Using capitalism to rescue working-class housing affordability


There are many issues for working people that arise from modern capitalism. For those making less than median income, but more than 60% of median income, housing affordability is a huge unsolved issue.

I don’t always agree with Goldman Sachs, but when I do it’s about the nature of modern capitalism. From a recent Bloomberg article:

Goldman says: “We are always wary of guiding for mean reversion. But, if we are wrong and high margins manage to endure for the next few years (particularly when global demand growth is below trend), there are broader questions to be asked about the efficacy of capitalism.”

Goldman has valid concerns: the fundamental issues with modern capitalism lie in its inability to create economic demand drivers and the savings effect economic principle. First, lagging demand stems from wages not keeping up with productivity since the early 1970’s: the real hourly wage of a typical worker should have grown from $9.58 in 1968 to $18.42 in 2014 based on productivity—real wages were actually $10.89—hurting workers directly (source: Economic Policy Institute). Second, the savings effect explains more issues with modern capitalism: between 1979 and 2013, the top 1% received 138% of income growth while the bottom 90% received only 15% of income growth (source: Economic Policy Institute). The savings effect principle suggests that the top 1%, with very high income, is more likely to save their net income instead of reinvesting into the economy, which hurts workers indirectly.

I haven’t figured out how to fix capitalism yet—I’ll work on that next—but its rational greed can begin to benefit working people under the right set of incentives.

We can create tax incentives for directing investment capital to a new class of REIT, a “Tax Exempt Affordable Housing REIT.” This class of REIT would be either publicly or privately traded and might actually help the 30th to 50th percentile of households in each county (60% to 100% of AMI) have more affordable housing options. The HUD affordability calculation leaves much to be desired, but creating a structure that restricts rents to 30% of annual income would help these households making below median income but above the tax credit project thresholds find and keep housing.

There are a number of federal tax policies that assist “low-income” housing, but they do not directly help “working class” households earning above 60% AMI and below 100% AMI. Locally, above 80% AMI is the real no man’s land of housing affordability.

Affordable housing is closer to long-term government bonds than the S&P 500 on the risk spectrum compared with market rate housing. But that’s not necessarily enough to make someone invest in affordable housing instead of the S&P 500 and its currently over-inflated profit margins that Goldman worries about.

Development costs are high, and the only incentive that we see working well in the 60%-100% AMI housing space is the Multi-Family Tax Exemption program for 80% AMI and below. The new Tax Exempt Affordable Housing REIT program would combine the investor class’ penchant for reducing tax burdens with affordable housing investment.

The Affordable Housing Investment Deduction would be a capital gains and ordinary income tax deduction for the individual investor for income derived from “Tax Exempt Affordable Housing REITs.” The AHREIT would be a for-profit entity that owns a majority general or limited partnership stake in units occupied by households that make less than 100% of AMI. Some mechanism would have to be put in-place for tax forms from pension plans to indicate the amount of the pro-rata cashflow from the affordable housing REIT investment as well. At the end of the day this makes a less risky investment with lower returns more attractive to every level of investor and helps real people have homes they can afford.


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