Charles Loveman: Unlocking The Market for Affordable Homeownership with Private Capital

Drawing on your experience with Heritage Housing Partners and your professional experience over decades in both public and private sectors building affordable housing, what are the barriers that exist today to developing affordable housing at scale in the Southern California/LA Metropolitan areas?

Charles Loveman: The answer to your question is that it just takes too long and costs too damn much to build a unit in California. Whatever the underlying causes for this, the reality is that it takes somewhere between 3 to 5 years to deliver a unit. Right now—especially with the impact of certain Trump tariffs—it’s costing between $650,000 and $700,000 to build a unit. You can’t build a unit for $650,000, sell it for $500,000, and stay in business very long.

Heritage Housing Partners—an affordable homeownership developer—is a rare animal within the affordable housing world. Almost every affordable housing nonprofit develops affordable rental housing. Other than HHP and Habitat for Humanity—who also does affordable homeownership, but with a somewhat different business model—there are very few players in the affordable homeownership space. Our perspective on California’s housing crisis comes from developing homeownership units.            

Elaborate. What explains why you and Habitat are the only players currently doing affordable homeownership? 

There used to be more nonprofit players in affordable homeownership, but they were either wiped out in 2008 or have abandoned this part of their business. Possibly for this reason, there’s a bias within the affordable housing community in favor of rental and against homeownership. When I ask policy makers about this, the stated reason is when an affordable homeownership unit is sold, the affordability covenant can be extinguished, and the unit goes to market. The reality is it is fairly easy to keep the affordability covenant intact, and even restart the covenant period when an affordable unit is sold. 

To follow up, what is the nexus between your product—affordable homeownership—and the rental market for affordable housing? 

What our low-income buyers pay for their monthly mortgage payment is what they would be paying for rent in a low-income rental project. But the biggest difference between affordable rental and homeownership projects are the funding sources. For instance, we can’t use low-income housing tax credits (LIHTC)—the funding vehicle for most affordable rental housing—because for-sale units are ineligible for LIHTC. 

The public sector funding sources between rental and for-sale are very different. Honestly, there’s much more funding available for the rental side of affordable housing than for the homeownership side, which I think is a policy mistake. 

Why, Charles, is it good public policy to offer “homeownership" in the housing marketplace, especially affordable housing?

It’s important because homeownership creates a wealth engine for those low to moderate-income households that we sell units to. Like anybody else who owns a house in Southern California, house prices appreciate and the owners of those homes build equity. For those buyers who are able to qualify for a mortgage, it’s a much better outcome financially. Likewise, our buyers are required to use 30-year fixed-rate mortgages, meaning the largest component of their housing cost stays the same year after year. Because of this, as time goes on, less of their annual income goes to housing costs and their discretionary income increases.

Elaborate on some of Heritage Housing’s projects in, for example, Pasadena, Glendale, and Whittier to give our readers a sense of what’s involved is successfully building middle market & moderately priced, affordable homeownership units.

HHP develops  low and moderate-income units. Our overall split is 55% low and 45% mod, but in the last 3 to 4 years, it’s probably a 75/25 split between low and moderate. Our biggest funding source was redevelopment set-aside money, and all these cities—Glendale, Whittier, Pasadena—had those funds. The County also used to provide homeownership funding, which went away, but now it looks like that might be coming back. 

The State of California has always had homeownership programs, but far too few in terms of number of programs and dollar amounts as compared to rental. But the public sector is where we go to fund the gap. Again, if it is costing us $600,000 to build a unit, and we are going to sell that unit to a low-income household for $250,000, we had to find $350,000 worth of subsidy to make the deal work.

And HHP has “invented” a couple of funding sources, most notably New Market Tax Credits. We were the first organization in the U.S. to use New Markets for homeownership housing, thanks mostly to our funding partner Clearinghouse CDFI. We use New Markets whenever we can, and it typically yields about $85,000 a unit of subsidy.  

