21 Mar 2000  Research & Ideas

No Place Like Home: America’s Housing Crisis
and Its Impact on Business

Affordable housing is a bottom-line issue, one that American business ignores at its own peril. New research and initiatives of HBS Professors William J. Poorvu and Michael A. Wheeler and others show why business needs to take a more provocative stance to assure that moderate- and low- income workers can afford to live near where they work.

 

In many parts of the country, housing costs and shortages have begun to show signs of adversely affecting corporations, workers, and local economies. Affordable housing — such as Boston's Orchard Gardens, — is increasingly scarce. How serious is the problem?

It's a tale of two Americas, the best of times and worst of times if you're a consumer in the current U.S. housing market. On the plus side, thanks to the 1990s' economic boom, some two-thirds of Americans, more than ever before, currently own their homes. At the same time, housing of all kinds — for buyers and renters — has become more expensive precisely because of the country's prosperity. With the wages and purchasing power of working people largely stagnant over the last two decades, the cost of adequate housing in a decent neighborhood has soared beyond the reach of many. Today, the demand for affordable housing exceeds the supply by a record 5.3 million units.

photo of F. Barton Harvey and two young children
Harvey with two young beneficiaries of affordable housing. (photo: courtesy Bart Harvey)

"Affordable housing is a problem that increasingly affects companies and employers, as well as the overall economy," says F. Barton Harvey (MBA '74), chairman and CEO of the Enterprise Foundation, a nationwide housing and community development nonprofit organization. Harvey explains that exorbitant housing costs encourage young, professional workers to look elsewhere for jobs, threatening the continued vitality of local industries that depend on their talents. (For example, 86 percent of the companies in one recent survey said that housing costs were a serious deterrent to attracting businesses and middle-income employees to New York City.) On the lower end of the wage scale, companies are forced to pay bonuses and to bus workers long distances to fill essential blue-collar positions. Says Harvey, "Firms must respond to these realities with higher wages, which make the goods and services they produce more expensive, which in turn makes the overall economy less competitive in a global business environment."

Where the Heart Is

Along with food, shelter is perhaps the most basic human need. In modern society, stable, safe housing is more than a matter of comfort and convenience; it positively affects childhood development, individual self-esteem, and family viability.

Housing is generally considered "affordable" when its cost does not exceed 30 percent of the median family income in a given area. In one typically hard-pressed neighborhood, Boston's South End, the average two-bedroom apartment rents for $1,400, considerably more than 30 percent of an average South End family's income. In Massachusetts as a whole, one recent study estimates that between 1990 and 1997, two hundred thousand more people moved out of the state than into it, in large part due to housing prices.

photo of William J. Poorvu
Poorvu: Analyzing a mix of socioeconomic factors. (photo: Richard Chase)

At HBS, William J. Poorvu, the MBA Class of 1961 Adjunct Professor in Entrepreneurship, has been teaching courses in real property since the 1970s. The author of many books on the subject, including, most recently, The Real Estate Game, Poorvu sees the housing issue as suffering from a lack of comprehensive, regional planning and as only one element in a complex mix of interrelated socioeconomic factors. "A lot of businesses that are concerned about the problem have concluded that the best way they can help is by supporting the schools and thereby creating an incentive for people to stay in urban neighborhoods," says Poorvu. He also notes that it is very difficult to build sound but less costly housing because of constricting regulations, building codes, and bureaucracy. "When all the various levels of subsidiary costs are added up," Poorvu observes, "the per-unit allocation becomes so large that only a few demonstration projects get funded."

photo of Michael A. Wheeler
Wheeler: issues of land use and taxes. (photo: courtesy HBS Communications)

Also watching developments on the housing front has been HBS professor Michael A. Wheeler, who teaches courses in negotiation that include housing issues. Prior to his arrival at HBS in 1992, Wheeler had taught for eleven years at MIT's Department of Urban Studies and Planning and was director of research at MIT's Center for Real Estate Development. "Housing in any form is relatively more expensive for municipalities than most other uses of land," Wheeler notes. "It means education and other social services have to be provided, and those costs tend to offset any tax-base revenues gained from housing. By contrast, with light industry, towns get the tax base without having to add a lot of social services. So communities that are chasing after business to locate in their areas have every incentive to zone restrictively for housing."

Not surprisingly, affordable housing has also become a growing problem in the suburbs. Often devoting little thought to housing availability in outlying communities, companies have relocated due to generous tax breaks and other inducements, exacerbating urban sprawl, clogged highways, and polluted air. Says Bart Harvey, "The Chamber of Commerce of Orange County, California, one of the wealthier areas in the United States, has approached the Enterprise Foundation for help with affordable housing. They are concerned about a range of housing for moderate-income people, including police, firefighters, teachers, nurses, and other sorts of workers. These people help build communities and keep them stable and functioning; they deserve to be able to live where they serve."

Build It and They Will Come

Laurie J. Gould
Gould: Working to address an imbalance. (photo: Webb Chappell)

With the federal government's involvement diminishing, nonprofit organizations that specialize in public-private financing for housing and holistic community development have come to the fore. Laurie J. Gould (MBA '96) is manager of finance at the Boston office of one such organization, The Community Builders, Inc. (TCB), which has nine offices in the Northeast and the Mid-Atlantic States. Says Gould, "The provision of adequate housing for people at all income levels is a problem that's never going to be solved by free-market economics. Only the federal government has the resources necessary to address the magnitude of the market imbalance that exists." Gould, who was the director of two homeless shelters before enrolling at HBS, was vividly reminded of that imbalance at the recent opening of a TCB project in Somerville, Massachusetts. "Seven hundred families showed up," she recalls, "to apply for forty apartments."

But the private sector, Gould notes, is playing an important role in affordable housing as an investor and is reaping handsome returns for its participation. "The primary vehicle for developing new affordable housing is the low-income housing tax credit, part of the Tax Reform Act of 1986," she says. "In essence, it provides a tax benefit to private investors — typically banks and insurance companies — in return for their upfront capital." Designed to attract private investment, the program is a proven success with more capital chasing it than can currently be accommodated. Supporters are hopeful that Congress will soon expand it.

Across the nation, government cutbacks on construction, maintenance, and subsidies for low-income housing, combined with the booming economy's overheated real-estate market, have created what many experts are calling an affordable housing crisis. They predict that the problem is likely to get worse because of a widening income gap and a shrinking stock of low-income units. As a result, business may eventually have to take a more proactive stance, as it has with education and health care, using its influence, creativity, and resources to help address the issue. Decent, affordable, and stable housing is a basic human necessity; it is also a prerequisite for maintaining a productive national work force. The bottom line speaks clearly: there's no place like home.

From the Harvard Business School Bulletin, February 2000.