Pulling policy and financial levers for housing affordability with Carol Galante

Foreign

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David bank and from Impact Alpha. This is an Agents of Impact podcast.

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The regional government funding can de risk. It can put up, you know, say, the early money for the pre development expenses, make sure the project, you know, gets through its entitlements and has all the capital that it needs for subsidy. And it just needs, you know, good long term, call it permanent financing at a, you know, the best rate that's available.

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That's Carol Galante of the Turner center for Housing Innovation and the Housing Lab at UC Berkeley. She's a proud houser, as affordable housing practitioners like to call themselves. I spoke with Carol to identify some of the policy and finance levers that can make housing more affordable in California and beyond. Impact Alpha's affordable housing coverage is supported by the Chan Zuckerberg Initiative. Let's jump right into our conversation. Carol Galante, welcome to the podcast.

0:39

Thank you. Good to be here, Carol.

1:05

I've been a reporter in California for many decades and housing and housing affordability has been at the top of the list at all newspapers and in all news organizations and I think in all discussions in California. California is always the top of the charts in home prices, in number of homeless, on all the housing issues. And you've been at it, I know, for so long. So I want to just put it to you straight. What's the one or two things that we can do to bring back some level of housing affordability?

1:08

Well, hey, I wish there was a silver bullet. I don't think there really is. But I think the things that are most important to do right now, given the backlog of challenges that we have, is we have to build more housing. Like, number one, we just need to build more and we need to build it more cost effectively than we do today. Those two things together would make a big difference in how many people can affordably own a home or rent a home in California.

1:43

Okay, well, let's just take that, those, those two pieces that, because that seems like that will more than occupy our, our time together. We need to build more in earlier eras, you know, including of my newspaper career, you know, neighbors were up in arms sometimes over the amount of building that was going on my street here. Actually single family homes, but a bunch of those homes have been turned into apartment buildings back in the 70s. Now there's a whole new wave of building. How do you square the keep it the way we like it and the need to build more camps?

2:27

Yeah, that is really a huge challenge because you also have to add in there we can't build in some ways the way we did in the 1950s, which is just, you know, a single family home sprawl as far as the eye can see. Because that is, you know, environmentally and commuting wise, all those things, you know, becomes problematic. So we have to build more, you know, within the existing fabric of communities, which is a challenge, right? It's a challenge for those of us who live in neighborhoods that are single family homes, maybe older, you know, single family homes. And you know, the idea that we're going to, you know, build more accessory dwelling units and more, you know, divide a lot and put a couple houses on those, on that lot. Those ideas are, you know, challenging to neighbors and communities. I mean, geez, in most places, if you want to, you know, build a fence, you have to get the approval of all your neighbors, you know. So the fact is that we've got to loosen some of those regulations and the state of California has been doing that.

3:00

It seems like there has been a bit of a sea change. California was known for being, you know, super cumbersome, I think, and particular cities as well. And now I think it's. The pendulum has swung in the other direction. How's that working out?

4:19

I wouldn't say it's totally swung in the other direction. I think we've made progress in the direction of. And there's some backlash because of that progress. We've made progress though in the ability to build multiple homes in existing neighborhoods. We've also done a lot around streamlining the approvals process around transit hubs, for example. So going denser where it makes sense to go denser, meaning four, five, six story buildings. And then in the neighborhoods doing what I call gentle density, kind of knitting in, you know, the fabric into the fabric of the neighborhood, some additional homes. And it is working. I mean, we have, you know, the single most permits permitted in most jurisdictions these days has been accessory dwelling units or those granny flats or whatever you want to call them, of accessory units to existing single family homes. That's the number one permit pulled in in California these days. So you've got two lanes now, right? You've got this small, gentle infill density, which on its own is going to make a difference, but it's never going to solve the entirety of the need to build more. And then the other track is building more, mostly apartments, although I'd love to see more condominiums instead of just apartments. But that would take some additional changes as at the state level around permitting rules.

4:32

Now building more is great, but many of those units are not going to be affordable. I understand in the housing world, you know, the sort of total number of units is what folks look at. And that in fact, even building market rate units, you know, has a salutary effect down, down the market as well. So are we just talking about sort of any number of units to ease the crunch, or are we talking about the kinds of affordable housing that people might think of, either income housing or inclusionary zoning or all these kinds of things that bring affordable units onto the market?

6:16

So in my view, you need to do both. I mean, you can't focus only on the extremely low income or the homelessness issue because that's not going to solve the problem either. Because if you don't build housing that the vast majority of people can afford, essentially in the private sector, maybe with some governmental assistance, which we can talk about, you're not going to solve the broad affordability issue. Because the affordability issue now is both deep in terms of income, like extremely low income people are very burdened. And on the other end, you've got middle class people who can't afford to buy a home affordably in places like California. And it's, you know, these issues are, you know, becoming problems in the rest of the country too. And that is not sustainable for our economy. It's not sustainable for, you know, people are going to move to the lowest cost places that they can move where they can buy a home. And so we're going to lose kind of the backbone of our workforce. All of those issues are integrated. It's not just about housing. It's about the economy and it's about quality of life. So we have to do both. And building more market rate and building more affordably. What might be considered market rate, making it available at the more you build, the lower the cost. You will be able to, you know, serve it up, you know, to the consumers. I mean, you take an example people, I don't think a lot of people believe this, but if you either have less demand or you have more supply and your prices will drop.

