Opinion Homes or Cash Cows?

How to Retrofit the Housing Economy

Are policy changes enough to address the housing problems we face?

Photo by iStock user bankrx

This article is part of the Under the Lens series

Homes or Cash Cows?

Nowadays housing is treated more as an instrument for financial gain than a place for shelter. How has this way of thinking changed the market? In this series we explore what people mean when they talk about the "financialization" of housing, some of its causes and effects, and what housing advocates are trying to do about it.

Photo by iStock user bankrx

Last year I was on a Zoom call with an aspiring candidate for local office here in California. The subject was the housing crisis, and especially homelessness. Sadly, California is leading the nation in unsheltered humans by a large margin. They were angry. So are many of us.

Three Takeaways

  • Public policy is not the only thing that affects housing construction and housing cost.
  • Changes in culture, power, technology, and “private policy” are also needed.
  • A different structure for how developers make their money, for example, could make a huge difference.

“When I see someone sleeping under an overpass,” they said, “I see a failure of policy.”

They are not the only ones. A failure of policy is a refrain I hear far and wide, from folks with decades of experience in the housing industry, activists new to housing, jaded housing policy vets, and plenty of elected officials. There is no shortage of my fellow writers and researchers who would look at our housing crisis and see the failure of public policy. If only it were that simple.

The Limits of Public Housing Policy

I’m using “public policy” to mean all the ways that public laws, policies, and programs affect an issue. In housing, this means basic laws like property rights or tenant protection laws, budgeted programs like Housing Choice Vouchers or tax credits where the government spends money, or internal policies and rule-making that determine how agencies operate and where they focus. It also includes the ways in which people and organizations participate all of the above—from contacting elected officials to participating in planning decisions or community engagement efforts.

Public policy clearly plays a key role in virtually every aspect of housing. Richard Rothstein’s Color of Law brought renewed attention to the role federal, state, and local housing and infrastructure policy played in the creation of a segregated America. Zoning and land use laws are the subject of heated debates around the country. Housing finance is incredibly intertwined with policy, from federal housing choice vouchers (aka Section 8) and local affordable housing bonds to Fannie Mae and Freddie Mac and the mortgage income tax deduction.

It’s understandable that when people think about housing problems, they think about public policy. Not only is public policy everywhere in housing, but it’s also the place where those of us who aren’t part of the housing industry can most easily have a voice.

Unfortunately, centering public policy so heavily in our understanding of the housing crisis limits us in four important ways. First, while public policy is obviously an important means to an end, it can too often become the end in and of itself. We mount expensive campaigns to change policy, change processes, while little changes on the ground. Nicholas Bagley calls this the “procedure fetish” in American politics. We love us some process, but the real goal is to change housing outcomes.

Second, public policy is only one of many factors going into those housing outcomes. Even if housing policy were perfect, laws don’t build and maintain houses. People do that, organizations and companies and agencies and individuals and small collectives do that, and even the public actors don’t do everything they do simply because it’s in the code. Culture matters, power and politics matter, personalities matter. The price of timber matters, the availability of skilled labor matters, climate change matters, historical memory matters. Much as any conversation about changing our transportation or energy economies would be incomplete if it ignored technological innovation, industry culture, workforce development, investor expectations, or consumer behavior, our conversation about housing is similarly incomplete without this larger frame.

When Andre Perry of Brookings and Stuart Yasgur of Ashoka wrote recently about “redesigning the housing market,” they talked about how “appraisers, bankers, mortgage brokers, real estate agents, and politicians” constructed housing markets. We can add many others to that list: for-profit developers, land speculators, builders and contractors, trade unions, nonprofit developers, CDFIs, insurers, land use attorneys, environmental organizations, YIMBYs, tenant groups, bond dealers, and especially that vast interlocking world of private equity, real estate investment trusts (REITs), hedge funds, pension plans, and more that constitute the growing and ever-changing world of housing investment.

