White House economist: Affordable housing has ‘ROI problem’

To put it plainly, there are just not enough homes to go around. The issue has, unsurprisingly, become a major theme on the presidential campaign trail. Vice President Kamala Harris is calling for subsidized construction and expanding assistance to first-time homebuyers. Donald Trump has promised to get rates lower, reduce red tape, and crack down on immigration to reduce competition for scarce homes.

Meanwhile, senior White House economist Jared Bernstein has opinions of his own. Shortly after the Fed’s September rate cut, Bernstein spoke with Fortune to share what he sees as the necessary measures to solve the nation’s housing shortage. Some of the fixes, he said, are relatively straightforward.

“From the perspective of developers, building affordable housing just does not pencil out,” said Bernstein, chair of the president’s Council of Economic Advisers.

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

“In no small part,” he said, “because low- and even middle-income people can’t always pay what it costs to develop such properties, and that is a very clear market failure.”

One tried and true measure of fixing this “ROI problem” for multifamily housing, he said, is the low-income housing tax credit, which requires developers to reserve a certain percentage of rent-restricted units for lower-income families. According to the Urban-Brookings Tax Policy Center, it’s by far the largest federal program encouraging 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 proposed annual budget in March called for a $37 billion expansion of the credit, as well as cutting a private bond financing requirement in half to create more deals.

Many critics say various intermediaries take a cut of the credit, meaning a significant part of the subsidy does not go to creating new housing stock, and add that the credit can inflate housing prices overall. 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 Tax Policy Center.

Getting around “NIMBYism”

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

Many states and cities are trying to alter zoning rules to allow for greater population density, particularly by enabling duplexes and triplexes to be built in neighborhoods designed for single-family homes. Blowback from homeowners, however, can snuff these efforts out.

When residents say “not in my backyard,” a phenomenon famously 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 the ability of cities to say no, people find other barriers, according to Sean Dobson, chairman and CEO of the Amherst Group.

“And it’s this tension between the cities trying to create more housing and the landowners trying to preserve what their view is of housing, [that] is really the source of the friction,” Dobson said at Fortune’s 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 to states and cities implementing zoning reform. Programs from the Department of Transportation and Department of Housing and Urban Development have similar components.

“When we structure some of the grants and loans that we provide,” 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 free up some exclusionary zoning, and we’ll make sure you have a better chance of getting that bid.’”

Maybe that will lead to some more homes—and lower prices.