TIME Money

How Rich Immigrants Can Solve L.A.’s Housing Crisis

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Zocalo Public Square is a not-for-profit Ideas Exchange that blends live events and humanities journalism.

If the city wants affordable homes, it needs to tap into funds from wealthy foreign investors

How could Los Angeles pay for more affordable housing?

One answer is money from wealthy immigrants.

To build apartments that are accessible to low-income residents, high-rent cities across the country—from San Francisco to Miami—have been tapping funds from EB-5, a federal government program that offers U.S. green cards to foreigners in exchange for investments in U.S. businesses. Launched in 1990 as a vehicle to create jobs, the program requires each investor to give at least $500,000 to a business that provides 10 full-time jobs to Americans. The investment is “at-risk,” so there’s no guaranteed return.

As an immigrant, a former securities lawyer and the founder of a business, I immediately found EB-5 compelling, and have worked to spread the word about its advantages and make it more transparent. I’ve created EB5 Investors Magazine, EB5investors.com, and a series of educational EB-5 conferences.

But the program was rarely used and little known until the Great Recession hit and traditional sources of capital dried up. Since then, real estate developers have embraced EB-5 funds from foreign investors around the world as an alternative for financing all kinds of construction projects, including buildings that contain affordable housing units. EB-5 funds helped build 115 affordable units at Stadium Place, an office-hotel-retail-residential project located in front of the Seattle Seahawks stadium. San Francisco’s massive Shipyard development in Bayview-Hunters Point, one of the poorest sections of the city, includes several hundred million dollars from individual EB-5 investors. As part of its negotiation with the city, the Shipyard developer pledged to devote 30 percent of its planned 10,000 units to affordable housing. And last month, Miami Mayor Tomas Regalado said that his city plans to target EB-5 immigrant investors as a source for financing an ambitious agenda to build affordable housing.

Like Los Angeles, most of the cities that have benefited from EB-5 appear toward the top of “least affordable’’ lists of U.S. cities. They all have large populations of homeless people, although Los Angeles has the highest number. (The homeless population in L.A. County grew by 12 percent in the past two years; the number of tents, vehicles, and homemade shelters being used as housing jumped 85 percent.)

But Los Angeles hasn’t cultivated EB-5 projects that involve affordable housing. Instead, L.A. developers with EB-5 have focused on building hotels – an easier route when you have to show job creation. Flag hotels in big cities are also easier to “sell” than low-income housing with migration agents in China who connect potential immigrant investors with projects. Of course, San Francisco and Seattle projects face the same reality and have gotten deals done. That suggests that developers here need a nudge to be more creative; one nudge might involve some form of city incentives.

Yes, there are challenges. Real estate developers, will tell you that affordable housing—defined as housing priced for people making less than 50 percent of a community’s median income—is notoriously difficult to greenlight because it is perceived as unprofitable. But what they don’t understand is that the use of EB-5 funds can help developers overcome that hurdle.

The big advantage for developers is that EB-5 funds are relatively cheap capital. Most EB-5 investors want to immigrate to the U.S. to raise their families, send their children to American universities, and take advantage of the entrepreneurial opportunities. A large return on investment is down the list for these immigrants. That translates into reduced demand for a high rate of return, which ends up costing the borrower less.

Another advantage: developers don’t have to put as much cash into projects, because of the lower proportion of equity in most EB-5 deals. In a typical deal using EB-5 funding, the developer maintains equity amounts equal to between just 15 and 25 percent of the total project cost.

Los Angeles affordable housing advocates would do well to look into EB-5 funding as an alternative source for financing mixed-use projects that include affordable and workforce housing. The money is there. Investors from China, Latin America, Europe, and the Middle East already have invested billions of dollars of capital through the EB-5 program with the hope of raising their children in the U.S. What better way to use wealthy investors’ funds than by helping to finance the construction of housing for middle and low-income Angelenos?

Ali Jahangiri is the founder of EB5 Investors Magazine and EB5Investors.com, a platform allowing investors to communicate directly with attorneys, and developers to connect with EB-5 regional centers and funding sources.