While these organizations are guided in part by public policy, they can’t be reduced to public policy—there are too many private decisions, too many individuals and organizations and companies making the housing market every day, especially in a place like the United States. Nor can responsibility for their actions be solely in the hands of elected officials and agency employees. When appraisers consistently and constantly undervalue African-American homes and communities, is their action solely a failure of public policy? The shape and size, incentives and rewards structures of the appraisal industry is mandated as much by lender practices as by public policy.

Third, focusing on public policy can make it seem as if the government is the sole relevant actor. Every day, millions of Americans go to work in some aspect of the housing economy. While the work we do is shaped in part by policy, it shapes policy as much as the other way around. It is often driven by private policy handed down from boards and bosses more than any public directives or mandates. It’s shaped by organizational and industrial culture, by historical legacies, by systemic racism, and by who happens to control land and buildings at any given moment.

In his masterful and underappreciated book Rise of the Community Builders, Marc Weiss chronicles how the earliest large developers in the United States pushed for and largely built the local governance system for housing and land use policy—the planning commissions, zoning commissions, etc. They did this to rein in bad actors from their industries that were sullying the reputation of tract development when they were trying to get this industry off the ground.

Even if many contemporary developers—both for-profit and nonprofit—push back against this policy apparatus they helped create, this is an example of how private actors make public policy as much as public policy guides private action. And make no mistake, the powerful financial and development actors who have gobbled up so much real estate and so many homes are just as active as ever in public policy circles, trying to smooth the road for their continued accumulation of other people’s houses.

The fourth problem with focusing on our housing crisis as a public policy problem is a very American issue. When folks hear public policy, they understandably think “government.” In a country where anti-government rhetoric is endemic and seemingly getting worse by the day, making it seem like government is to blame is a dangerous strategy. Efforts to reform zoning, for example, often narrowly focus on regulation as the center of the problem. This can easily devolve into a fight about one’s belief in regulation, rather than whatever regulatory reform is actually being proposed. Fights become ideological, with housers who actually want the same thing—safe, secure housing that is affordable to the people who live in it—yelling at each other mercilessly because of their different opinions of government and policy and regulation, not because of differences in the housing outcomes they want to see.

A Housing Economy Approach

What we need is what I like to think of as a housing economy approach, or a housing economy retrofit. If we’re really focused on housing outcomes, then we need to look at solutions across the housing system. We need to appreciate how big the housing economy is (a recent estimate by Zillow put it at $43.4 trillion), how much wealth and employment is wrapped up in housing. We need to ask for and demand changes in private policy—the ways in which private actors finance, build, and control housing and the way in which incentives are built into business and ownership models. And we need to start appreciating that one of the things we’re ultimately trying to do is change housing markets, plural. In housing especially, this isn’t something that is done by public policy alone, but in a complex dance with all of the people involved in making, operating, and living in housing.

These types of deeply structural questions will always involve policy and government, but also extend across the full landscape of the housing system. This is not an argument for “market-based solutions,” in the current market, but rather for fixing the multitude of housing markets we have, making new ones we need, and acknowledging that some commonly touted strategies, like community land trusts, still operate within a market.

This is a retrofit of epic proportions, one that requires a change in mindset as much as a change in institutional practices.

Fortunately, there are many out there who share this approach, or are at least doing important work in their corner of the housing economy to create real change. Perry and Yasgur and their organizations have created the Economic Architecture Project, which, while centered on the constant devaluation of Black homes for a century, includes a wide range of folks intervening in financial and legal architecture of real estate markets, and particularly in the ownership of land and debt. They come from land trusts and tenants unions, commercial redevelopment thinkers and new investment model builders, grassroots nonprofits and startup for-profits—a full range of ideas unified not by housing ideology but by a shared commitment to a specific housing outcome—making housing markets less racist.

I see their work as part of a much-needed next step in transforming the organizations and institutions that make and manage real estate and housing. Here are some of the pieces of what that might look like, organized into two of the most critical parts of the housing economy—investment and development. 

