Financing Affordable Housing: New Age Models and Solutions for the Los Angeles Market
Affordable housing in Los Angeles is more than a necessity; it's a critical component of urban sustainability.
In a city where the skyline is dotted with cranes and new developments, the gap between the housing supply and the needs of the less affluent grows wider.
In the context of the Los Angeles real estate market, recent trends and data highlight a widening gap between housing supply and the needs of less affluent residents. As of 2023, the housing market in Los Angeles County has experienced a notable surge in prices alongside a decline in sales. This scenario indicates a robust demand but a limited supply of homes, which exacerbates the affordability crisis. In July 2023, the median sold price in Southern California reached $830,000, with Los Angeles County even higher at $851,540. This increase in prices is a clear sign of strong demand. However, the market is constrained by a scarcity of available homes, causing prices to rise further. This situation creates a seller's market, where homes often sell above the asking price, making it increasingly challenging for lower-income individuals to afford housing.
Moreover, the Los Angeles housing market continues to face a long-term supply shortage. With only 2.9 months of housing supply left in Los Angeles County, the market falls short of the 4 to 6 months of supply typically needed for a balanced market. This shortage inevitably leads to upward pressure on home prices, making it even more difficult for less affluent buyers to enter the market.
This disparity doesn’t just impact those struggling to find a home; it ripples across the entire fabric of society, affecting economic stability and social welfare.
The Economic and Social Implications of Neglecting Affordable Housing
The consequences of overlooking affordable housing are profound. When people spend the majority of their income on rent, they have less to spend on other essentials like food, healthcare, and education. For instance, according to the US Bureau of Labor Statistics’s report from 2022: “ Los Angeles-area households spent $5,679, or 55.8 percent, of their food dollars on food at home and $4,495 (44.2 percent) on food away from home.”
This cycle of poverty exacerbates societal inequities, leading to increased homelessness, health issues, and a workforce that's perpetually struggling.
Innovative Financing Models: A New Dawn in Real Estate Investment
Traditional financing methods need to be revised to bridge the affordable housing gap.
Traditional financing methods have indeed struggled to adequately address the affordable housing gap, as evidenced by recent data and reports. According to the National Low Income Housing Coalition's (NLIHC) 2023 report, there is a critical national shortage of 7.3 million affordable and available rental homes for extremely low-income renters in the U.S. This shortage, calculated for renters with incomes at or below either the poverty line or 30% of their area median income, increased by over 500,000 rental homes between 2019 and 2021. The increase was due to a rise in the number of renters with extremely low incomes and a simultaneous decline in the housing supply affordable to them.
This situation is further compounded by the fact that just 33 affordable and available homes exist for every 100 renter households with extremely low incomes. This shortage impacts every state and the District of Columbia, leading to widespread housing cost burdens. Consequently, 73% of extremely low-income renter households are severely housing cost-burdened, spending more than half of their limited incomes on housing. They represent over seven out of every ten severely housing cost-burdened renters in the U.S.
The NLIHC report underscores the necessity of local zoning and land use reform to address the shortage of affordable rental housing. However, it emphasizes that these efforts alone are insufficient without significant federal investments in housing assistance. The report advocates for sustained investment by Congress in deeply income-targeted programs such as the National Housing Trust Fund, Housing Choice Vouchers, and public housing to effectively tackle the housing crisis faced by the lowest-income renters.
However, innovative models are emerging, offering new hope. Real estate investment funds, specifically those focused on social impacts, are increasingly being seen as a viable solution. These funds not only promise returns for investors but also ensure that projects meet the social needs of the community.
Social Impact Bonds: Aligning Interests for the Greater Good
Social impact bonds (SIBs) have indeed emerged as a novel approach, combining efforts from private investors, governments, and non-profits to address social issues such as affordable housing. These bonds function on an outcomes-based or pay-for-success model, where the returns to investors are contingent upon the achievement of specific program targets.
One notable example of the application of SIBs in the affordable housing sector is seen in the city of Denver. The city utilized social impact bonds to fund housing projects aimed at providing stable housing for the homeless and reducing their reliance on emergency services. This initiative focused on housing stability and aimed to decrease the use of jail beds by at least 20 percent. The success of this project was measured by its ability to achieve these outcomes, with the repayment to investors being contingent on this success. The use of SIBs in this case allowed Denver to fund important community programs and address chronic homelessness effectively.
Another instance of SIBs contributing to affordable housing solutions is seen in the larger context of impact investing. Globally, the impact investing market, which includes social impact bonds, is valued at over $500 billion. This indicates a significant shift towards more socially responsible investment practices, with a growing number of investors looking to contribute to projects that offer both financial returns and positive social outcomes.
Crowdfunding: Democratizing Real Estate Investment
Crowdfunding platforms are indeed becoming influential tools in funding affordable housing projects. These platforms allow for the aggregation of small amounts from a large number of people, effectively democratizing real estate investment. This approach opens up opportunities for individuals who may not have substantial capital but are eager to contribute to impactful projects.
The growth and potential of crowdfunding in general are highlighted by several key statistics:
Market Growth: The crowdfunding industry is experiencing rapid growth. In 2023, the market value of the crowdfunding industry is estimated to be $12.27 billion U.S. dollars. It's projected to double by 2027, growing at a compound annual growth rate (CAGR) of 11%.
Campaign Dynamics: Crowdfunding campaigns are expected to increase to over 12 million by the end of 2023; there’s an undeniable growing trend towards the use of crowdfunding platforms for a variety of projects, including those focused on social causes like affordable housing.
Donor Behavior: The average pledge for a fully funded project on crowdfunding platforms is around $96. This figure highlights that successful crowdfunding campaigns are often supported by many small-ticket pledges rather than a few large donations. This aspect is particularly important for affordable housing projects, as it enables a broad base of community support.
Community Investor Model: A new SEC rule could allow for a Community Investor model under Rule 506 and Regulation A+, which would be particularly beneficial for affordable housing projects. This model would involve more transparent and community-connected development, potentially opening up crowdfunding to a wider range of investors and projects.
Conclusion: Charting a New Course in Los Angeles' Housing Market
Los Angeles stands at a crossroads. The path we choose now in addressing the affordable housing crisis will define the city's future. By embracing innovative financing solutions like social impact bonds and crowdfunding, and by supporting real estate investment funds focused on social impacts, we can begin to mend the fabric of our society, providing stability and hope to those who need it most.
Disclaimer: This article is for informational purposes only and should not be considered as financial or investment advice. Please consult with a qualified financial advisor before making any investment decisions.
Endowed with vast expertise in financial and accounting management, Joumana Nasser is fundamental in providing the financial precision, transparency and accountability in FNX Development's real estate endeavors. Kickstarting her career post a business management degree from California State University-Northridge, Joumana navigated the intricate world of Bank of America's foreclosure department in 2010.
Transitioning through prominent roles, her command over sales, finance, and accounting steered her towards Agoura Hills Financial and eventually, the FNX Development Impact Fund. Joumana's unparalleled attention to detail ensures that figures are spot-on and timelines are met. At the forefront, she masterfully navigates finance and construction accounting, ensuring each project stands on firm financial ground.
Passionate about social causes, Joumana actively supports projects focused on children, disaster relief, education, and more.
