Commentary: How Can We Solve America’s Affordable Housing Crisis? CDFIs are the Key

The U.S. affordable housing crisis has reached critical levels, with a record half of all renters—some 45 million households per U.S. Census Bureau data—struggling to find places they can afford, according to Harvard’s Joint Center for Housing Studies 2024 rental housing report. Addressing the crisis requires both public and private investment.

One potential solution is to leverage the power of community development financial institutions, which attract capital from a broad range of public and private sources that want to earn financial returns and make meaningful social impact. The nation’s almost 1,500 CDFIs provide financing in underserved rural, urban, and Native communities that historically don’t have easy access to mainstream capital.

As city and urban planners, developers, government officials, and other stakeholders know, meeting the demand for affordable housing requires both local knowledge and substantial investment. CDFIs collaborate closely with their communities, giving them the on-the-ground experience to help investors increase the impact their money can have and thus support win-win projects.

What does today’s affordable housing crisis look like?

Housing costs, which have been rising for years, shot up sharply post-pandemic, far more than incomes rose. For instance, by 2022, the median U.S. single-family home price was 5.6 times the median household income, a 2024  JCHS analysis noted. That was the highest ever, climbing from 4.1 times in 2019, before Covid exploded. And for renters, “affordability is the worst on record,” JCHS found. “The number of renters with cost burdens has hit an all-time high, and the stock of low-rent units has continued to fall.”

As a rule, households that spend more than 30 percent of their income on housing are considered moderately cost burdened; those that spend 50 percent or more are severely burdened. A record 22.4 million renter households are moderately cost-burdened at latest count, and more than half of those are severely burdened, according to JCHS.  The hardest hit are minorities. More than half of Black, Hispanic, and multiracial renter households are cost-burdened, the researchers found.

To keep roofs over their heads, families tighten budgets elsewhere, including food, health care, and other necessities. Low-income households are especially challenged by housing costs. Their communities also face increasing burdens. Both formal and informal social safety nets are strained. Children shift from school to school as their families try to find homes. Buildings deteriorate when owners can’t afford maintenance. Also, high costs can lead to yet another daunting community problem: homelessness.

How can CDFIs be leveraged to support affordable housing creation?

So what are community development financial institutions? There are many types: loan funds, banks, credit unions, cooperatives, and other kinds of capital providers. They all, however, are unified on the same mission, which is to serve communities. This mission is at the heart of what CDFIs do. All must pass a U.S. Treasury Department certification process that legally stipulates their primary mission is promoting community development. To meet that mission, they provide an array of financing opportunities for projects and businesses that support low-income or historically underserved people and places.

Last year, the Federal Reserve gathered hundreds of examples of how CDFIs are working to improve housing access. Some CDFIs provide flexible lending terms so people who might not fit conventional profiles can get mortgages. Some link lending and homeowner education and support programs. CDFIs back lease-purchase programs, offer downpayment assistance or provide deferred-repayment loans for home maintenance. One CDFI the Fed cited provides lines of credit to quickly bid on properties, which is a frequent problem for affordable housing developers. Another CDFI developed a lending program tailored to providing housing for seasonal farm workers.

At  New Jersey Community Capital, the CDFI I lead, we support an array of affordable housing and community development ventures through several business lines. These include a community loan fund that supports the preservation and development of affordable housing, a growth fund that finances high-potential businesses led by diverse entrepreneurs or operating in underserved communities and a vertically integrated real estate corporation that works with local nonprofits and minority contractors on community-focused real estate projects and refinances non-performing loans to avoid foreclosures, all in underserved communities. 

Not surprisingly, government funding is vital to supporting housing affordability, and CDFIs are key vehicles for deploying federal capital. For example, the New Markets Tax Credit Program alone has funneled billions of dollars through CDFIs into affordable housing development in low-income communities. Through this program, investors can work with CDFIs and receive a tax credit equal to 39 percent of their investment over seven years, providing a stable return on their money. At NJCC, for example, we worked with Paterson Habitat for Humanity to use a $5.2 million NMTC Program allocation to build 14 affordable housing units in that city. Wells Fargo was the investor in that project.

CDFIs leverage government, institutional, and private capital 

The ability of CDFIs to leverage federal funding combined with private capital to create a robust financing framework amplifies both the impact of every dollar invested and the risk-adjusted return to investors. Increasingly, institutional investors such as pension funds have a mandate to support social goals while also meeting stable investment goals. Affordable housing investment, which is usually supported by government efforts such as the New Markets Tax Credit, the federal Low-Income Housing Tax Credit, and an array of state and local programs, helps meet both those goals.

