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New Policies Take Aim At Boosting Affordable Housing

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America is in an affordable housing crisis. With home prices rising dramatically over the past four years and rents following right along, tens of millions of Americans are spending a significant chunk of their income just to put a roof over their heads. This means less money in Americans’ pockets for education, nutritious foods, investments, or an emergency fund. But, new government policies could help lessen the budgeting blow Americans are feeling from unaffordable housing costs, and investors may be able to help while turning a profit.

Dennis Shea, Executive Director of the J. Ronald Terwilliger Center for Housing Policy at the Bipartisan Policy Center, has been fighting for affordable housing long before the recent ramp-up in housing costs. Today, we ask Dennis what caused our unaffordable housing market, why it got even worse after the pandemic, the impacts high home prices have on the economy, and the potential solutions every investor should know about.

We even ask the uncomfortable question: Are investors to blame for the state of housing prices? But worry not—Dennis shares numerous ways investors can actually help low-income households and their communities while turning a profit with affordable housing development. If you’re looking to invest while building an even better housing market, this is the episode for you!

Dave:

For many Americans, whether you’re an investor or a potential home buyer, the prices of housing seems astronomical. We are in housing shortage. Interest rates remain higher than most people thought they were going to be leaving many Americans feeling hopeless. Today we are going to dig into what is happening on the policy level in regards to affordable housing.

Hey everyone, and welcome to On The Market. I’m your host, Dave Meyer. Today we’re going to be speaking to Dennis Shea, who is the director of the j Ronald tur Center for Housing Policy at the Bipartisan Policy Center. That is quite a title, woo. And today with Dennis, we’re going to get into what is going on with affordable housing, how we got in this situation, what current public policy is, how that is evolving, and make sure to stick around to the end of the show because I’m going to talk to Dennis about how investors like you and me fit into the affordable housing puzzle. All right, let’s bring on Dennis. Dennis Shea, welcome to On the Market. Thanks for being here.

Dennis:

Great to be with you Dave.

Dave:

Before we jump into your specific work about affordable housing, can you explain to us what the Bipartisan Policy center is and what its mission is?

Dennis:

Sure. Thanks Dave. The BPC Bipartisan Policy Center was created about 16 years ago by four former Senate majority leaders, Bob Doll. I used to work for him many, many moons ago. George Mitchell, Tom Dashell, and Howard Baker. And the mission is to be a place where people with strongly held political views can come together in a respectful manner and discuss and debate and try to develop policy solutions on a bipartisan basis that can move the country forward. And we have a number of different programs including economic policy and energy and democracy and health. And I run the housing program here at BPC.

Dave:

Thanks for that background, Dennis. Appreciate it. And it sounds like a really interesting role that you have there. Let’s dive into the housing issues here. So first and foremost, how did you get involved with housing and specifically affordable housing?

Dennis:

Well, I was the assistant secretary for policy development and research at the US Department of Housing and Urban Development, HUD back in the administration of George W. Bush. So around 2007, 2008. It was a tough time, obviously for the housing industry. I also got to know over the years Ron er. Now Ron is the former CEO of Trammell Crow Residential. He has been responsible for building hundreds of thousands of apartments throughout the country during his career at Trammell Crow. I have done work with Ron over the years prior to being back here at BPC and Ron made a donation to the BPC to create a center called the Jay Ronald Olga Center for Housing Policy. And our mission is to identify bipartisan policies that promote housing affordability both on the rental side and on the home ownership side. So again, specifically to your question, it all started with HUD in the George W. Bush administration back in the day, as they say.

Dave:

So of all the different elements of housing that you could be focusing on, why is housing affordability your primary focus?

Dennis:

First of all, we believe that housing is foundational. The home, the house, your house obviously provides shelter, but it also is connected to so many other important things. It’s connected to health, it’s connected to opportunity. If your home is located in a neighborhood close to say transit or employment, that could impact your ability to move upward in society. So housing, we believe housing is so fundamentally important. It’s foundational, but so many Americans today are struggling with housing costs over the past four years. Home prices, for example, have risen by 28%. Now the median value of a home is about $418,000. Rental prices in many communities have over the same period of time have skyrocketed. About 42 million Americans now pay about one third of their income just on housing costs, and that leaves a lot less for other sort of essentials like health and education and nutritious food, for example.

