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10 Things We Can Do Now To Promote Affordable Housing

"There are many other common sense solutions that reasonable people concerned just with implementing good policy would be able to agree on. But we’re not doing any of that."

~State Assembly Member, Kevin Kiley, speaking before the Assembly Housing Community Development Committee in June of 2021

The Consequences of Public Policy Mistakes

Perhaps, the greatest mistake the federal government ever made was raising interest rates after the 1929 stock market crash to teach ‘speculators’ a lesson. This played a significant role in worsening the Great Depression that followed.

The second greatest mistake the government ever made was to bail out the big banks and their wealthy collaborators (the “top”) after the crash of 2008, in the belief that wealth and economic health would “trickle down” to the masses, instead of sending aid directly to the millions of Americans who were losing their jobs and their homes (the “bottom”).[1] That precipitated the slowest economic recovery since the Great Depression. So slow that the average family has yet to catch up in real, inflation-adjusted terms.

The 2020 once-in-a-100-year pandemic left the government no choice but to send subsidies directly to the “bottom.” If we factor out the impacts of economic lock-downs, supply-chain disruptions, and the war in Ukraine that fueled global inflation helping the bottom instead of the top has worked pretty well to keep our economy running.

In the depths of 2020, traditional thinking was not an option. I would argue that our affordability crisis is another circumstance that requires challenging the status quo. But Sacramento is stuck in the 2008 belief system and remains stridently committed to “top-down” schemes to stimulate growth and housing affordability.

The truth is that neither our economy nor housing affordability depends on the health of the big banks or big housing developers. Throughout history, beginning with the rise of the merchant class that sparked the Renaissance, socioeconomic success has depended on the health of the working middle class. Trickle-down economics is a con.

California has failed to produce a significant amount of affordable housing because the state continues to pursue a “tax and spend, “demand and punish” approach and refuses to accept that its ideologically-driven policies are misaligned if not completely divorced from the realities of our markets.

Picking up, then, from where Part I of this series left off and putting aside the fact that “housing affordability” is really just a symptom of our society’s “overall unaffordability,” before we discuss new ideas we need to examine some of the facts, challenges, and misconceptions surrounding affordable housing development.


History teaches that a market-based, profit-driven system will never build affordable housing unless it’s in its self-interest (a company town) or it is subsidized. So, in response, Sacramento's idea of subsidy has been to turn over control of housing policy to the market. In fact, Sacramento politicians claim that there is no other way to attract private capital to help address our housing needs. State housing laws offer a no-strings-attached giveaway of entitlements designed to maximize private, for-profit investment returns while providing insignificant public benefits.

As a result, all we’re getting are disproportionate amounts of market-rate development, gentrification, displacement, and a myriad of loophole-exploiting gimmicks to qualify for more density and escape paying property taxes.

Worst of all, the state has abandoned its fundamental responsibility to provide housing for those most in need: the poor, the disenfranchised, and the working middle class.


It’s commonly believed that there’s not enough money available to subsidize the development of affordable housing. This is true if we only consider subsidies paid for by taxpayers. But the world is awash in speculative capital[1] and regularly throws stupid amounts of money into questionable, Wall Street, startup ventures. But at least when you invest in a wildly speculative new company there’s the hope of a big payday. What is the incentive for investors or future homeowners if affordable housing is subject to deed-restricted upside appreciation, deed-restricted rental rates, or rent control?

Private investment capital is disinterested in developing low-income housing because housing policies and tax laws are misaligned with what private investment capital might find attractive.

By continuing to trash local governments, local zoning, and local planning, state housing policies deal with our affordable housing challenges in the worst possible way. We are going to need the participation of private investment capital to address housing affordability. The question is how to attract capital without “giving away the store” and getting a paltry percentage of affordable units in return.


Generally speaking, the costs per unit of housing construction decrease with economies of scale. This has led state legislators to conclude that large-scale housing projects are the most desirable. As such, state housing legislation focuses on density and big projects by big developers (100 or more multifamily housing units in one location).[2] But this “bigger is better” bias has actually been detrimental to the development of affordable housing.

