When I was a very little boy, my grandmother’s house, an unbelievably long ­are-we-there-yet? place six hours’ drive down the Merritt Parkway, the Wilbur Cross, and the Garden State Parkway, was a magical place. 

Bridges inspired by Robert Moses to keep out trucks

It had stucco walls, a screened-in back porch, and railroad tracks just behind, and if one walked to the town center, you could take the train into Manhattan, where my grandfather worked for the Saturday Evening Post.  By far the best room was upstairs, the spare bedroom with its small mountain of children’s books, one of which was the Five Chinese Brothers. 

Nowadays we’d find this 1938 children’s tale stereotypical and condescending, for its critical premise is that although the five brothers all look alike to outsiders, each has a unique and wonderful special skill, used in story sequence to keep the first brother from being executed for a good deed that backfired.  

I found myself thinking very fondly of the Five Chinese Brothers earlier this week, when I was explaining to someone that housing ecosystems are supported by five distinct broad coalitions, each of which has unique attributes and behaves with predictable logic, even if each of which is comprised of dozens to millions of individuals acting in their own self-interest has unique attributes — and when they all work together, like the Five Chinese Brothers they are invincible:

1.         Family/ household.  Good housing incubates good families; good housing incubates bad families.  If the house is not a home, if children have nowhere to be loved by their parents, the family fails.  Home ownership changes behavior, for the attributes of homeownership bring out the civilizing influences in people (especially men).

Just another improving homeowner, sharpening the fence spikes

Investment (whether financial, personal, spiritual, or emotional) in the home means investment in the school system, local government, public safety and private behavior. 

As Pruitt-Igoe, Robert Taylor Homes, and other decrepit public housing mutely testify, any system that demotivates residents to care about their housing is doomed to failure. 

2.      Sponsor/ owner/ manager.  Affordable housing is a complex business; it’s hard work, highly specialized and often thankless. 

I develop affordable housing and this is the thanks I get?

Being a landlord is not a popularity contest.  Moreover, because affordable housing pursues the ‘double bottom line,’ economic and social objectives are always in a tension. 

“Affordability!” “Economics!”

Affordable housing property management is a highly specialized business that takes training, experience, and both brains and heart.

Affordable property — especially affordable rental — must be looked after; more, it must be cared for.  If it is not, it collapses.

3.         Capital markets.  “You know what makes this bird go up?” asked Tom Wolfe’s imagined Gordo Cooper in The Right Stuff.  “Funding makes this bird go up.” 

Added sidekick Virgil Ivan (“Gus, just Gus”) Grisson, “He’s right.  No bucks, no Buck Rogers.” 

Without government financial resources, quality affordable housing would never be sustainable.  And without the capital markets — Mycroft Holmes’s multi-floor money store — government would never be able to lever its money to go far enough.  As Mycroft’s brother Sherlock put it:

“Money,” said Holmes, “that is, investment capital, can be bought and sold — which is equity, hard or soft.  And it can be rented, with debt also hard or soft.  But regardless of the form, equity or debt, it has a price, and that price is measured in yield, the weighted average cost of capital.  We saw with my friend Musgrave that he needs capital.” 

And capital, dear boy, is everything

As does government and every developer.  So although the financier’s contribution is intangible — as a developer once challenged me, “How many bricks you put in my building?” — it is no less essential.  And if the capital markets turn thumbs down on a venture, that venture is likely to fail, and probably deserves to fail, because it has been improperly underwritten.

Questioning the underwriting

As Mycroft Holmes summarized,

“This whole edifice, all its floors and all of our competitors, one vast interconnected financial ecosystem that sifts risk down until it meets willing capital, and sifts yield up until it meets a hungry consumer.  Rising and falling, risk and benefit, just as we rise and fall in this iron contraption.”

If risk does not migrate away from government, then government spends large sums and gets nothing for its money. 

Speaking of government, let’s meet the next two brothers.

4.         Locality and local government.  Without free-flowing, liquid capital, money economies cannot produce enough housing, let alone enough affordable housing.  But capital, as numerous economists (most recently Hernando de Soto) have observed, is shy and skittish.  It cannot be compelled, it must be coaxed.  In the modern age, no government has ever confiscated or confined capital for very long — it always finds a way to run and hide, to the nation’s or locality’s detriment. 

Property is sessile, people are mobile, jobs are more mobile, and capital travels at warp speed.  So the myriad of other laws, incentives, subsidies, and conditional permissions that make up the government incentives menu prove to be the distinguishing feature between attracting new affordable housing investment and repelling it. 

Short-term good, long-term bad, Hugo!

Additionally, of the public-policy interventions where government may choose to spend its money, housing is not only the most expensive, it is also the least mobile.  Property, after all, does not move –

Not going anywhere

– unlike health care, jobs, education, or public safety, all of which are mobile.  Whereas those interventions can be created at multiple levels (for instance, we have local cops, state cops, and Federal police), housing is ultimately local; thus the unit of government that most cares about affordable housing, and most influences affordable housing, is local government. 

Everybody can come, everybody can speak

As I’ve said elsewhere, local government demonstrates its interest in or antipathy toward affordable housing through its mixture of real estate taxation (incentives) and zoning (incentives or barriers).

Local government is also the front lines of housing affordability, for good or ill — it’s where the rubber meets the road.

If local government opposes affordable housing, it is all but impossible to create it unless the state or Federal governments use crowbars (inclusionary zoning overrides like Massachusetts Chapter 40B) or blunt instruments (like the old desegregation orders). 

Unless the locality gains something from housing affordability, the other brothers are often thwarted.

5.         National government.  Even as property is local, capital — and the policies that influence capital at a macroeconomic level — is national.  Interest rates; income taxation; special tax treatment of housing, rental property, or affordable housing; even particular forms of ownership such as non-profits; all are governed by laws and decisions made at the national level. 

They go up, they go down, and they affect all of us

Aligning the interests: having the brothers work as a team.  Because national policy is the largest stage, it gets the most attention.  Further, it is decided by a handful of people — even in the US Congress, there are scarcely twenty elected members in both chambers who make a serious study of affordable housing (that is not a knock on Congress; rather, the members have scores of areas, and divide up responsibility among themselves). 

Simple impact analysis causes many advocates to focus their attention on national policy, often to the exclusion of local policy, capital markets implications, and even dynamics at the household level.  This is tempting, and understandable, but wrong — we ignore the other brothers at our peril. 

See what happens when you ignore the financial elephant in the room?

In fact, and even more challengingly, programs work only when each subgroup within a constituency has incentives aligned with the others’.  It is not enough, for instance, to address the motivations of developers — owners and managers are distinct and legitimate constituencies with incentives different from (even if similar to) those of their fellow private-sector participants.

Still, the prospect of further complications is too gloomy for this post. 

Housing policy and program development works only when it results in programs that give benefits to all five brothers simultaneously.  When that happens, nothing is impossible.

What happens when the incentives are aligned

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