So housing affordability is incredibly important. When I started working with Ron, we worked on a paper together called The Silent Crisis, and we were wondering why aren’t people in Congress or why isn’t the media talking about housing affordability? This was about 10 years ago and now things have really even gotten more severe since that period. And there’s much more written, much more ink spilled about the housing affordability crisis. So it’s no longer a silent crisis. And I have to say I am a creature of Washington DC I guess, and we use the word crisis a lot here in town and it’s one of the most overused words probably in Washington. But I do believe this housing affordability issue is really at crisis levels.

Dave:

And what brought us to this crisis level, Dennis?

Dennis:

Well, we view the housing affordability situation through three lenses. The lack of supply, there’s just a mismatch between the demand for housing and available supply. Second, the need to preserve the existing stock of affordable housing. And third, there are just going to be some people whose incomes don’t meet their housing costs and they need some demand side supports like vouchers. But much of our focus over the past couple of years has been on the supply side. I think there’s broad bipartisan recognition that the root of the housing crisis is this lack of affordable supply. There’ve been various estimates put out. Freddie Mac says we’ve underbuilt housing by about 3.8 million homes of the past 15 or so years. Same with Up for growth and other advocacy organization. The National Association of Realtors put out a paper a couple of years ago, said we had underbuilt housing by 5.5 million homes since the Great Recession.

So it all kind of starts with the Great Recession. 2006, 2007, 2008, the home building industry was decimated. People left the industry workers left industry, and they still have tremendous problems recruiting and identifying skilled workers in the residential construction industry. So that’s part of the problem. Another big piece of the problem is we’ve just have too many restrictive land use and zoning regulations that limit density and limit the types of diversity of housing that can be built in certain communities. So that’s a big contributor of the problem Covid struck. And then we had supply shortages and supply disruptions, and if you looked at the prices of things like timber and steel and copper, they went through the roof and that still reverberates. And then with rising interest rates, rising mortgage rates, now we have a new phenomenon. The lock-in effect, people with mortgage rates that are relatively low, 3%, maybe even lower, just are not going to leave their house and sell their house and go to another home and get a mortgage at 7%. So there’s been a lot of inventory that’s been locked up as a result of the rising interest rates. So all these factors, Dave, in our view, have really contributed to the supply shortage over the past 15 or so years.

Dave:

That’s a great summary and regular listeners of the podcast will probably recognize some of these topics that we talk about frequently as contributing to some of the housing market dynamics. So far. We’ve covered some of the reasons that we lack housing supply and affordable housing in the us and when we come back, Dennis is going to discuss what is being done on the policy side to address it. Stick around. Welcome back to On the market. Dennis, I’m hoping you could help me. I get this question a lot when I talk about this and say we have Underbuilt housing and people say, okay, yeah, if that’s been going on though for the last 15 years or so, why has it gotten so acute? So recently it feels like, yes, this has been a problem developing for a while, but since the pandemic, it seems like it’s really just taken on another level of urgency and crises. So what happened then that has led to this acceleration?

Dennis:

Well, I think what you saw, it’s now becoming, it used to be a really kind of a coastal problem or big city problem. Then with the pandemic, people started, aha, I don’t have to live here and I could move somewhere and work remotely. So then you saw the explosion of demand in places like Nashville, Tennessee and Austin, Texas, and a place that really, because if it’s a very attractive place to live, was Montana a place like Montana for example. I think about 50,000 people moved in there during the pandemic years and they didn’t have the housing supply to accommodate it that. So housing affordability became a major issue in the state of Montana. And Governor Gen Forte, who’s a Republican governor, put together a task force, diverse group of people representing all points of view, and they came up with a series of legislative bills to reform the land use and zoning issue. So I think what you’re seeing now, Dave, is that prior to the pandemic housing affordability was a major issue. I mean, if you live like me and DC and I come from New York City, other areas, this has always been a big, housing affordability has been a long time problem. But with the pandemic, you saw it becoming a problem in more and more places throughout the country that Boise, Idaho, for example, that people were not used to. So I think that’s part of the problem.