6:51

I think I did hear that somewhere.

8:53

And just take, you know, take San Francisco during the, you know, post pandemic years, or city of Oakland post pandemic year, I mean, the high end quote unquote, luxury rents dropped like, you know, like a rock. Why? Because there were a lot of regulatory reasons during COVID But afterwards it was like, well, people had moved to more affordable places when, you know, they didn't have to commute into San Francisco anymore. And, you know, that's changing now because again, the economy is. Is coming back, but rents will fall if the demand isn't there, and rents will fall if there's more supply available to those who can afford it.

8:57

That's an abundance argument. As Ezra Klein and Derek Thompson pointed out last year, build more of it and prices will fall. You've been involved, I know, with the Turner center for Housing Innovation at UC Berkeley and the Housing Lab there, around innovations. What are the exciting innovations, particularly in the second part of your platform, around making it cheaper to build? Actually, yeah.

9:47

So we have spent a lot of time at Turner center focusing on industrialized construction methods, on, you know, so streamlining, of course, for the permitting process, but also making the actual construction of homes more affordable. So building more in factories, building more parts in factories. All of that makes it less expensive. You know, you can easily cut 50%. Easily, that's a strong word. But you can cut 50% of the timeline of building by building it off site while in a factory, while at the same time you're doing all the grading and the work that you need to do on site, and then bringing it together, that cuts your interest rates on your construction loan. You know, the amount of time you have on a construction loan, that. That saves a ton of money. And so that's one way to actually bring the cost of building down. The other issue that we're working on very actively right now is dealing with all the layering of the financing sources, particularly when you're talking about housing affordability and the cost that that adds to the overall cost of the project. I mean, we've done studies that show that for every layer of financing you put on an affordable housing development, you know, the costs go up, you know, 3%. You know, like, that's not much. But when you have five sources of financing, all of a sudden that, you know, that's a lot of extra cost to carry and complication and time.

10:11

Well, that's what I was going to ask you. What are the financial innovations and then by extension, what are the roles of private investors that could help reduce the cost of capital and reduce maybe the number of layers as well?

12:05

Well, there are two things on the government side. I mean, there has been an effort in the, at the state level in California as an example, to consolidate their own apparatus up there in Sacramento for how they allocate and administer state funding. And that's just getting underway. But I think that's a really important fact to have on the table. The second that, you know, I've been somewhat involved in is working on what we Call regional housing finance agencies where you, I want to say, on one hand, devolve the funding down to the regional level from the state and at the other end, expand a regional effort so that localities aren't kind of left on their own to finance the gap that's required on many of these developments in order to make them financially feasible. And local governments are in tough spots these days with the economy as it's been post Covid. And so their budgets are tight, they don't have the money. So aggregating. So to get to scale in new development and acquisitions, even of existing properties, consolidating some effort at a regional level. So Bay Area, San Diego, Los Angeles, you know, each have formed regional housing finance agencies to supplement and fill in gaps and also be able to get to some economies of scale.

12:19

It should be pointed out that in California, these regional groupings are, in population terms, are probably bigger than many states, but smaller than the sprawling state of California as a whole. And that the regional areas, as you say, have certain natural affinities. I mean, transportation is regional and certainly air quality and commute times and other things, job employment markets are all regional. So how housing markets can be regional as well. And just give us a little sense of like in Los Angeles, I know there's some very interesting bonds being floated to be able to finance more housing and ways of, I guess, stacking up capital. I don't know whether that adds costs or reduces costs. So how's it working out?

14:26

Well, Los Angeles has passed a sales tax measure and there's an entity called La Casa, and it's LA county, which is very large, you know, compared to, say, any Bay Area county in terms of population. So it's one county, but it's regional. There's a number of cities, you know, including the city of Los Angeles, but lots of other cities in Los Angeles county. So they are now underway. They're. They've passed that sales tax measure and you know, they have, you know, several hundred million dollars to be able to allocate to new housing development. And they are just underway with starting to put out that money. So it's a little early to say what the impact is going to be, but they have a, you know, that the key thing is they have a steady stream of subsidy from this sales tax measure that can help both homeless housing and the services that those folks need to get back on their feet or to be serviced if they have disabilities or whatever. So it's a steady stream. And so that creates the environment in which you can leverage Both private sector money with that steady stream of capital to help make these projects economically feasible for the private sector to also step in. And then you're leveraging that, that subsidy.

15:14

Just stick on that for a second. What are the opportunities for private investors, and in particular what we might call impact investors to have a, to play a useful role in this conundrum of the housing finance?