As explained in Smaller is Better: Missed Opportunities, the state’s focus is misaligned with the realities of the development opportunities that exist in California, particularly in suburban and ex-urban communities. The majority of the existing housing/mixed-use development, redevelopment, and adaptive-reuse opportunities are for smaller, infill projects (less than 100 multifamily housing units) located in under-developed commercial corridors where functionally obsolete buildings on modestly sized parcels are abundant.

Smaller, local developers are also, arguably, better situated to build community-serving, infill projects in these locations. But as it is, they are essentially excluded from the state’s housing incentive programs (e.g., tax credits).

We need to create housing policies that can scale up rapidly and be responsive to the widest variety of local conditions. We need large-scale assistance programs targeted at small-scale, local development opportunities, rather than continuing to rely on large-scale projects by the biggest housing developers.


Overall, California has the highest tax rates in the country if you add up property taxes, sales taxes, business fees and taxes, and income taxes. California's base sales tax rate is 7.25%. Our state's top income tax rate is 13.3%.

High tax rates reduce market liquidity, are a disincentive to risk-taking, and become a monetary and psychological barrier for buyers and sellers. Worse, California treats real estate investment gains as ordinary income: California has no capital gains tax for real estate transactions, including the sale of personal residences. This is a major obstacle to market liquidity. Conversely, however, this also means that any tax benefits offered can be a very powerful incentive.


Big housing developers have well-paid, lobbyists working full-time in Washington D.C. to remove local zoning and planning control. Meanwhile, California has no one representing us in D.C. who is solely focused on our affordable housing challenges. If California is going to address its affordable housing needs, it’s going to have to “lobby up the ladder” to the federal level, to win support for the innovative financial and tax incentives needed to succeed.


Mortgage rates are rising and property operating and maintenance costs rising from inflation. Home buyers are having a harder time qualifying for loans or coming up with a sufficient down payment. Lenders are reluctant to lend to marginal buyers, having been burned in the past. And renters are being priced out of metropolitan markets.

Local governments find themselves on the front lines of the housing battle without any bullets in the guns (actually, without even any guns). Local governments get all the blame for failing to build affordable housing but have no funding or “carrots” to offer developers to influence what, if anything, gets built.

As a result, large, for-profit developers are now the gatekeepers to a city’s ability to fulfill its RHNA housing quota, avoid state penalties, fines, and third-party lawsuits, or even benefit from housing tax credit programs.

This is a real estate developer’s dream. Unless the city offers more giveaways of land, zoning rights, low-cost financing, or taxpayer-funded grants, developers have no motivation to develop anything. They can easily go elsewhere if returns on capital are not favorable enough.

And, developers are good negotiators, used to pressing for as much as they can get until the deal almost breaks. Cities, on the other hand, have proven to have negligible negotiation skills and only seem good at writing big checks, taking on too much debt, and worrying about what punishments state agencies will rain down on them.

As such, local governments are at the mercy of private investment capital. Private investment returns decide what gets proposed, where it gets built, and how it’s designed.


California housing policies have everything upside down.


We need to empower the bottom, not the top.


Incremental changes can lead to big things.

First and foremost, we need to enable local government agencies, local stakeholders, and local developers at the bottom of the food chain, not at the top of the power pyramid in Sacramento. The primary goal is to promote the development of “low-income” housing, affordable to those making less than 50% of the median income in a community.

These suggestions are, admittedly, complex but we won't solve our affordability challenges with clever sound bites. Here then are ten things we can do immediately to stimulate the development of affordable housing.


Because California has higher taxes, adjustments to the tax code that provide incentives to build affordable housing will have greater positive outcomes. The following changes could help add liquidity to the housing market and incentives for the development of more affordable housing.

Create a California capital gains tax on earnings from investment in low-income housing.

Since California treats profits from the sale of real estate investments as ordinary income, offering developers reduced taxes on the revenues from the operations and/or sale of low-income housing increases their return on investment and acts as a subsidy. But this should only be offered to investors in low-income housing.

Change the 1031 exchange law to allow for “non-like-kind” tax deferred sales for investment in affordable housing.

The federal Section 1031 tax-free exchange rule in real estate is heavily used by real estate investors. It allows the exchange of appreciated, investment real estate for other “like-kind” investment property and defers capital gains taxes on value increases (profits). This applies to both federal and state income taxes. Its purpose is to add liquidity to the real estate markets and encourage investment.

