What lessons can the U.S. learn from housing programs, policies, or regulatory frameworks in other countries? Are there specific tools in use (e.g., covered bonds, full recourse loans, prepayment penalties, etc.) that we should consider adopting or using on a larger scale?
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Our work at the Affordable Housing Institute has taken us to over a dozen countries from the very poor (Kenya) to the very rich (Dubai), to say nothing of my 37 years’ experience with the U.S. ecosystem. Here are some principles proven around the world:
- Though housing finance ecosystems operate on sound principles, every housing finance ecosystem is sui generis. Everything does influence everything else, and it is impossible to intervene unilaterally without the ecosystem responding even before you have intervened. The trick is to work with the ecosystemic and market forces, not obliviously to them.
- Urbanization is unstoppable, even in America. America will continue to urbanize, and as it does some parts of the country will depopulate.
- Affordable housing is an intrinsic element of national urban infrastructure, because it is where blue-collar and flexible jobs go to sleep at night. The city does not exist that has no poor people in it, and we have to make sure that the people who make the city work can live in the city they make work.
- The need for affordable housing is not a discrete problem to be solved, it is a chronic condition to be managed. Pure markets always have a bottom quartile, and that quartile cannot afford market-quality housing (which is itself a rising standard). The public interest is always involved.
- Only government has the resources needed to tackle housing affordability at scale. Government should act at all three levels (national, state, and local), and should use both cash and non-cash (e.g. zoning, density) resources.
- Regulate entities, not programs. This may seem counterintuitive, what with FHA (regulated by programs) versus the GSEs (regulated as entities), but any program-regulated system cannot adapt quickly enough. UK Housing Associations are strongly regulated, but each housing property is unregulated except insofar as it fits within the association’s portfolio.
- Unlike conventional housing, affordable housing has two goals, economic and social, and neither can be dominant over the other. That’s why those involved should all be Mission Entrepreneurial Entities (for background, see here) that learn how to do both at once.
- Insist that regulated entities (a) are transparent, (b) are licensed according to objective standards, (c) limit their directorial compensation, (d) redeploy operating cash flows back into the business, and (e) maintain meaningful cash liquidity.
- Profit is the price you pay for competence. Make sure entities can make money at every essential business function, otherwise the only entities remaining are those not competent.
- Consolidate deal funding sources. Every source above three adds exponential inefficiency.
- Do both supply-side (production) and demand-side (affordability) interventions. Each works best when the other is present.
- Diversity of product offerings is a strength, not a bug or a feature.
- Occupied homes and apartments are an asset, because they are 24/7 eyes on the street, in Jane Jacobs’s phrase. Unoccupied homes or apartments are a magnet for undesirables. Residential occupancy is the lifeblood of neighborhood health.
- Be aware that every market has informal affordable housing. In the U.S., we have mobile homes, colonias, in-law apartments, and roommate group houses, to name a few. All these add to the supply of affordable housing, yet are at best invisible and at worst actively discouraged. That is a mistake.
- Every nation over-rates homeownership, whereas a good supply of quality sustainable affordable rental is the key to urban economic growth, because rental is where jobs-in-formation incubate.
- What is market today will be below market in ten years, because technology is remaking what we think of as ‘basic accommodations.’ Plan for physical reconfiguration and hence for tenure change and refinancing.
- Don’t write in statute anything that might need to be changed any time in the next twenty years.
- Put the infrastructure in before the city grows, not after – even if the infrastructure is sketchy (‘an arterial city of dirt roads,’ in Shlomo Angel’s great phrase). Infrastructure will not pay for itself except as a platform for greater economic efficiency and hence for city wealth creation.
- Communities and cities own market failures such as slums or foreclosures, so housing finance must always be anchored in local conditions. The more we securitize into abstract instruments removed from individual markets, the greater the capital-cost efficiency but the less the market-responsiveness flexibility. One can make a strong case that we wouldn’t have the current foreclosure fiasco had we not eliminated the S&Ls and with them their local touch on the markets.
- “The past is a foreign country; they do things differently there.” We have forgotten America’s own housing past, and lost lessons along the way: the value of flat rents and not means-adjusting (U.S. before the Brooke Amendment); the utility of rooming houses and multi-household housing; the criticality of localized market knowledge and dedicated housing-finance capital sources (S&L’s or building societies).
David A. Smith is the founder and chairman of Recap Real Estate Advisors.
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