There were over 200 housing bills introduced this legislative session purportedly addressing a housing shortage and growing homelessness. What should be the state’s housing policy priorities—as someone who’s been in the business of developing low and moderate-income housing for decades—to incentivize the building of affordable housing units at scale? 

Let me take this from a different direction and put on the table two ideas. One idea is how the private marketplace used to house the middle class—from the end of World War II until the Great Recession—by building tract housing oriented to middle-income buyers. Those buyers would likely be in either a rental unit or a starter condo, but would move to buy a new house in a tract somewhere. I know there’s a lot of land use and transportation issues with tract housing, but as a housing model, it enabled the private sector to deliver the majority of new units to the middle class, and that freed up the rental inventory for everyone else. And almost all of this housing production was paid for by the private sector.

Idea number two was how the GI bill—which is considered one of the most successful housing policies in the history of the US—provided a subsidy to buyers in the form of a government loan guarantee. It said to the marketplace of homebuilders, ‘we’re delivering millions of credit qualified middle-income buyers to you, go build houses and sell them to these folks’. The whole thing was done with private capital. California is not going to solve our housing crisis with only public sector money, there’s just not enough of it. So we need to re-learn the lessons of how to build homeownership units for the middle class.

So the missing piece is unleashing the private sector to build middle-income housing, and subsidize demand, not supply. The problem is we’re upside down. It costs more to build that unit than a middle-income buyer can afford. We have to chip away at the cost—and there’s a handful of smaller things that the State can do via tax exemptions, impact fees, and the like—and follow the GI bill model to provide a credit vehicle so that these middle-income buyers are credit qualified to buy at today’s prices.

We think the way to do that is with a 10-year private sector silent mortgage. The one thing we have going for us in California is that over 90% of the time house prices appreciate 4 to 5 percent a year. HHP is working to create a financing vehicle to enable middle-class households to become homeowners, so that after 10 years they will have the equity to repay that loan.  And there’s certainly plenty of capital out there to provide this financing. 

As an affordable housing developer in California, you’re always fighting the fact that prices are going up. We need to flip the script and make that fact be the thing that works in our favor, at least for middle-income buyers. I strongly believe that you can attract private investment capital to lend to the middle class, because over time house prices in California reliably increase year over year, and therefore provide the means to repay that loan. 

You have years of experience doing this from the public sector, then years from outside of— but aligned with—the public sector.  Why haven’t we seen your suggestion included as one of the myriad of proposals from Sacramento? What explains that? 

As I said, I think there is a bias in the housing policy world in California against affordable homeownership housing. My best guess is that most housing policy folks have grown up in the world of low-income housing tax credits, which was put into place in the 1986 Tax Act. Since these folks know the rental world, that is the foundation of their policy prescriptions. 

But the public sector and nonprofit sector aren’t going to build our way out of this crisis; the private sector and private capital need to be brought into this equation. We used to build 200,000 units/year in California prior to the Great Recession, and ten years after we’ve finally crept back up to 100,000 units/year. We’re delivering half of what we used to deliver. The governor has set a goal of producing 500,000 units a year. How’s that going to happen unless the private sector is brought to the table, and we focus again on building homes for the middle class? 

The voters of Los Angeles city and county—to address the homelessness challenge of 56,000 unhoused people in the city of LA—have voted to tax themselves to the tune of nearly $1 billion to fuel the construction of such housing and services. Has the public sector and the elected officials who champion those programs oversold the results?

The new homelessness numbers came out 2 or 3 months ago, and everyone was shocked that homelessness went up in California.  Despite the fact that the public sector admirably allocated billions of dollars to fight homelessness, and despite the fact that lots of new units came on line. More units will come online in the near future, because it takes years to deliver a unit in California. But people are becoming homeless at a faster rate than we’re building units because of the fact that middle-income households have nowhere to go. They’re staying in their rental units, and bidding rental units away from lower-income households. 

The number one cause for homelessness at this point in time is displacement by somebody who can pay a few bucks a month more in rent. Affordable housing is this wide spectrum of need, from homeless individuals to middle-income households who are priced out of homeownership in California. And it’s all interconnected. You can’t only focus on one segment of this spectrum, and ignore the rest, without some adverse impact. In my view that is a mistake that ignores the interconnectedness of the housing market. 

