The Complicated Housing Value Chain
For the last 5 years, I worked on efforts to solve the issues related to affordable lending and access to credit for low to moderate income borrowers trying to buy homes. I was focused on what Freddie Mac, as a secondary market player, could do to help borrowers. But it was only one piece of a complicated and interconnected puzzle.
Expanding the credit box and addressing access problems only gets you part of the way. To solve the problem, you have to address affordable housing, not just affordable lending. For every visible problem you can ask why multiple times:
Why are building costs so high? Why has the cost of each of the 5 “L”s grown so much over time? Why are we still using the same methods in housing construction as our grandfathers did?
Laws (regulations and government infrastructure)
Why is it so much more attractive for developers to build higher income homes, rather than homes for low -to-moderate income buyers? Why have incentives not made a bigger impact?
Why is there a perceived trade-off between eco-friendliness and affordability?
Why is the community both an obstacle and a support for affordable and sustainable housing?
Why don’t lenders like to make loans with small balances?
The problem is vast and when you answer one layer of why questions, you often find another layer of new why questions.
The Sustainable Housing Value Chain: A Framework
Like any other complex problem, we need a framework for our discussion. At FinTech4Good are proposing using the value chain below to categorize all the activities that are necessary to build, finance and operate housing by various supply chain partners, as well as the framework and infrastructure that either facilitate or inhibit sustainable housing.
Explaining the Housing Value Chain
In each of the boxes in the grid there are opportunities for digital innovations. Each innovation might help the individual participant be more cost efficient or provide a better experience. The value chain is a construct to look across the boxes and identify key opportunities for innovations within or between the boxes.
Each column in the graphic represents a major activity area and each row, the entity who performs portions of the activity.
Developing housing. These activities include all those necessary to build the housing, undertaken either by the private sector, government entity and nonprofits. Even in the case that the development is undertaken by the private sector, the government plays an important role by their activities related to zoning, holding land records, and code requirements. Nonprofits also typically play a key role, particularly where housing needs are not being met by public and private sectors.
·Buying and selling housing. These activities include all those necessary to finance the transaction of the home to owners, as well as the activities associated with the sale transaction. In the US, and in most countries, there are a combination of private sources of capital, government sources of capital and nonprofit funds that all work together to finance homeownership. Private and public entities also play a role in qualifying borrowers, recording liens, and ensuring compliance with regulations associated with lending. The sales transaction and the ownership construct are also areas where innovation could reduce friction.
Operating the housing. These activities include renting, paying utilities, loan management and servicing, as well as insurance management. These activities may also be done by each of the three entities based on who is managing the housing, but as in the other columns, even in the case of private operation, the infrastructure and regulation from the government row often play a large role in what is possible. As the new technology emerges, there are new possibilities for public / private partnership in the development and usage of Smart City infrastructure that would further extend this relationship.
Reimagining the Value Chain
Each of the organizations working on their own box assumes the boxes around them are largely fixed. They are optimizing within their box. We welcome those types of innovations. They are important, but the game change will likely come from working across the boxes. What if:
the revenue stream that accrues to the operator tracked through the Internet of Things could be used to incent the housing developer to create an eco-friendlier solution?
the developer was able to fulfill impact assessment requirements through an artificial Intelligence simulation model reducing time to develop?
crowdfunded equity tokens could be used to raise money for affordable development or blockchain could be used to track shared equity arrangements, diversifying and democratizing financing?
Come join us in imagining how technology could be applied to housing’s challenges. By pulling together experts across the value chain who understand what is needed with entrepreneurs and technologists who understand what is possible, we have the opportunity to rethink the paradigm.
If you would like to learn more about FinTech4Good's efforts in applying digital technology to affordable and sustainable housing or would like to join us in our efforts please sign up here Digital Innovations For Affordable and Sustainable Housing Interest Group.
Article by Ann Epstein