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Impact Investing: A Tool to Lead Us Out of a Widening Affordability Crisis

Paul Hwang By Paul Hwang, Portfolio Manager, IMPACT Community Capital

As we continue to shelter in place, the resulting economic downturn serves as an important reminder of the critical role that homes play in our well-being, and how this crisis is hitting our most vulnerable populations the hardest: people who can’t work from home, parents without leave time allowing them to be at home with their kids while schools are closed, and those already challenged to make rent even before the fastest surge of unemployment in U.S. history.

Now more than ever, we are thinking of these families, many of whom are serving as the backbone of the economy during this pandemic, delivering our packages, keeping public transportation running, and stocking our grocery store shelves. We must not forget that these workers — who are courageously putting their health on the line —face impossible decisions almost daily like buying groceries versus paying the utility bill because so much of their income goes to housing.

Even before the pandemic, businesses, including institutional investors, were beginning to recognize the importance of access to affordable housing for their employees, customers, partners and the communities in which they operate. They were coming to view affordable housing as critical infrastructure — a good investment and good for business. IMPACT agrees and believes that financing affordable housing presents an opportunity for investors seeking alternative fixed income investments, offering stable cash flows that also create good for their stakeholders and communities. Through our long-running affordable housing debt program, IMPACT provides investors opportunities to improve lives in their communities.

Households that spend more than 30% of their income on housing are considered to be “cost burdened.” More than 20 million renting households in the U.S. fall into this category, according to the National Low Income Housing Coalition. Harvard’s Joint Center for Housing Studies (JCHS) recently put this figure into greater context: Today, nearly half of all households that rent (47.5%) are cost burdened. And within this group, more than half are “severely cost burdened,” meaning more than half their income goes to paying just for housing. Most households in this latter group are at or below the poverty line (<30% AMI), but a growing number are above the poverty line.

Regardless of what cost-burdened households earn, one thing’s for certain: Families that must spend a third or more of their pay just to put a roof over their heads have less money left to spend on other things. A 2017 study by Federal Reserve economist Jeff Larrimore and Brookings Institution fellow Jenny Schuetz found that after paying rent, the median household in the lowest income quintile has less than $500 left over each month. In comparison, among all renters, the median household has nearly $2,200 left over each month after paying rent. To put this in perspective, the average household spends more than $360 a month just on food at home, according to 2017 consumer expenditure figures from the Bureau of Labor Statistics. If those in the lowest income quintile wanted to spend the monthly average on food at home, they would have just $140 to spend on everything else.

According to a 2019 ranking of the health of every county in the country, among adults who live in areas with the highest cost burden (ranked by decile), 19% are in poor health. In counties with the lowest level of cost burden, that figure drops to 13%. JCHS research found that severely cost-burdened households spent 37% less on food, 77% less on healthcare, and 60% less on transportation in 2017 than families who weren’t cost burdened.

Access to housing at affordable prices, like those financed by IMPACT, dramatically changes the lives of families. In Los Angeles, for example, the market rent for a 2-bedroom apartment was $1,791, as of April 2019, according to data provided by Novogradac and the U.S. Department of Housing and Urban Development. By comparison, the average monthly rent for Low Income Housing Tax Credit (LIHTC) housing, such as those financed by IMPACT (30% AMI) was $705, representing more than $1,000 in monthly savings. Affordable housing strengthens the broader economy by providing families with more money left over to spend on discretionary and non-discretionary goods and services. These positive impacts carry over year-over-year and cumulatively provide stability to increase family members long-term economic well-being. According to a 2019 paper written for the staff of the Joint Committee on Taxation, every additional year children live in LIHTC housing, there is a 3.5% increase in the likelihood of attending a four-year higher education program and a 3.2% increase in future earnings.

There’s a clear opportunity for investors and business: Bringing more affordable housing in their respective markets can improve the health and financial stability of their customers and employees. Investments that help finance the development of affordable rental units can offer greater stability than other forms of real estate lending through lower turnover and higher occupancy rates. After all, families hungering for access to affordable housing tend to stay longer once they find an affordable home. The average length of stay for households in assisted housing programs has risen to 6 years, according to figures from the U.S. Department of Housing and Urban Development. That’s up from 3.5 years two decades ago and compares to the 2.3 year average stay for renters overall, according to ResidentRated. Moreover investment opportunities of affordable housing persist through market cycles, as the need for affordable housing rises when the economy is strong with climbing rents and when the economy sours with falling incomes and rents.

Investing in affordable housing supports local communities, working families and business growth, contributing to the broader economy through higher spending on essential goods. The savings from affordable housing not only helps families pay the rent, it encourages the development of community for the long run providing investors and business with additional, non-financial returns because they understand that good, affordable housing is the foundation upon which better lives are built.

Thoughts? We’d love to hear from you at info@impactcapital.net.

Housing Expenditures by Income chart (BLS, '17)

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Disclaimer: This blog post is not an offering document for any securities. It is also not an offer of, or an agreement to provide, advisory services directly to any recipient. The information presented in this blog post is intended to describe certain views of the author and Impact Community Capital LLC. The information presented in this blog post may contain statements of opinion, forward-looking statements and relies on certain assumptions. Any such opinions, forward-looking statements and assumptions may be inaccurate, and there can be no assurances that the examples included herein will reflect actual investment outcomes. Neither the author nor Impact Community Capital LLC intends or assumes any obligation to update or revise these opinions, forward-looking statements and assumptions in light of developments which differ from those anticipated. Past performance may not be indicative of future results and there can be no guarantee as to the return or volatility of any particular impact investment or set of impact investments. All investments carry a risk of loss that investors should be willing and able to bear. Use of this document is subject to the terms and conditions set forth on Impact Community Capital LLC’s website and can be accessed at http://impactcapital.net/about/terms-and-conditions/.