White House economist: Affordable housing has ‘return on investment problem’

To put it bluntly, there simply aren’t enough houses to go around. The issue has, unsurprisingly, become a major theme on the presidential campaign trail. Vice President Kamala Harris calls for subsidized construction and expanded assistance for first-time home buyers. Donald Trump has promised to cut tariffs, cut red tape and crack down on immigration to reduce competition for scarce homes.

Meanwhile, senior White House economist Jared Bernstein has his own views. Shortly after the Fed’s rate cut in September, Bernstein spoke with wealth to share what they believe are the steps needed to solve the nation’s housing shortage. Some of the fixes, he said, are relatively simple.

“From the developers’ point of view, building affordable housing just doesn’t scale,” said Bernstein, chairman of the president’s Council of Economic Advisers.

Incentives are needed to build such housing, he said, to help developers get a return on their investment.

“In large part,” he said, “because low- and even middle-income people can’t always pay what it costs to develop such properties, and that’s a very clear market failure.”

A tried-and-true remedy to this “return on investment problem” for multifamily housing, he said, is the low-income housing tax credit, which requires developers to set aside a certain percentage of rent-restricted units for income families smaller. According to the Urban-Brookings Fiscal Policy Center, it is by far the largest federal program that encourages affordable rental housing for low-income households.

The Joint Committee on Taxation estimates the program will cost $15.2 billion by 2025. President Joe Biden’s annual budget proposed in March called for a $37 billion extension of the credit, as well as cutting the funding requirement in half of private bonds to create more deals.

Many critics say that various intermediaries take a cut of the credit, meaning a significant portion of the subsidy is not used to create new housing stock, and add that the credit can inflate housing prices in general. At the same time, some state authorities tend to approve projects that concentrate low-income developments in areas where they have historically been clustered and where economic opportunities are limited, according to the Fiscal Policy Center.

Moving into “NIMBYism”

Bernstein, who mentioned similar incentives for building affordable single-family housing, is known as a staunch progressive. Still, both Republicans and Democrats across the country agree with him that restrictive land-use policies are also a major obstacle to addressing the housing shortage.

Many states and cities are trying to change zoning rules to allow for higher population density, particularly allowing the construction of duplexes and triplexes in neighborhoods designed for single-family homes. The pushback from homeowners, however, can undo those efforts.

When residents say “not in my backyard,” a phenomenon known in the real estate industry as NIMBYism, they often pack city or town council meetings and pressure local officials to block such changes. Even when states pass laws to limit cities’ ability to say no, people find other barriers, according to Sean Dobson, president and CEO of the Amherst Group.

“And this tension between cities trying to create more housing and landowners trying to preserve what they think housing is, (that) is really the source of the friction,” Dobson said at Of luck Future of Finance conference in May.

Bernstein believes that’s where the federal government can help. In 2022, a $1.7 trillion spending package from Congress included $85 million in grants for states and cities implementing zoning reform. Programs from the Department of Transportation and the Department of Housing and Urban Development have similar components.

“When we structure some of the grants and loans that we do,” Bernstein explained, “we say, ‘Look, if you want an infrastructure grant, that’s great. We want to give it to you. Tell us how you’re going to clear certain exclusion zones and we’ll make sure you have a better chance of getting that offer.’”

Maybe that will lead to more houses – and lower prices.