Fixing Investment

Seemingly every day, my social media feeds send me a new story about wealthy investors buying up American housing. It’s not just single-family homesstudent housing, mobile home parks, virtually any housing type is liable to be an investment strategy for someone. (It’s like the reverse of the old adage—folks will take anything that is nailed down). It’s a trend that negatively impacts both prospective homeowners, who can’t compete, and tenants facing corporate landlords more willing to raise rents and evict. As in most troubling trends in housing, African Americans get the worst end of the deal. Even homeowners associations, never famous for being particularly progressive, are taking action.

This is a problem that clearly has a policy fix. New regulations, especially at the federal level, could curtail this increasingly dangerous trend. For example, reforms to IRS Section 1031, which encourages real estate investors to recycle their capital, could make it easier to get predatory capital out of the real estate economy.

But it’s not as easy as simply using policy to stop something. We also need to replace it with something more functional. Investment is necessary to housing. But the sources of capital that built so much affordable housing in the postwar era are now being used for the opposite social purpose. Changing this involves activists and shareholders and pension reform organizations, pushing to ensure that their money isn’t used to exploit or displace.

Doing this has to include real, widely shared standards for what constitutes quality investment in real estate. With the growth of impact investing and what are known as ESG (environmental, social, governance) requirements and goals, we really need to know what a “good” real estate investment looks like—but don’t yet. Major global impact investment groups like the Global Impact Investment Network or GRESB can be very vague on real estate, beyond sustainability requirements. As Shelby King reports in a Shelterforce article, a landlord or property manager can become a certified B Corp—a program for businesses to signal that they are committed to social and environmental responsibility—without any real estate–specific conditions. Does your investment tolerate evicting people en masse to make profit? Are you driving gentrification and displacement? You can be doing all of these things and still be certified.

The lack of real standards has led to anyone and everyone claiming to be doing impact investment in real estate. Anyone touching the affordable housing sector, even if they are exploiting and evicting, can claim to be doing social good. For example, Blackstone, the world’s much-criticized largest private equity group, positions itself on its website as a solution to the housing supply and housing affordability problems.

To replace bad investments, we also need better financing options. What does financing look like that enables real estate and housing development aimed at creating lasting affordability, community stability, and a new set of more diverse housing entrepreneurs? The Inclusive Capital Collective (ICC) released a “black paper” in 2021 that took important steps in outlining a better financing system—in developer terms, how to imagine a good “capital stack.” Their vision includes a greater role for philanthropy and community in the equity portion, at lower expected returns, with traditional financial institutions staying in their lane as lenders—not owners.

A key piece of any investment challenge is risk. To get to the point that the ICC imagines—where the right kind of capital is available to the right kind of builders at the right price—we need a better system for managing risk. Larger investors can be convinced to take below-market returns in exchange for someone else taking the hit if investments fail. The Partnership for the Bay’s Future, a Bay Area collaboration between philanthropy and corporate investors, recently reflected on the first few years of their $500 million effort to fund housing. One key finding was how challenging it was to find the right actor to take the risk.

Public agencies have traditionally done very well at taking on this kind of risk—think about how important the FHA was in guaranteeing the risk behind postwar suburbanization (if only they had extended this to different types of housing and communities of color). We are poised for a new era of public investment in risk mitigation, including having government act as a shared equity partner. Philanthropy can maximize its impact by using its money to even further insulate investors, especially those investing in housing for people making below 50 percent AMI. But this only works if we have strong private standards for investment, so that the incentives line up all throughout the investment system. This is the kind of intertwining public and private policy that reshapes markets—not just for capital, but for the houses themselves.

Fixing Development

These changes to housing investment—to the capital stack, to who takes the risk in building housing, to the growing role that public and philanthropic investment can play—are essential to changing the business models of housing development. Developers can’t build without capital, and few developers are in a position to tell capital what the terms of the deal should be. But if the capital stack were to change, if public and philanthropic capital were to leverage their influence more and focus on reducing risk for other investors, and if impact investing set real standards that included better business models for development, we could see profound changes in how America builds housing.

