system. If not now, when?