California should begin a pilot program and lobby Washington D.C. to allow tax-deferred exchanges of “non-like-kind” investments if and only if that exchange resulted in investment in the preservation, development, or redevelopment of low-income housing. Investors sitting on gains in the stock market or artwork or Bitcoin or any other type of investment could put their realized gains into affordable housing projects and pay no tax on those gains. (This is similar to Opportunity Zone financing.)

This could, conservatively, free up tens of billions of dollars for low-income housing development.

It is a misnomer that “big money” is always seeking the highest return. Entities like pension funds, insurance companies, large foundations, college endowments, sovereign funds, and others are more concerned with consistent, stable, dependable, and safe returns. And real estate is at the top of that list.

Create a reduced rate, capital gains tax on the sale of a primary residence for owners who are 55 years old or older.

Many elderly residents feel stuck in large homes that they’ve owned for decades because of the enormous taxes consequences if they sell. This has reduced the number of homes for sale. A one-time, reduced tax rate would be a powerful incentive to increase housing available for growing families.

Create a state tax deduction for donations to for-profit projects, but ONLY for very low-income housing development

Capitalize on California’s high tax rates by allowing charitable tax deductions to qualified “for-profit” ventures to develop very-low-income housing (rental housing for 30% of median income or less).


Increase the federal LIHTC and the corresponding California program, tenfold.

The Federal Low-Income Housing Tax Credit (“LIHTC”) program has been one of the most successful incentives for the development of low-income and affordable housing. Tax credits are more economically stimulative than tax write-offs because they are tied to increased economic activity, job creation, and employment. And it is estimated that LIHTCs are involved with almost 90% of all the low-income housing built in the U.S.

But the program is decades behind the times. In 1986, when the LIHTC program was first introduced, the federal funding was approximately $6.8 billion. Today, 36 years later, the funding is about $9.6 billion. To be in line with housing inflation costs, the current federal low-income housing tax credit per year would need to be closer to $100 billion.


As noted above, local governments are presently at the mercy of private investment capital. We need to empower local governments to be able to provide the kind of affordable housing that they need in their communities.

Change how Low Income Housing Tax Credits are allocated. Send LIHTC directly to local governments

The federal government allocates federal Low-Income Tax Credits to The California Tax Credit Allocation Committee (CTCAC), within the State Treasurer’s Office. The CTCAC then allocates both the federal LIHTC and California’s version of the LIHTC to projects that meet their requirements.

This concentration of decision-making in Sacramento invites the influence of high-paid lobbyists and political partisanship and results in inequitable distribution of credits, mostly going to large projects by large developers. This top-down process is generally divorced from local housing needs and contradicts the state’s “fair share” policies.

Instead, we can distribute low-income housing tax credits directly to California cities and counties, based on their percentage of state population, and allow them to allocate the credits to the proposed projects in their community. This gives local government the “carrot” and negotiating tool they need to incentivize developers to build the types of low-income housing that are most needed, locally. It ensures that smaller, infill, low-income projects that are best suited to the unique requirements and obstacles that exist in each community have a better chance of being realized, and it vastly simplifies the time and costs involved in allocating tax credits.

Create a public entity to enable tax credit syndication for small developers.

Help small, infill development projects benefit from LIHTC. Tax credits are typically sold by developers to third-party investors (i.e., major corporations) that can utilize the credits to reduce taxes on their earnings. These transactions are typically done through syndicators who also package credits into derivatives for institutional investors. Generally, tax credit syndicators won't work with smaller developers with small LIHTC allocations because it’s not profitable (too much work for small percentage-based fees).

A public syndication agency is needed to facilitate tax credit sales for small developers: an electronic, online, public LIHTC exchange where developers and investors of any size can interact to buy and sell LIHTCs.


Fund California public housing agencies so they can do their job

The California Association of Housing Authorities (CAHA) is a collaborative organization representing PHAs in 72 cities and counties in California: everywhere from small towns like Eureka (population 26,938) to large metropolitan areas like Los Angeles (population 10.2 million). California’s PHAs are;

But, California’s PHAs have been underfunded and grossly neglected for decades. It’s time to give them state funding assistance to help them do their job.