Dave:

Thank you for explaining that. I just want to add two things and correct me if you disagree here, Dennis. Two things that I want to highlight. One is that you said that earlier that there’s a mismatch. So oftentimes there could be cities that are losing people and losing demand, and there might be in your particular market, sufficient housing or even in excess housing. But you see with these changing migration patterns like using Boise or Bozeman as examples, people just started moving there in droves and overwhelmed the housing supply in those particular areas. But I also want to call out that household formation and housing demand is not always a zero sum game. And demographic trends and some of the things that happened during the pandemic as well have led to just more overall demand, whether it’s people not wanting to live with a roommate anymore or millennials reaching this quote, peak home buying age, that all these things sort of converged. It seems to sort of make this simmering problem into a rapid boil.

Dennis:

That’s a great point, Dave. I mean, you have to look at the demand side and household formations, which is really critical. And you’re right. I mean people, millennials, twenties, thirties, they were breaking up with roommates, maybe getting out of their parents’ house finally and saying, okay, I got to step up out on my own. And that put a lot of demand, particularly in the rental rental side. There’s a tremendous uptick in demand, which now the market’s responding in many communities and building, building in response to the demand.

Dave:

Great. Well, I want to move in a minute, Dennis, to talk about some of the potential solutions and remaining challenges to improving the situation. But just want to extrapolate for a second. Obviously the people who are rent burdened or can’t afford to buy a home right now are individually impacted, and that is probably a very challenging situation. But I’m curious if you can help us extrapolate this out and understand how the challenges with housing affordability are impacting the American economy and society as a whole.

Dennis:

Yeah, we did a paper, you could get on our website, bipartisan policy.org, showing that the lack of access to affordable housing strongly impacts in a negative way, labor mobility. People are unable to move to the areas of the country where the jobs are because housing is so costly and it is a real drag on overall GDP growth and the person who, we have a paper that kind of summarizes that work on our website, but Edward Glazer, I would highly recommend people, your viewers checking his work out. He’s the chairman of the economics department at Harvard University. He has written extensively about the impact of lack of access to affordable housing, how that negatively impacts the ability of workers to move to where the jobs are, and then that impacts economic growth. And anecdotally, I’ve gone to places around the country gone universities, it was at a university, I won’t say where, and they said that they’re having trouble attracting professors, new young professors because they couldn’t afford the cost of housing in that particular community. So it has broader macroeconomic implications, and that’s what we try to make that point at the BPC because that’s an argument that really both parties should get.

Dave:

Got it. Okay. Thank you for explaining that. Let’s move on to some of the existing solutions and potential solutions out there. So there has been a longstanding tax credit called the Low Income Housing Tax Credit that was created I think 35 years ago. Something like 30, 35

Dennis:

Years ago. Yeah, 1986. 1986. You did the math. That’s what, 37 years ago?

Dave:

It’s 37 because 36. So that was easy for me what year, older than I am, but So tell us, Dennis, what is the L-I-H-T-C and what was it created to help solve?

Dennis:

Okay. It’s a tax credit created in 1986, bipartisan George Mitchell and Democrat and Jack Danforth, the Republican from Missouri were the sort of the authors of this idea. It provides a reduction in tax liability to private investors and developers who put money into rental housing that is income restricted, meaning that it’s available to households at a certain lower income level and also rent restricted. And the program start off a little slow, but since 1986, it’s been responsible for financing about 3.7 million affordable rental homes. Wow. So it’s a way of harnessing, attracting, encouraging private sector funding into affordable rental housing. And it has been successful and it is our most successful affordable rental production program in the United States. And I know at BPC in terms of solutions, we support expanding the Litech or the low income housing tax credit. There’s legislation, the Affordable Housing Credit Improvement Act pending in Congress that has like 218 or more sponsors, evenly divided between both parties. I mean, it’s enormously supported by both parties. There is now something going on. Remember the tax relief for American Families and Workers Act, the tax package child tax credits and the business expensing, which passed the house earlier this year, which is now stalled in the United States Senate that has provisions in it that would strengthen the Litech and would lead to an estimated 200,000 new affordable units over the next two years. So we are advocating for that very, very strongly.