17:02

I mean, I think there's a number of different roles. I mean impact capital can come in to a particular development that has a backing in some way from the regional entity. And so there's different examples of how that can happen. One is perhaps the regional government funding can de risk. It can put up, you know, say the early money for the pre development expenses, make sure the project, you know, gets through its entitlements and has all the capital that it needs for subsidy. And it just needs, you know, good long term, call it permanent financing at a, you know, the best rate that's available. And that sometimes is not, you know, going to your, you know, big bank, you know, to get that funding the other way is less expensive, again, more patient for lack of a better term, capital as a debt piece that where the return is coming, you know, over time or through aggregation, you know, just like the real estate investment trusts. You know, I mean, part of the way that the returns get done there is, you know, because you've got aggregation of a portfolio. So again, getting to that scale that can attract impact capital. I mean if you're not doing enough impact capital isn't going to come in, you know, for a couple million dollars a deal like, you know, like it's a lot of work. It's, you know, you have to be at scale to make it worthwhile for that capital to invest. So they can co invest actually at the la casa level, maybe not even at the deal level. So there's a lot of different structures that I think could be put into play.

17:18

The other topic that obviously commands a lot of attention in California is homelessness. And it's another one of the intractable issues over time. Are there any bright lights of solutions or approaches there that are working?

19:23

Well, I think there are. I would say that they're working to a degree. Permanent supportive housing does work, but right now it's extremely expensive to build. So the effort to get the costs lower and to build differently for that population than you would build for the market and that was like you got to have the right kind of social service space. You have to just have a very intense service package because people who have been on the streets for a long time, have many needs. It's not just housing. Housing is certainly first and foremost, but, you know, they have a lot of other needs. Then there's also, you know, one of the things that these regional agencies can do is more, you know, I'll call it temporary intervention. And I don't mean temporary new homes. I mean keeping people in their homes, keeping people, you know, that short term, $500 that, you know, but for that, they're going to be on the streets the next day. So there are interventions that say the Bay Area Housing Finance Agency has worked on some localities that are large enough, have worked on, and those are proving to be catching people before they are on the streets and catching them before they're on the streets for a long time. Because once they're on the streets for a long time, you know, their outcomes become worse than if, you know, they're helped at an earlier phase in the process.

19:41

So an ounce of prevention will be much, will be much cheaper. Let me just bring it back around and say California often gets held up as a kind of cautionary tale or some kind of apocalyptic hellscape that other states would, would not like to become. Is there any way in which California is leading the way for solutions that actually might be useful in other parts of the country?

21:38

Well, I do think we led the way along with probably State of Oregon on all the permitting reforms. And maybe we had the worst regulatory environment. So maybe that's not a great example. But this whole movement to gentle density, I mean, really, necessity is the mother of invention. And I think California has had the advantage of having such a deep problem that those things have really helped. I would also say just innovations of companies. In Turner Labs, we, you know, foster, we have a cohort of companies each year that are working on housing affordability issues, you know, and so we help them navigate the regulatory system. I mean, an example is, you know, Fannie Mae and FHA now will help enable accessory dwelling units to be built for people who don't have a lot of equity, you know, to use to build that home. You can get financing now under certain circumstances from these, you know, backed by these large institutions, which, you know, is all because, you know, not all because, but because we help start a movement to fix that problem, you know, identify the problem and then work on both the private sector solution and the public sector regulatory solution, you know, to go together.

22:08

And we haven't focused too much on federal policy, but President Trump has interestingly been calling for a ban on private equity fund Purchases of single family homes. There's been a big wave of acquisitions of homes and turned into rental housing, and that's had a effect on the housing market. Is that a good idea?

23:58

Well, the question is, what is a good idea? So I have a lot of opinions about this, which is, I think the idea that single family rentals are bad is just incorrect. I live in a pretty exclusive neighborhood and both of the single family homes on each side of me are rented now. They're rented by the people who own these homes and lived in them. You know, one of them has moved to assisted living and, you know, her son is managing the home for her. So absolutely nothing wrong with that. In fact, there's a lot right about it. It's giving families who could otherwise never afford to live in this neighborhood to live here at a market rate, rent for single family homes. So I think the, the movement against single family rentals is overblown. There can be corporate aggregation in some neighborhoods, and I don't think that's hugely common at the moment. I think the regulatory scheme that's being talked about is to try to prevent that concept from spreading. And, you know, I see some value in that. Just, just like, you know, I don't think you want, you know, you don't want a company town that has a monopoly on the real estate because if they do, then they can raise rents or, you know, do what they wish, not maintain the homes, et cetera, you know, without punity, impunity, with. They could do it with impunity. Right. So there's a, you know, I'm in favor of capitalism, but I'm in favor of regulated capitalism when, you know, it becomes usury to the consumers and whatnot. But I think the ban on, and I don't think it's going quite that far, but I think that's the issue is should it be regulated? I think yes. But should it be banned? I say no.

24:20

Pragmatic realism. Carol Galante, I can see why you're a longtime leader in what I think you proudly refer to the community as the community of Housers. And you'll be our favorite Hauser going forward. So please come back and keep us in the loop on housing innovation and housing affordability. Thank you so much for joining us.

26:45

Thanks for letting me be here. Talk to you soon.

27:09

That's going to do it for this Agents of Impact podcast. Big thanks to Carol Galante, to our producer Isaac Silk, to the whole team at Impact Alpha, and to all of you agents of Impact, with gratitude for all that you do,

27:13

Sam?

27:29