Affordable Housing Institute : US

Though the housing financial ecosystem is complex and interdependent, we can see it, like the rain forest, as having several distinct ecological subsystems, the housing finance ecosystem can be thought of as four inter-related sub-ecologies:

 

1. Finance.  Effective markets for property developers to raise long-term capital (debt, equity, and everything in between), with reliable costs of capital and efficient tradeability of instruments.

 

2. Homeownership. Broad participation in homeownership and financial products that enable households to move up and down the ownership spectrum as their economic and personal circumstances change over their lives.

 

3. Permanent rental housing.  A large supply of for-rent properties co-located not only with homeownership tenures but also with proximity to healthy communities (jobs, retail, schools and recreation).

 

4. Sustainable affordable housing.  Specific incentives and resources to bring affordability to the lowest quintile of the population.

 

Though they are interdependent, some are much more dependent than others.  Specifically, each higher number is sustainable only if the lower-numbered ecosystem is healthy and functioning.   You can have physical homes without finance, but you cannot make homeownership financially meaningful without finance.

 

Here is one of the great challenges of housing. 

 

Want a house, anywhere in the world?  Gather together, donate the materials, donate the labor, and build it.  From Habitat For Humanity to the self-built slum, that physical assembly process is the same. 

 

Want to resell a house, at a market-clearing price?  Now you need a financial ecosystem.

 

I think of them as rings, each lower one broader than the ones above, stacked up together in a shape known to puzzlists as the Tower of Hanoi:

 

“Let’s see, does homeownership go on top of sustainable affordable housing, or finance?”

 

In the Tower of Hanoi puzzle, you can move only one ring at a time, and you cannot place a larger ring atop a smaller one.  The puzzle is how to shift a whole stack of rings. 

 

This little metaphor is more applicable than at first blush it might seem.  Each higher level depends for its success on accessing specialized versions of the tools created for the lower level.  In rain-forest terms, affordable housing is an epiphytic plant, living among the branches of more fundamental species (such as functioning rental development, effective property financing tools, and stable capital markets).

 

It also provides a cautionary tale for Yanks like me who work in other countries.  When one migrates out of the US — the world’s most complex housing finance ecosystem, heavily populated and arguably overgrown with native species — to other countries, one cannot be like Captain William Bligh, bearing a single plant and expecting it to take root.  The higher-level ecosystemic advances — permanent rental housing, sustainable affordable housing — cannot be transplanted in like so many cuttings and expected to grow if the fundamentals of homeownership finance and capital markets are undeveloped or withering.  Parachute them in and, after a brief flowering stimulating by fertilizer lucre, they simply die.

 

In short, before you can improve the ecosystem, you have to understand it — its census, its dynamics, its market gaps — and design interventions at the right point: basically, the highest properly stacked ring of housing finance. 

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