TIME Ideas hosts the world's leading voices, providing commentary and expertise on the most compelling events in news, society, and culture. We welcome outside contributions. To submit a piece, email ideas@time.com.

TIME Supreme Court

Supreme Court Upholds Federal Tool Against Housing Discrimination

Supreme Court Issues Multiple Rulings
Chip Somodevilla—Getty Images The United States Supreme Court on May 27, 2014 in Washington, DC.

The 5-4 ruling is a win for civil rights groups who support the Fair Housing Act

(WASHINGTON) — The Supreme Court handed a major victory to the Obama administration and civil rights groups on Thursday when it upheld a key tool used for more than four decades to fight housing discrimination.

The justices ruled 5-4 that federal housing laws prohibit seemingly neutral practices that harm minorities, even without proof of intentional discrimination. The case involved an appeal from Texas officials accused of violating the Fair Housing Act by awarding federal tax credits in a way that kept low-income housing out of white neighborhoods.

Justice Anthony Kennedy, often a swing vote, joined the court’s four liberal members in upholding the use of so-called “disparate impact” cases.

The ruling is a win for housing advocates who argued that the Fair Housing Act allows challenges to race-neutral policies that have a negative impact on minority groups. The Justice Department has used disparate impact lawsuits to win millions of dollars in legal settlements from companies accused of bias against black and Hispanic customers.

In upholding the tactic, the Supreme Court preserved a legal strategy that has been used for more than 40 years to attack discrimination in zoning laws, occupancy rules, mortgage lending practices and insurance underwriting. Every federal appeals court to consider it has upheld the practice, though the Supreme Court had never previously taken it up.

The ruling is a defeat for banks, insurance companies and other business groups that claimed such lawsuits are not explicitly allowed under the Fair Housing Act, the landmark 1968 law that sought to eliminate segregation that has long existed in residential housing.

Both the Obama administration and civil rights groups have tried for years to keep the issue away from the Supreme Court, fearing that conservative justices wanted to end the use of disparate impact lawsuits in housing cases. In fact, two similar cases out of Minnesota and New Jersey previously had reached the court in recent years, but those cases were settled or strategically withdrawn just weeks before oral argument.

Yet the court took up the Texas case last year despite the fact that there was no split among lower courts over the issue. That led to major worries for the NAACP and other civil rights groups that the court was inclined to end the strategy.

TIME Supreme Court

Supreme Court Lets Obamacare Federal Subsidies Stand

The 6-3 ruling will preserve health insurance for millions of Americans

(WASHINGTON) — The Supreme Court on Thursday upheld the nationwide tax subsidies under President Barack Obama’s health care overhaul, in a ruling that preserves health insurance for millions of Americans.

The justices said in a 6-3 ruling that the subsidies that 8.7 million people currently receive to make insurance affordable do not depend on where they live, under the 2010 health care law.

The outcome is the second major victory for Obama in politically charged Supreme Court tests of his most significant domestic achievement. It came the same day the court gave the administration an unexpected victory by preserving a key tool the administration uses to fight housing bias.

Chief Justice John Roberts again voted with his liberal colleagues in support of the law. Roberts also was the key vote to uphold the law in 2012. Justice Anthony Kennedy, a dissenter in 2012, was part of the majority on Thursday.

“Congress passed the Affordable Care Act to improve health insurance markets, not to destroy them,” Roberts wrote in the majority opinion.

In a dissent he summarized from the bench, Justice Antonin Scalia said, “We should start calling this law SCOTUScare.” Using the acronym for the Supreme Court, Scalia said his colleagues have twice stepped in to save the law from what Scalia considered worthy challenges.

Justices Samuel Alito and Clarence Thomas joined the dissent, as they did in 2012.

Nationally, 10.2 million people have signed up for health insurance under the Obama health overhaul. That includes the 8.7 million people who are receiving an average subsidy of $272 a month to help pay their insurance premiums.

Of those receiving subsidies, 6.4 million people were at risk of losing that aid because they live in states that did not set up their own health insurance exchanges.

The challenge devised by die-hard opponents of the law, often derided by critics as “Obamacare,” relied on four words — established by the state — in the more than 900-page law.

