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Unexpected consequences of MacKenzie Scott’s big donations to housing nonprofits like Habitat for Humanity

You might’ve read that MacKenzie Scott, Amazon founder Jeff Bezos’ ex-wife, is making huge donations to some nonprofit organizations, including donating $436 million to Habitat for Humanity. Relative to buying a giant yacht, or yet another Manhattan aerie, or giving money to universities so wealthy that they can’t spend the endowments they have and are so bureaucratic that they can’t support their own researchers during a pandemic, that’s a great thing to do. This isn’t a “you suck” post, because she doesn’t and I like her unusual approach to philanthropy. But there are two notable undercurrents that the lightly edited press releases don’t cover—likely because journalists know little about how nonprofits work or the American housing market—one is the distortion effect on many competing local nonprofits, and the other is the challenge of pouring more money into a constrained, near-zero-sum system.

Regarding the first point, local grant and human services systems will probably be distorted by unprecedentedly large donations to a particular nonprofit like Habitat. While national nonprofits like Habitat do some nationwide work, most of their activities are conducted by local affiliates, which are usually nominally independent nonprofits. When you see a media story about a new Habitat development in Worcester, MA, (I made this example up) a local affiliate is sponsoring the project. Local affiliates of national nonprofits like Habitat are required to conform to certain standards set by the national entity, but essentially do their own thing. A few years ago we worked for a local Habitat affiliate in a big East Coast city. As we worked on the project, we were startled to learn there were actually two Habitat affiliates in the same city: each carved out its own turf, and they even engaged in legal and public relations battles with each other! Many local nonprofits compete with on another for donations, grants, volunteers, and the like, even if they are playing for same team. So, it’s possible some of Scott’s Habitat donation will go to one affiliate, but not the other, in the same city.

A sudden huge donation from Scott to a national nonprofit that in turn sends a big bag of money to a particular local nonprofit, like the imagined Worcester Habitat, might create a toxic mixture of envy and disdain among other local nonprofits, much like a large inheritance or a lotto win often generates resentment among the people around the windfall recipient. The local Habitat affiliate is going to find many other local nonprofits attempting to attach themselves to any project it undertakes, in an effort to become subcontractors on that project or otherwise share in the largess. Since Habitat has the big money, other nonprofits will work overtime to get a piece of that that money. Nonprofits that realize they’re going to be outside the golden circle might quit collaborating and, in some cases, try to sabotage the lucky local Habitat. Letters of support will dry up, which won’t be a short-term problem but may become a long-term one; although “collaboration” among nonprofits is often silly, funders like to imagine it’s happening. Many don’t want to acknowledge that nonprofits compete with each other like businesses to a greater extent than most people realize—though sophisticated GWC readers already know this, either from personal experience or reading us. Another aspect is the the suddenly well-endowed local Habitat affiliate will be able to offer much higher salaries that their competitors and will poach local talent.

We saw this blowback effect happen in spectacular fashion a few years ago to one of our clients in a mid-size Midwestern city. Many nonprofits and even public agencies will become extremely unhappy when one of their peer organizations succeeds wildly. One year, at least half a dozen proposals we wrote for this otherwise ordinary nonprofit client got funded. His organization got millions of dollars in grants, which represented a huge amount of money in his low-income, high-risk community. Every other nonprofit CEO knew about his organization’s success. Superficially, all the players in our client’s service area congratulated our client, but our client, unfortunately, began to believe in his own greatness. Because he did, the quality and quantity of his interest in future grant-writing efforts declined.

Simultaneously, many local collaborators became less eager to help him. Organizations that used to provide letters, as he did for them, stopped being able to provide letters, albeit for innocuous reasons (“staffing changes,” “priority shifts:” those sorts of things). His ability to execute his organization’s mission became compromised by intransigence from the city and from other local nonprofits, all of whom were envious. These factors led to peril for our client’s organization, which eventually went under altogether; by the time he realized the danger, he was already on the deck of his sinking nonprofit ship. He should have handed out more subcontracts and acted with greater humility, but he did not. Will Habitat avoid his fate? We shall see. This is not a new tale, as Greek Tragedies, Shakespeare, movies, and politics are filled with such tales of hubris.

The second point involves housing policy itself, a topic we’ve dealt with before regarding Los Angeles’s Prop HHH initiative. Housing constraints lowered aggregate US growth by 36 percent from 1964 to 2009—an enormous amount most people don’t appreciate (imagine your organization’s budget being 36 percent larger, and your paycheck having 36 percent more dollars in it). Numerous factors impede the construction of affordable housing: parking minimums, improper building lot setbacks, height limits, neighborhood reviews, and more. Supply restrictions are everywhere, and few states or municipalities have gotten serious about alleviating them. If you add large amounts of additional money into a market that is supply-constrained, prices will go up in the face of constant demand, but more supply won’t come online. This results in numerous negative knock-on effects. There are some efforts afoot to change this dynamic—some are now calling for an “abundance agenda,” in contrast to the artificial scarcity mindset and policies now common in housing policy. In the meantime, however, we’re stuck with bottlenecks in the zoning and permitting process, which impede housing developers of all sorts—including Habitat. On top of those bottlenecks, inflation and supply chain problems have kicked up in the last few months, such that even if states begin enacting an abundance agenda, builders are still behind because of a raw-materials and skilled labor deficits. We’re constricting our population itself, as people have fewer children because so much of their money is going into housing costs.

Habitat for Humanity is likely to suffer worse than than for-profit builders. Habitat doesn’t advertise this, but they take forever to build housing units, particularly relative to commercial builders like Lennar (Lennar built 60,000 units in 2021) or Toll Brothers. While merchant builders can churn out single family homes in four to six months, it can take Habitat up to two years to finish a comparable house. I looked at the 2021 Habitat National Annual Report and IRS 990 Form, which obfuscate results with lots of happy talk, but I couldn’t find a clear statement of how many units were actually finished in 2021. Draw your own conclusions. Although Habitat hires subcontractors for the skilled trades that are required for home building, they nominally rely on volunteer labor and the “sweat equity” of buyers. As far as I can tell, Habitat mostly builds single-family units, rather than multi-family, both because those units are easier to build and provide easier roles for volunteers and homeowners, as well as making for better photo ops. But we really need more missing middle housing, rather than more single-unit one-offs in the exurbs. Everyone in the business knows how Habitat works, but don’t expect to see it in the media which has been in love with Habitat since Jimmy Carter picked up a hammer 40 years ago.

The biggest problem in American housing policy isn’t “lack of money” per se: even many nonprofits can find some amount of HUD, state, local, or foundation funding to build affordable housing. The biggest problem is the regulatory regime, which makes building new housing excruciatingly expensive, time consuming, and difficult. Until we improve the regulatory regime, we’re not going to do much to make a real dent in the housing affordability problem (housing can’t both be cheap for end users and a “good investment,” which is one of the many reasons American housing policy is incoherent).

Housing affordability is the income-related issue for our age. If someone is concerned about “income inequality” but doesn’t have “housing abundance” at the top of their agenda, are they virtue signaling, or serious?