Dave:

Okay, great. Yeah. So let’s actually dig into it a little bit. So just to summarize, it’s basically a tax incentive for real estate developers to create affordable housing that has some provisions on it about what it could be rented for. Is that right?

Dennis:

Yeah, it has to be the people who avail themselves of the project who live in the project have to, or the development have to have incomes generally below 60% of area and median income and the rents are also restricted, but the subsidy that’s provided makes the math work for developers.

Dave:

And is it just ubiquitous? Can anyone apply for this? Is there a limitation to it? It sounds pretty successful. So what’s holding it back?

Dennis:

Yeah, there’s authority tax allocation authority delivered to all 50 states, and I believe Puerto Rico and the Virgin Islands on an annual basis. It’s based on a percentage of per capita for each state. It’s a certain amount of tax credits that they can utilize. And then these tax credits are states develop something called qualified allocation plans where they put out the, this is okay, developer private, you want to compete for the tax credits, you meet the, we set some goals in our qualified allocation plan. This is the state. And then developers apply competitively to get access to the credits. Of course, it costs the federal government money, so that’s why it’s not unlimited program, but the credits are allocated on a per capita basis to the respective states. And then developers compete for the credits through state agencies.

Dave:

Okay, got it. I wish we have some co-hosts on the show who are developers, and I know two of them, James and Kathy, have tried to build affordable housing with mixed success. And so I’m just curious, is this easy for developers to do or is this sort of an extra hurdle? Is it cost intensive for them to try and apply for these funds?

Dennis:

I think people who have been doing it for a while have find it relatively straightforward, but if you’re doing it for the first time, it’s probably a bit more complicated and potentially a bit more mystifying. But the program’s been around for 36, 37 years, just one year older than you, I think Dave. But yeah, it’s got a rhythm that people in the community really understand how it works.

Dave:

We do have to take one more quick break to hear a word from our sponsors, but stick around because we have more from Dennis when we come back. Welcome back to the show. Now, you also mentioned before the A-H-C-I-A you in Washington. You guys love your acronyms.

Dennis:

I know, I

Dave:

Know. But it’s the Affordable Housing Credit Improvement Act. Can you tell us a little bit more about what that would offer?

Dennis:

That would essentially increase the allocations to the states by about 50% and make other adjustments in the program that would make it more accessible and extend the utilization of the credit. So it’s basically a 50% bump up in allocation in spending for the program.

Dave:

Okay. So just similar program, just expanding it, doing, there’s a few

Dennis:

Other important changes, but that’s essentially it.

Dave:

And would this 50% increase meet the need for affordable housing or how far would it get us?

Dennis:

It’s estimated that over 10 years it would create 2 million new affordable rental homes. Wow. Additional. So it would be significant, but there’s no one answer to this problem. And it’s not just going to be a federal government solution. Local cities states need to take action. Many are taking action. But if the A-C-H-I-A passed in Congress, that would be significant about 2 million homes over the next 10 years. It’s also something called the Neighborhood Homes Investment Act, which is a similar program modeled after the litech low-income housing tax credit, which would incentivize private investment in starter homes for sale in distressed communities. And that would be an estimated 500,000 new homes over the next 10 years. So if we combine both, that’s 2.5 million over 10. That’s not going to solve the problem. But these are important actions that could be taken to help close the gap.

Dave:

Absolutely. But are there any other policies or ideas that either you’re working on or you’ve heard of that you think could additionally help close the gap?

Dennis:

Yes, there are programs out there. One thing that the federal government could do would be to incentivize local communities to reform their zoning and land use policies to allow greater density and more diversity in housing types. So that is something that we have supported at the BPC sort of incentive approaches.

Dave:

And Dennis, I’m just going to, let me just interject here just to make sure everyone understands a lot. Municipalities have very rigid and specific zoning codes, which means that, for example, you might be in a neighborhood or a city where you can only build single family homes. And even if developers want to build multifamily, which is more efficient and more cost-effective to build, or the community really needs it, sometimes they can’t do that because they have these restrictive zoning. And so I think what, Dennis, just correct me if I’m wrong, but I think what you’re saying is perhaps cities can be incentivized to change those zoning to allow for higher density, meaning rather than having a single family home on every plot, maybe you have a duplex, triplex quadplex so we can get more houses into the same amount of space.