The law’s opponents argued that the vast majority of people who now get help paying for their insurance premiums are ineligible for their federal tax credits. That is because roughly three dozen states opted against creating their own health insurance marketplaces, or exchanges, and instead rely on the federal healthcare.gov to help people find coverage if they don’t get insurance through their jobs or the government.

In the challengers’ view, the phrase “established by the state” demonstrated that subsidies were to be available only available to people in states that set up their own exchanges. Those words cannot refer to exchanges established by the Health and Human Services Department, which oversees healthcare.gov, the opponents argued.

The administration, congressional Democrats and 22 states responded that it would make no sense to construct the law the way its opponents suggested. The idea behind the law’s structure was to decrease the number of uninsured. The law prevents insurers from denying coverage because of “pre-existing” health conditions. It requires almost everyone to be insured and provides financial help to consumers who otherwise would spend too much of their paycheck on their premiums.

The point of the last piece, the subsidies, is to keep enough people in the pool of insured to avoid triggering a so-called death spiral of declining enrollment, a growing proportion of less healthy people and premium increases by insurers.

Several portions of the law indicate that consumers can claim tax credits no matter where they live. No member of Congress said that subsidies would be limited, and several states said in a separate brief to the court that they had no inkling they had to set up their own exchange for their residents to get tax credits.

The 2012 case took place in the midst of Obama’s re-election campaign, when he touted the largest expansion of the social safety net since the advent of Medicare nearly a half-century earlier. But at the time, the benefits of the Affordable Care Act were mostly in the future. Many of its provisions had yet to take effect.

In 2015, the landscape has changed, although the partisan and ideological divisions remain for a law that passed Congress in 2010 with no Republican votes.

The case is King v. Burwell, 14-114.

TIME housing

It’s Getting Harder For the Middle Class to Pay The Rent

Bidding Wars Break Out In U.S. As Supply of Homes for Sale Shrinks
Bloomberg—Bloomberg via Getty Images A for rent sign stands in front of a row house in the Logan Circle neighborhood of Washington, D.C.

They're struggling to meet their payments

One in five middle-class renting households are struggling to meet their payments, according to Harvard’s The State of the Nation’s Housing 2015 report released today.

Renters making $45,000 to $75,000 a year have been deemed to be “cost-burdened,” meaning those households are spending more than 30% of their income on rent. In cities such as New York and San Francisco, which are notorious for their skyrocketing property prices, more than half of middle-class renters faced “disproportionately” high payments, the report shows.

The findings coincide with the release of data concerning homeownership rates, which have fallen over the last eight years. “The trend does not appear to be abating,” said Chris Herbert, managing director of the Joint Center for Housing Studies, which released the data on home ownership. More people are turning to forking out monthly rents, the report said: the number of new rental households has increased by 770,000 annually since 2004, making 2004 to 2014 the strongest 10-year stretch of rental growth since the late 1980s.

The decline in home ownership is being driven by such factors as rising prices, stagnant incomes, tougher lending standards, and a lack of housing, the report said.

As more renters enter the market, rental prices are rising fast, and the average household can’t keep up. A report by the New York Times details this trend in worrying fashion: last year, rents rose at a 3.2% rate, more than twice the pace of overall inflation.

“It’s more of a new normal,” said Nobel laureate and Yale economics professor Robert J. Shiller in the Times article. “We went through a wrenching experience with the biggest housing bubble and the biggest collapse since 1890. This is an anxious time.”

MONEY home ownership

Homeownership Hits Another Record Low

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Alamy

Still can't afford a home? You've got company

For millions of young Americans the dream of ownership may be farther away than ever.

A decade after the housing bubble collapsed, America’s home ownership rate is still dropping, according to a new survey by Harvard University’s Joint Center for Housing Studies. Just 63.7% of American households owned their own homes in the first quarter, researchers found. That ratio is the result of 10 consecutive years of declines since nearly 70% of Americans called themselves homeowners in 2004.

What gives? Despite a bull market and improving jobs picture, many of America’s would-be home buyers—Gen Xers in their 30s and 40s and twenty-something millennials—are still trying to get out from under the financial burdens imposed by the recession.

