REFinBlog

Editor: David Reiss
Brooklyn Law School

February 12, 2016

Homeowner Nation or Renter Nation?

By David Reiss

Andreas Praefcke

Arthur Acolin, Laurie Goodman and Susan Wachter have posted a forthcoming Cityscape article to SSRN, A Renter or Homeowner Nation? The abstract reads,

This article performs an exercise in which we identify the potential impact of key drivers of home ownership rates on home ownership outcomes by 2050. We take no position on whether these key determinants in fact will come about. Rather we perform an exercise in which we test for their impact. We demonstrate the result of shifts in three key drivers for home ownership forecasts: demographics (projected from the census), credit conditions (reflected in the fast and slow scenarios), and rents and housing cost increases (based on California). Our base case average scenario forecasts a decrease in home ownership to 57.9 percent by 2050, but alternate simulations show that it is possible for the home ownership rate to decline from current levels of around 64 percent to around 50 percent by 2050, 20 percentage points less than at its peak in 2004. Projected declines in home ownership are about equally due to demographic shifts, continuation of recent credit conditions, and potential rent and house price increases over the long term. The current and post WW II normal of two out of three households owning may also be in our future: if credit conditions improve, if (as we move to a majority-minority nation) minorities’ economic endowments move toward replicating those of majority households, and if recent rent growth relative to income stabilizes.

This article performs a very helpful exercise to help understand the importance of the homeownership rate.  This article continues some of the earlier work of the authors (here, for instance). I had thought that that earlier paper should have given give more consideration to how we should think about the socially optimal homeownership rate. Clearly, a higher rate, like the all-time high of 69% that we had right before the financial crisis, is not always better. But just as clearly, the projected low of 50% seems way too low, given long term trends. But that leaves a lot of room in between.

This article presents a model which can help us think about the socially optimal rate instead of just bemoaning a drop from the all-time high. It states that

Equilibrium in the housing market is reached when the marginal household is indifferent between owning and renting, requiring the cost of obtaining housing services through either tenure to be equal. In addition, for households, the decision to own or rent is affected by household characteristics and, importantly, expected mobility, because moving and transaction costs are higher for owners than for renters.  Borrowing constraints also affect tenure outcomes if they delay or prevent access to homeownership. (4-5)

This short article does not answer all of the questions we have about the homeownership rate, but it does answer some of them. For those of us trying to understand how federal homeownership policy should be designed, it undertakes a very useful exercise indeed.

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February 12, 2016 | Permalink | No Comments

Friday’s Government Reports Roundup

By Shea Cunningham

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February 12, 2016 | Permalink | No Comments

February 11, 2016

Reverse Mortgage Lowdown

By David Reiss

17069-a-woman-and-older-man-sitting-at-a-table-pv

Athene quoted me in Is a Reverse Mortgage Right for You? It opens,

Experts weigh the pros and cons of this loan—to help you make a smart choice.

For homeowners age 62 and older who have a significant amount of equity (appraised value minus mortgage balance) in their homes, a reverse mortgage can seem like an attractive option. Simply put, a reverse mortgage allows you to convert a portion of the equity in your home into cash, without having to sell your home. But this type of loan isn’t right for everyone. Here’s help determining if a reverse mortgage is the smart choice for you.

Pros: A reverse mortgage is a loan against your home equity, which you can take as a lump sum payment, a monthly payment, or a line of credit. The loan is paid off when you no longer live in the home. “It allows a homeowner to access home equity in the present in order to supplement current income,” says David Reiss, a professor of law at Brooklyn Law School who teaches residential real estate courses.

Consider this loan if you would like to stay in your current home and

  • Have lived in your home for a long time and plan to use the equity to supplement Social Security and other investment income streams
  • Have other assets and are not using this as a loan of last resort
  • Might not be able to access the cash you need in emergencies

Cons: These loans aren’t cheap, says Scott Withiam, housing counseling supervisor at American Consumer Credit Counseling, Inc. Plus, the industry that sells them has been under scrutiny from the Consumer Financial Protection Bureau for deceptive practices. “The reverse mortgage industry has had more than its share of shady operators who are drawn to all that equity that seniors have amassed,” says Reiss. “Homeowners considering a reverse mortgage should make sure to review the terms of the transaction with someone whose financial judgment he or she trusts.”