Explain why we currently have high local government fees and rigorous regulations on housing development and resistance, post-Prop 13, to greater density.

The development community builds infrastructure in California in a post-Prop 13 world. I’ve been thinking a lot about SB50. I’m not really sure what Senator Wiener’s vision of an SB 50 building would look like. But if it is like Minneapolis’s example, they eliminated single-family zoning with the goal of creating duplexes and triplexes that look like single-family houses in single-family neighborhoods. Again, I’m not sure what Sen. Wiener’s vision looks like, but I am pretty sure we’re not going to build 500,000 duplexes a year. 

And to be clear, I don’t have an objection to duplexes and triplexes in single-family neighborhoods, but there’s not enough housing production that would come out of that. Another point is that when you need to build a development project, and they tell you that you have to replace the sewer main or put in the water main, that becomes a hugely expensive cost if you are developing a small project. Put another way, because new residential development is how we pay for most infrastructure improvements in California, that’s one more reason why most developers like bigger projects vs. smaller projects. 

Related to your answer, there’s some pushback to SB 50 and SB 330 by local government and other placemaking advocates who claim that before the state can wrest control over zoning and land use from cities, it has to commit to paying for the infrastructure impacts and upgrades to support whatever housing is permitted by state law. How would you react to such a constitutional change to require state funded local infrastructure by the state before the latter can burden local governments to produce more housing? 

I don’t want the state making local land use decisions, period, even if it comes with their checkbook for off-site infrastructure. I think that’s the wrong way to go. Based on my experience in the cities that we’ve worked in, they figured out how to pay for their infrastructure needs while still reducing permit and impact fees for affordable housing. The only thing I would ask of them is to redefine affordable housing to include middle income households  

New research shows that the largest owner of residential property in the metropolitan areas of California—Sacramento, San Francisco, Silicon Valley, LA, and San Diego—are the likes of Blackstone. Obviously,  there’s been a dramatic change since 2008 in ownership of R1 property. Is that finding accurate;  and, who is competing now with Heritage Housing for property on which to build housing in metropolitan LA?

I think it is right. In the aftermath of the Great Recession, Blackstone and groups like them went in and bought up all those single-family houses that were being foreclosed, and are now operating big rental programs. There was always a fear about what would happen if they decided to dump all of those units all at once, what it would do to the housing market, but so far they seem to be making money as residential landlords of single-family houses.

We compete with Wall Street funded apartment developers.  I think HHP delivers a much better product than they do, because among other reasons, we develop mixed income homeownership housing, and we are always trying to adapt our projects to the surrounding neighborhood. In contrast, these big apartment developers have their development formula,  which is often not so sensitive to the local context. Also, apartments are typically smaller than homeownerhip units. They’re building studios, one bedrooms, and some two bedrooms versus the two, three, and four bedroom homeownership units that HHP builds. 

But their competitive advantage is access to capital, which is always a challenge for a nonprofit developer 

Before closing, planners— including local city planners—rarely are quoted defending the value of local planning when confronted by a relentless and tech-funded YIMBY/WIMBY campaign arguing for state control over local zoning. Why, do you believe, many planners are reluctant to step forward and articulate the value of what they do as city planners and the importance of what they do? 

I am dating myself, but when I started out in my career there were a couple of giants in LA planning. Planning Director Calvin Hamilton and CRA Administrator Ed Helfeld.  Those guys had big visions of what they wanted to accomplish and the way planning ought to work. Over the years, it’s become more the norm that planners are the neutral processers of development applications. They don’t articulate as strong a point of view as used to happen when I was a young guy starting in this profession. I think, with our housing crisis, the climate crisis, etc, planning needs to be front and center, and the current generation of planning leaders needs to articulate and promote a vision of what the future of LA County will look like. I would rather this come from the local planning and housing community than from the Legislature