Most Gen Xers were just buying their first homes or getting ready to trade up when housing prices peaked in 2006. As a result, they had the smallest financial cushion when the recession hit. Unable to make mortgage payments, many were forced to rent again. Today homeownership rates for this age group has fallen to a level “not seen since the 1960s,” the study found.

While Millennials didn’t fall into that trap, they’ve faced their own hurdles. The influx of older renters has pushed up what landlords can charge, making it harder for would-be first time home buyers to scrape together money for a down payment. Over the past decade, the percentage of young renters age 25 to 34 facing a “cost burden”—meaning they spend more than 30% of their income on housing—has jumped to 46% from 40%.

What can improve the situation? On a policy level the researchers call for loosening lending standards, such as offering loans to borrowers with smaller down payments or lower credit scores. Of course, given that was a big part of what got us into the housing mess in the first place, that seems like a ticklish proposition.

A better bet may be that the economy will bail us out, with a slowly improving employment situation boosting incomes. One thing that hasn’t changed: Young Americans still want to own homes. Among renters in their 20s and 30s, more than 90% hope to buy a home eventually, according to a Fannie Mae survey cited by the authors.

 

 

 

 

 

TIME Millennials

Millennials Can’t Afford to Buy a Home in These Cities

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Chris Windsor—Getty Images

California has the three least affordable cities for millennials looking to buy homes

Millennials are often the most sought-after demographic, whether by retailers or news organizations. But when it comes to real estate, the young generation is getting squeezed out of some cities.

The nasty combination of rising residential real estate prices and slow wage growth is making it difficult for a lot of millennials to afford buying a home in some areas — especially in California.

According to Bloomberg, the five U.S. cities with the highest “home affordability gaps” can all be found in the Golden State, led by San Jose, where the median annual salary for millennials falls more than $80,000 short of the minimum required to purchase a home in the city. San Jose is followed by San Francisco, where the home affordability gaps is roughly $60,000.

Los Angeles, San Diego, and Sacramento round out Bloomberg’s top five of the least affordable cities for millennials looking to buy a home, while Riverside comes in at eighth on the list to give California six cities in the top 13.

Somewhat surprisingly, New York places only sixth on the list, with a home affordability gap of $6,550, although Bloomberg notes that the statistics used to come up with that figure incorporate housing prices from areas far outside of pricey Manhattan:

Almost 80 percent of New York’s millennials reside in three counties: New York County, Queens County and Kings County, where Manhattan, Queens and Brooklyn respectively are located. Using the average median home value for those three boroughs ($749,596) and the 2015 estimated earnings for millennials living there ($49,193), the affordability gap comes out to a whopping $52,262.

TIME cities

Airbnb Uses Data in San Francisco to Fight Back Against Critics

airbnb
Chris Weeks—Getty Images/Airbnb A general view of atmosphere is seen at Airbnb's Hello LA event at The Grove on September 30, 2013 in Los Angeles, Calif.

The company is releasing its own assessment of how Airbnb affects the city, which paints a rosier view than previous reports

Lawmakers in San Francisco are set to vote on two proposals Tuesday that could restrict locals’ ability to use home-sharing company Airbnb. But before they do, the firm is releasing its own report assessing its impact on the city.

Airbnb’s report, obtained by TIME (and viewable through the link above), is adding to a pile of reports that have already attempted to assess the company’s economic benefits and costs to the city. The company’s data team used proprietary information about Airbnb users that government agencies do not have access to; although that means no one can double-check Airbnb’s figures, the company says it is the most realistic picture of how the service is affecting the City by the Bay. Their take: assertions that Airbnb is cannibalizing much-needed housing stock are overblown.

A central question in months of heated hearings over Airbnb has been whether it creates an economic incentive for landlords to take units off the market in order to rent them out full-time to tourists on home-sharing platforms. With housing in short supply, rents have skyrocketed and lower-income residents have been forced to leave the city. That has made some residents aggressively wary of anything that might be squeezing out the middle class. Meanwhile, other San Franciscans have testified that income earned from using Airbnb has helped keep them in their homes.