Dennis:

Exactly. And there are other things like parking minimums, which can be reduced potentially, and permitting reform where if you follow certain requirements, you get the permit as of right, as opposed to having to go through other sorts of processes which add cost to building. So yes, that’s a great summary, Dave, on the zoning. So we have an advisory committee at the Tooler Center, and to our members are Henry Cires, who’s the former secretary of HUD in the Clinton administration. And Steve Stivers, who is the former Republican ranking member of the housing subcommittee, he’s now the CEO of the Ohio Chamber of Commerce. They recently wrote an op-ed for Newsweek saying, let’s use some of the appropriated, but unobligated covid relief funds to support the production of affordable housing in good locations. And let’s waive at the federal level, waive a lot of regulations and at the local level, communities who want access to these funds have to make reforms. So that was an idea that there’s about, we estimated tens of billions of dollars in appropriated but un obligated covid relief funds. And if 10% of that were used to help affordable housing help produce more housing in good locations, that would be a worthwhile use. But that’s something that they’ve advocated. Now,

Dave:

Dennis, I want to ask you one more question. This show is primarily, our audience is primarily real estate investors, real estate agents, people who work in the investing industry. And over the last few years, I’ve at least commonly heard that investors are at least partially to blame for the affordable housing issues in this country. So I’m curious, your honest opinion, do you think that’s true or just more broadly, what role do investors play in the affordable housing issue?

Dennis:

I personally don’t ascribe to that view. I know others have concerns about the acquisition of housing by institutional investors or private firms. I don’t personally have that view. I mean, we need more, my view is we need more private investment in housing in the United States. It cannot be the government exclusively building homes, financing homes. So I don’t share that point of view. And you look at some of the statistics I’ve seen, there are other things that are causing the housing affordability problem. Generally a lack of supply building being the primary culprit.

Dave:

Got it. Okay. And so if your belief is that investors in private investment can help alleviate the affordable housing issue, is there anywhere our audience could learn more about what they could do to help build affordable housing if they’re so interested?

Dennis:

I would recommend you come to our website, bipartisan policy.org, bipartisan policy.org. We have a lot of good material and content on our website that’s fortunately digestible. We don’t overwhelm you with 20, 30 page papers. We give you good lists. So for example, this may not apply to private investors, but we have like 10 actions that cities could take to increase housing supply. And it lists 10 things, five actions that states can take that would increase housing supply. We have primers on the low income housing tax credit that take this ostensibly complicated program and explain it quite succinctly, and I think in a way that’s easily accessible to people.

Dave:

All right. Well, Dennis, thank you so much for joining us and educating us on this really important issue. We appreciate your time,

Dennis:

Dave, great to be with you. Thank you.

Dave:

Another big thanks to Dennis for joining us, and thank you all for listening. This is a really important topic, at least I think that affordable housing is an issue that investors should be thinking about. Obviously, as Dennis noted that this impacts our entire economy, not just in the housing sector, but does impact jobs, local communities. And of course, it impacts the individuals who are increasingly rent burdened or having trouble affording their own home. I just want to remind people that most of the data, most of the policy suggests that there isn’t mutual benefit here by creating more affordable housing. It’s not going to negatively impact real estate investors or those in our industry. So if you are interested in learning more about this, definitely check out the show notes and Dennis’s work. And I also encourage you to see your local government is doing what your local municipality is doing. And if there’s any ways, if you’re so interested to get involved in creating affordable housing in your own community. Thank you all so much for listening. I hope you enjoyed this episode for On The Market for BiggerPockets. I’m Dave Meyer, and I’ll see you guys soon. On the Market was created by me, Dave Meyer and Kaylin Bennett. The show is produced by Kaylin Bennett, with editing by Exodus Media. Copywriting is by Calico content, and we want to extend a big thank you to everyone at BiggerPockets for making this show possible.

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

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