A Little-Known Corner of the Lending Industry Can Help Our Housing Crisis
By Adam Briones September 17, 2024 8:00 am
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America’s housing affordability crisis has gotten so bad that it’s become an issue in the presidential campaign. Democratic nominee Kamala Harris has announced a multi-part plan to cut housing costs, and while neither candidate will be president until January, the rest of us involved in housing shouldn’t wait to do what we can. Today, a relatively little-known segment of the lending world can help create the solution we need.
Community development financial institutions (CDFIs) have traditionally focused mainly on helping small businesses, playing a relatively minor role in housing finance aside from a few large entities supporting traditional affordable housing projects, often financed through the federal Low-Income Housing Tax Credit program. Today, CDFIs can help relieve the housing crisis by filling gaps in available financing for new housing.
In her convention speech, Harris highlighted her housing plan that seeks to build 3 million new homes. Former President Barack Obama added, “If we want to make it easier for more young people to buy a home, we need to build more units, and clear away some of the outdated laws and regulations that have made it harder to build homes for working people.”
Indeed, experts have identified exclusionary, single-family zoning as a major impediment to increasing the housing supply and reducing costs.
Happily, many places have enacted or are considering zoning reforms. In California, home to the organization I lead, legislators have passed a series of laws designed to make it easier to build “missing middle” housing — developments of between two and 10 units that can significantly expand the supply of both rental and for-sale homes affordable to working families.
A variety of similar reforms to allow increased density and smaller lot sizes and to permit accessory dwelling units have been enacted all over the country — in places like Minneapolis, Houston, Columbus and Milwaukee, as well as the states of Rhode Island and Hawaii. These reforms can improve affordability because they inherently use significantly less land per housing unit. Single-family homes by their very nature are more expensive than townhouses or small, multi-unit buildings.
Much attention has rightly focused on renters, with a growing number of Americans severely rent-burdened. But we must also create more affordable homeownership opportunities. Homeownership remains the primary way most Americans build wealth, but single-family homeownership is far out of reach for too many — especially Black and Latino families who, on average, have less wealth and lower incomes than whites. Middle-density, for-sale housing is the most cost-effective way to increase homeownership in these communities.
The sorts of two- to 10-unit developments that these zoning reforms facilitate can have other important benefits. More compact neighborhoods with less sprawl — especially when the increased density is near public transit and near the places where residents work, shop, and go to school — mean less traffic and shorter commutes. That, in turn, leads to reduced smog and greenhouse gas emissions — a win-win-win scenario.
But zoning reforms alone won’t get middle-density housing built.
A recent white paper by Enterprise Community Partners states, “There is a consensus among housing developers and experts that inadequate access to financing is one of the prominent challenges to developing smaller-scale multifamily housing.” That same report found that these financing challenges primarily stem from the scale of development and the fact that “these developments are often pursued by small-scale developers,” who are more likely than larger ones to struggle to meet the capital and underwriting requirements of commercial lenders.
The White House has also pointed out important gaps in available construction financing, noting that “market gaps exist for the construction and rehabilitation of single-family homes, two- to four-unit properties, ADU construction, manufactured and modular housing delivery, and smaller multifamily properties.” This financing gap has clearly slowed progress in building more middle-density housing, and CDFIs can help. They can fund some projects themselves, but they don’t have to do it all: If they demonstrate that this type of lending can be profitable, commercial lenders will naturally follow.
CDFIs have a strong track record in small business lending, successfully addressing market gaps in traditional lending for socially beneficial endeavors. CDFIs have greatly helped meet the needs of small-business and microenterprise owners throughout the U.S. who face structural hardships in accessing capital from traditional lenders.
Broadening their work to fill in the financing gap for small, multi-unit housing projects could help significantly in making this type of housing available on a scale large enough to help ease our housing affordability crisis. The field urgently needs the creativity that CDFIs now bring to small-business lending, the sooner the better.
Adam Briones is CEO of California Community Builders, an Oakland nonprofit that works to close the racial wealth gap through housing and homeownership.