Perhaps the most important number in these reports is the estimate of how many nights per year a host would have to rent a unit out before they’d be making more money doing the Airbnb thing than if they housed a traditional, long-term tenant. There is no way to know how many landlords are, in fact, hoarding their units from locals to rent them out to tourists, but this number provides a picture of when it would make economic sense to do so.

The San Francisco Planning Department estimated this breaking point is 257 nights; a report from the city’s independent budget and legislative analyst’s office estimated 59 nights. Airbnb arrived in between the two, at 211. The company’s data researchers calculated the figure by comparing the average nightly earnings of Airbnb hosts in San Francisco to market-rate rental prices.

The share of Airbnb listings in San Francisco that are rented out more than 211 nights per year, according to the company’s report, is 6.1%, representing less than 1% of total housing units in the city and just over 1% of vacant housing. The most damaging estimate from previous reports, which was calculated using assumptions Airbnb disagrees with, suggested that Airbnb could be responsible for nearly one fourth of vacant housing units being taken off the market.

While those numbers, based on different approaches to the U.S. Census Bureau’s statistics on vacant housing, will continue to be debated, there are some general points about home-sharing’s benefits that are generally agreed upon. All stays at Airbnbs are being taxed like hotels, so the city gets a 14% cut of that revenue. These additional housing options, which may offer a more immersed-in-the-city experience than traditional hotels, likely attract more tourists to the city. Those tourists then spend money that helps fuel the local economy.

Hosting via Airbnb was technically illegal until 2014. All rentals for 30 days or fewer were prohibited by law. The board of supervisors, the city’s lawmaking body, legalized short-term rentals with a landmark piece of legislation, which compromised by setting certain caps. Under that law, residents can list their homes 90 days per year when they’re not present and an unlimited amount of days when they are. One proposal being considered Tuesday, penned by progressive Supervisor David Campos, would restrict all users to just 60 nights per year. Another proposal from Supervisor Mark Farrell and Mayor Ed Lee would set caps on both at 120 days.

The average number of nights a user is renting out a listing is 90 per year, according to Airbnb, and 80% of San Francisco hosts actually live in the place they’re listing; more than 70% use the income to help pay their rent or mortgage. “This report makes clear that the vast majority of Airbnb hosts are regular San Franciscans sharing the home in which they live and using the money they earn to pay the bills and make ends meet,” says Airbnb spokesperson Christopher Nulty.

What remains murky is exactly what’s happening with the remaining 20% — and how many of those 1,000 or more listings are second homes or apartments that could be easing the housing strain.

MONEY Budgeting

Americans Spend More on Taxes Than Food, Clothing and Shelter Combined

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Getty Images

The surprising math on how we spend

Every year, the Tax Foundation compares the total amount of taxes paid in America and the amount of spending on the necessities of food, clothing, and shelter. In most recent years, the Tax Foundation has concluded that Americans spend more on taxes than on necessities — and 2015 is no different.

The Tax Foundation projections show a total of $4.85 trillion in taxes paid in 2015, divided between $3.28 trillion in federal taxes and $1.57 trillion collected at the state and local level. According to the Tax Foundation, total taxes are approximately 31% of the national income. Using data available from the Bureau of Economic Analysis (BEA), the Tax Foundation calculated approximately $4.3 trillion in spending for the basics with food at around $1.8 trillion, clothing at $0.3 trillion, and housing at $2.2 trillion.

Here’s the real question: Is this spending comparison indicative of a problem or of a correct and equitable tax structure? Should any of us be outraged? Probably not, although there are reasons for concern.

Certainly, the trend is not promising. The gap between taxes and spending on the essentials in 2012 was approximately $150 billion, rising to almost $300 billion in 2014 and around $550 billion in 2015. It’s hard to spin that as a positive development.

The Tax Foundation’s report also says nothing about equity of taxes and spending. Certainly, the Tax Foundation can leave the impression that taxes are too high for all Americans by using aggregate values. More progressive sites such as the Center on Budget and Priority Policies (CBPP) call these values misleading, pointing out that with our progressive tax system, poorer Americans clearly pay a greater share of their income for the essentials and less in taxes.