5. Create Programs That Enable Homeownership

Offer first-time home buyers co-equity loans

Many potential home buyers lack the funds to make a traditional 20% down payment on a conventional mortgage. Lowering the required down payment violates prudent underwriting standards for lenders and helped lead to the 2008 financial crisis. A solution that is already being tested in cities such as Pleasanton, California, is to create a public fund that provides prospective home buyers equity capital to make their down payment in the form of an “equity sharing” loan or an equity investment.

The public fund is repaid its equity investment plus a commensurate percentage of the property’s appreciation (profit) when the house is sold or refinanced.

Insure private, multifamily lenders against losses on home mortgages

Defaults on mortgages for primary residences are historically quite low (approximately 2.5%). However, private mortgage lenders are often reluctant to lend money to “marginal” borrowers when mortgage rates rise.

Create a program that insures private lenders against a percentage of the potential losses in the event of default by the borrower.


Insure multifamily lenders instead of giving away property rights and public funds

Leverage is the backbone of real estate investing. Insuring debt is a form of leverage of public funds. It is generally more stimulative to insure debt against losses than to invest cash as equity in a real estate development because of the inherent multiplier effect of leverage. It is also less expensive than issuing debt through bond sales tied to general funds.

One dollar of equity is worth one dollar of development value, whereas one dollar of debt insurance is worth forty dollars of development value if the debt default rate is 2.5%.

Instead of subsidizing developers with “gifts” of zoning, property rights, reduced loan rates, and outright grants of public funds, the public gets more bang for the buck insuring debt rather than issuing debt.


Create state-funded rental housing vouchers

The existing ‘rental housing voucher’ program that is administered locally by public housing authorities is grossly inadequate. Not only are there not enough vouchers available, but in most cases, the value of a housing voucher is insufficient to pay the cost of rent in California.

California can create its own, state-funded, rental housing voucher program to better address the enormous need for rental assistance.


Developers of market-rate housing do not need the financial support of California taxpayers.

There is no good reason whatsoever why California should ever subsidize or incentivize market-rate housing. For-profit developers are good at adjusting pricing based on supply and demand. And if a project is a mix of low-income and market-rate units, then state assistance and incentives should only apply to the low-income part of that project.


Outlaw purchases of single-family homes by major investment groups

Over the past decade, the number of single-family homes purchased and managed as rentals by major, national investment groups has sky-rocketed. It is estimated that large investment syndicators now own $60 billion worth of single-family homes in the U.S. This is not just driving up prices, but it is driving local individual investors out of the market.


The state’s Regional Housing Needs Assessment (RHNA) process and its housing quota system are an unworkable mess. Its allocations are unrealistic and its growth and housing needs forecasts are false. Even the State Auditor’s Office, which is notoriously shy about criticizing other state agencies, agrees with that assessment.

Unless the official statistical data are real, the entire enterprise collapses. But the Department of Housing and Community Development (HCD), the agency in charge of the RHNA calculations, has shown no interest in having accurate data. They have even admitted that their data is faulty but they want to push for big numbers to satisfy the political ambitions of state legislators.

The truth is that HCD’s agenda is not really about better housing policies. If it were, the suggestions in this article would be obvious to them. It’s really about HCD’s determination to hold onto its power. That alone may be the biggest obstacle to affordable housing development in California.

The state RHNA housing quota process needs to change. It is divorced from our socioeconomic realities.

[1] According to the Small Business Administration, small companies create 64% of new jobs in the United States.

[2] This is what the Federal Reserve is currently trying to reign in by raising interest rates.

[3] The biggest housing development companies garner the majority of available Low Income Housing Tax Credits, state agency housing grants, and other forms of financial subsidies, while small to mid-sized housing developers proposing smaller projects (e.g., less than 50 units) rarely qualify.

Bob Silvestri is a Marin County resident, the Editor of the Marin Post, and the founder and president of Community Venture Partners, a 501(c)(3) nonprofit community organization funded by individuals and nonprofit donors. Please consider DONATING TO THE MARIN POST AND CVP to enable us to continue to work on behalf of California residents.