Federal Reserve Bank of New York researchers recently looked at investment in affordable multifamily housing as heightened demand for units — demand that continues to overwhelm supply of such properties — has drawn interest from both bank and nonbank investors. The banks generally put in money to support their Community Reinvestment Act obligations, the researchers pointed out, while nonbank investors are driven by what are known as ESG goals — environmental, social, and governance. According to the respondents the researchers surveyed, about two-thirds of capital in their investment vehicles came from those socially motivated nonbank investors. 

Given their experience with providing capital to communities that need it, CDFIs are well-suited to attract private and institutional capital, offering stable returns and impactful investments. “We think rated CDFIs will maintain three defining characteristics: sound underwriting, strong portfolio oversight and patient capital,” S&P Global noted in its 2024 U.S. Public Finance Housing Outlook. The credit ratings firm follows the sector and has provided issuer credit ratings to an increasing number of the larger CDFIs.

Those ratings support CDFI access to public capital markets, where CDFIs had issued $1.4 billion in rated debt offerings as of mid-2023. CDFI debt offerings in both public and private markets can provide attractive, stable returns to investors. Some CDFIs are also selling their loans on secondary markets, the way other housing lenders do, to increase the capital they have to make more loans. This opens yet more stable investment opportunities. 

The future of CDFIs in affordable housing 

New CDFI rules coincide with the significant growth of these mission-based lenders. In the past five years, the number of certified CDFIs has increased by 40 percent and their total assets-under-management have nearly tripled to approximately $452 billion as of early 2023, the New York Federal Reserve reported. The new rules are set to encourage more sophisticated and larger-scale operations among CDFIs. But many CDFIs report that the need is growing, too, so sometimes they don’t have enough capital to meet demand.

We in the CDFI industry find that some asset managers are unfamiliar with us and our work, and others think of us solely as do-gooders unconcerned with profit. But we can point to double-bottom-line success — doing well by doing good. Sustainable investments like those that CDFIs make can outperform more traditional investments and add stability to portfolios, according to research by Morgan Stanley. As an industry, CDFIs have diversified portfolios and strong balance sheets, which mitigate risk for investors. They also have the expertise to underwrite, close, disburse, and service investments in a broad range of sectors and markets and like any manager they provide their investors with impact-centered reports on outputs and outcomes.

Several findings that substantiate the efficacy of CDFI investments to often cautious institutional investors looking to increase the social impact of their money were recently brought to light in a white paper from the Local Initiatives Support Corporation and Enterprise Community Partners:  CDFI investments are transparent and measurable, and most offerings follow international sustainability bond guidelines. The paper also found markets for both rated and unrated bond and note programs continue to grow, providing more avenues for private-sector investment in CDFIs. 

Updated regulatory changes that the Treasury issued last year enhance CDFIs’ capacity to manage large-scale investments. These modernized certification requirements will let qualifying CDFIs expand their geographic service areas. They also provide flexibility not only to make loans but also to increase equity and venture capital investments. For instance, to take advantage of these new rules, NJCC’s five-year strategic plan calls for expanding beyond its New Jersey roots to more underserved areas along the Eastern seaboard and in other underserved areas nationally where we believe we can leverage our expertise. Others CDFIs plan similar growth.

These changes and other developments allow CDFIs to continue in their role as key participants in public-private efforts to expand the supply of affordable housing. It’s this combination of public and private funds that allows many affordable housing projects to pencil out for developers and investors. Treasury Secretary Janet Yellen has pointed out that CDFIs have a track record of leveraging $1 in Federal money into $8 of community investment. In June, Yellen announced a new Treasury program that will provide CDFIs with $100 million over three years specifically earmarked to finance affordable housing.

CDFIs have had and will continue to have an important role in addressing the nation’s affordable housing crisis. Increasingly, they provide a way to match much-needed institutional investor capital with community needs, via avenues such as tax credits, debt offerings, and secondary market mortgage sales. The investors can earn the returns they need and the social impact they desire.

City and urban planners, government officials, residents and community stakeholders are aware of the affordable housing needs in their own communities. CDFIs want to help meet those needs, and so do institutional investors. If stakeholders engage with the CDFIs in their communities, everyone can support the mission of providing affordable community development. 

To find CDFIs that serve your community, see the website of the Treasury Department’s Community Development Financial Institutions Fund at https://www.cdfifund.gov.

Bernel Hall is president and CEO of New Jersey Community Capital, the largest community development financial institution in New Jersey.