Meanwhile, the wealthy pay more in taxes and while they may make more discretionary purchases in food, clothing and shelter, it isn’t enough to make up the difference. Therefore the “average” (middle-class) American probably does not pay more in taxes than for the basics, and the lower income levels certainly do not.

This conclusion implies a higher amount of wealth transfer to help lower-income Americans with spending on their basics. Indeed, a graph created by the Tax Foundation shows a steady rise in transfer payments as a percentage of the cost of living, from 0.5% to nearly 35% in 2011. The Tax Foundation acknowledges some double-counting inflating the value, but the trend is still valid.

This illuminating graph and other explanations may be found in a 2012 article on the Tax Foundation website. For example, the amount spent on taxes was roughly equal to that spent on food, clothing and shelter from 1929 until the 1990’s, when the divergence began. Since then, taxes have increased disproportionately in a sawtooth pattern, with dips corresponding to economic crashes (2001 and 2007-2009).

If you have a budget — and you should have if you don’t — you can certainly figure out whether or not you paid more in taxes than you did in 2014, and can probably make a good estimate for 2015. What you do with that information is up to you.

You may well conclude that you pay too much in taxes, but use the exercise as an opportunity to analyze your spending on the basics. Are you getting the best value out of your dollar for your food, clothing, and housing payments? We’ll just ignore the subject of whether you’re getting your money’s worth out of your taxes. Save your outrage for that topic.

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MONEY buying a home

Why You Still Can’t Afford to Buy a House

DreamPictures—Getty Images

Homeownership is at a 25-year low

Last month did not bring good news for those looking for evidence of a housing recovery. According to the Commerce Department, the seasonally adjusted home ownership rate for Q1 2015 sank to 63.8% — a number not seen since 1989. That represents a 1.2% decrease from Q1 of 2014, a 0.2% drop from Q4 2014, and the continuation of a general ten-year decline from a peak of over 69%. A few more months of this trend would put home ownership in historically low territory.

At the same time, household formation (those striking out on their own) increased by 1.7 million in Q4 of 2014 and another 1.5 million in 2015. Home prices are continuing to rise according to the S&P/Case-Shiller index, and the inventory level of unsold housing has dropped below five months according to the National Association of Realtors (NAR). Six months is a typical supply for a healthy housing market.

So, the number of households is increasing, the housing supply is low, and prices are rising — yet the number of homeowners keeps decreasing. How does this add up?

It appears that too many of these new households still cannot afford to buy a house, at least not the ones that are available to them. They are forced to rent instead, and as a result, that market is also out of balance. Diana Olick of CNBC reports that rental vacancies are hitting historic lows. The current market could be considered a “pre-recovery” stage, if you will — millennials and those knocked down by the housing crisis have recovered to the point where they can enter the rental market, but not to the point where they can afford to buy a home even with the currently low fixed interest rates.

There is a cascade effect going on in the housing market that will take some time to remedy. Those who want to upgrade their homes are having difficulty gathering down payments and qualifying for loans, thanks to wages that are still stagnant and credit that is still relatively tight. Thus, the supply of starter homes is low, making first-time ownership difficult for those who have recovered enough to qualify. Some signs of wage pressures and loosening credit are present, but not enough to fuel a true recovery.

In terms of numbers, the calculation methods may make the situation look worse than it really is. Since the overall number of households is increasing and the majority of these are renting, the number of homeowners relative to the total is shrinking. It is not as though large numbers of people are losing their homes, as was the case during the housing crisis.

Many economists expect the decline in home ownership to begin stabilizing finally and to stay stagnant until the true recovery phase can kick in. A combination of rising wages, job increases, government approaches to make credit more affordable to first-time homebuyers, and the general decline of underwater homes through home appreciation should lead to a housing upturn. Of course, the question on everyone’s mind is: how long will it take to reach full recovery and convert renters into first-time homebuyers?

Nobody has that answer, and the housing market has defied most predictions of recovery over the last few years with frustratingly mixed progress. However, we can predict one thing with certainty. If the housing outlook is still struggling at this time next year, politicians and policymakers up for re-election will panic and start to take action, most of which will probably be misguided. Let’s hope the market intervenes before the politicians can act.

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