One of the most important transformations we must make is changing the incentives for real estate developers. Right now, developers participate in what is often called “promote” or “waterfall structures.” In this system, the developer’s share of the profits kicks in AFTER equity investors get both their original capital back, plus expected returns. This conditional piece of the action is risky for developers, as they only get paid after equity investors get paid. It also creates a strong incentive to seek out the highest return projects and drive rents and sales prices as high as they can possibly go. A lower-profit development could mean investors get paid, but developers don’t.

Housing for working people, on the other hand, only pencils out for developers if it’s built at scale—lots of projects generating steady predictable returns. If we change the incentive structure, we can change the outcomes, and change the product. This may mean building for a fixed fee, rather than for a long-term share of rental income. It may mean building to sell to the actual people who may live there, or to nonprofits or mixed-income neighborhood trusts or CLTs (any form of resident-controlled housing will do). But no matter the change, it can only come if capital is willing to come along for the ride. Better yet would be capital willing to insist on these changes, giving developers who’d gladly build housing for regular folks for a clear price with less risk the chance to do just that. 

It is also critical to transform who does development, something that has gotten more and more attention of late. There are many ways to do this, but there are two important avenues that reformers are currently pursuing. One is to support the growth and development of more BIPOC- and women-led developers, diversifying who gets to build. The Economic Architecture Project is just one of many efforts to provide the kind of access to capital, training, and expertise needed to open up more doors. The goal is what developer Charmaine Curtis calls “a deeper bench of developers of color and women developers who have traditionally been marginalized and shut out.”    

A second area of experimentation is with what is often called “social housing.” Social housing means many things to many people, but it generally refers to development systems where the public sector plays a large role in developing housing. Montgomery County, Maryland’s model, based on mixed-income housing models from Europe and Asia, is an important early example that other jurisdictions, including the state of California, are looking at.

While social housing models are often public-led, to put them only in the box of “public policy” is a mistake. Social housing puts the government in the driver’s seat as the developer and a core financial partner, but the government doesn’t go it alone. Private capital is still central to the capital stack, but with different levels of risk and reward. For-profit general contractors still bid on jobs and build the housing, much like how we build roads and transit systems. Nonprofit housing organizations become owner-operators, much like they already do for LIHTC housing. Some models even include individual homeowners and innovative models of housing tenure like limited-equity co-ops. Social housing is a full spectrum public/private/nonprofit partnership that carves out a clear role for a diverse set of development actors, changing incentives and accountability structures and profit margins across the board. It is public policy, but not just public policy.    

Fixing Housing Politics

A housing economy retrofit may not be exclusively about public housing policy, but it is very much about housing politics.

It means that those of us inside and outside of the for-profit and nonprofit housing industry who want to see change must push just as hard in the boardrooms and in the C suites as we do in the legislatures. We need the organizations that represent the millions of workers and small business owners in the housing and real estate industry to change their policies and their approaches, and be pushed by their members to do so. Developers, contractors, architects, and other housing professionals must push the organizations that represent them to demand a better housing economy. Shareholders and pension holders must demand more of their companies and funds, to use their political voice to change the private policies that often lead to bad terms, and terrible consequences farther down the housing system. Members of environmental groups can push their organizations to be better on housing, starting with the recognition that housing is central to the climate crisis—both the problem and solutions to it.

As I mentioned earlier, one of the reasons why so many of us, including many aspiring politicians, see our housing crisis as a failure of policy is that policy seems to be the pathway that all of us can pursue for reform. But shifting to this wider lens actually empowers more and more of us to take responsibility for changing our housing economy. It provides more points of access, more possible levers for change, more targets for campaigns, more opportunities for success. Far more of us work in jobs connected to the housing industry than in jobs related to housing policy. We have a housing economy to rebuild, and the sooner we embrace this fact, the easier it will be to build the broader coalitions we will need.

After all, the goal is to change the housing, not just the law.

This article is part of Homes or Cash Cows, an Under the Lens series.
Help keep us strong by becoming a Shelterforce supporter today.

Other Articles in this Series

Homes or Cash Cows?