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February 11, 2016 | Permalink | No Comments

Thursday’s Advocacy & Think Tank Roundup

By Shea Cunningham

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February 10, 2016

Making the Switch to Dirt Law

By David Reiss

photo by Tunde

Lawyer & Statesman quoted me in Real Estate Lawyers in Demand about how lawyers can make the transition to a dirt law practice. It reads, in part,

Real estate is one of the most fickle industries around — hot when the economy is growing and cold when it is not. The good news is that real estate is growing again and that means more jobs for attorneys.

Robert Half Legal, a legal staffing agency, reports that the real estate lawyer is the third most in-demand legal position in the South Atlantic region. Real estate is the second-fastest-growing legal industry in the South Atlantic region and the fourth fastest in the Mountain and Pacific regions.

At Brooklyn Law School, real estate law has become the most popular specialization. Graduates are finding more jobs in the specialization’s niche areas such as cooperative and condominium representation, said Professor David Reiss, who also serves as the academic program director of the Center for Urban Business Entrepreneurship.

If you have the time and money, Reiss thinks additional training in real estate can certainly help attorneys specialize their experience in the law. Course and certificates seem to be the best option in regards to both time and money.

“Taking a few relevant courses might make sense for most people instead of devoting the time and money that an LL.M. in real estate would entail,” he said. “Certain kinds of certificates can also help you stand out from other candidates, like the Leadership in Energy and Environmental Design (LEED) certificate. It does not involve nearly as much time or money as an LL.M. degree would, but it does signal a level of knowledge and commitment to a particular practice area.”

Don’t worry about getting your real estate license (unless you already have one). Spreading yourself too thin will be more harmful than productive, Reiss said. Attorneys also need to consider the requirements and restrictions of their individual jurisdiction.

“In some jurisdictions, such as New York, members of the bar are exempt from the various requirements necessary to become a licensed real estate broker,” he said. “But in my experience, lawyers are better off doing one thing well — being good lawyers — rather than being a jack of all trades.”

As with a lot of specialized areas of the law, real estate law has plenty of niche areas in which lawyers can further delve into. This can make you more attractive to clients and employers.

“Specializing in areas of the law relating to real estate can make a lot of sense — co-ops, condos and HOAs; construction law; land use; finance; affordable housing; and foreign investment programs, to name a few,” Reiss said.

*     *     *

While real estate can be up and down, Reiss said real estate law could be a good field even during slower economic times.

“No matter what the economy as a whole is doing, clients are still buying and selling properties, financing and refinancing them, and entering into property leases,” he said.

To prepare for careers in real estate law, Brooklyn Law School encourages job applicants to have very focused resumes, which increases their marketability.

“We find that students with focused resumes can make a compelling case to a range of real estate employers, even if their overall GPA is not high,” Reiss said.

Participating in bar association committees is also highly recommended for networking and learning purposes. Reiss says it is important to notify your network that you are transitioning into a new specialization.

“A good word about your work ethic and ability to learn can help compensate for a lack of direct experience,” Reiss said.

All that said, Reiss recommends attorneys be sure of their specialization interests before getting too far into the field.

“You should keep in mind that once you specialize, many people will pigeonhole you in that area,” he said. “So you want to make sure that you like the practice area and that there is a sufficient flow of work to keep you busy.”

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February 10, 2016 | Permalink | No Comments

Wednesday’s Academic Roundup

By Shea Cunningham

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February 9, 2016

Bold New Housing Plan?

By David Reiss

photo by Cybershot800i

Wanderer Above the Sea of Fog by Caspar David Friedrich

Enterprise Community Partners has released An Investment in Opportunity: A Bold New Vision for Housing Policy in the U.S. I thought it would be useful to highlight its specific proposals to make rental housing affordable for low-income households:

I. ENSURE BROAD ACCESS TO HIGH-OPPORTUNITY NEIGHBORHOODS

  1. Improve the Section 8 program and expand regional mobility programs to help more families with rental assistance vouchers access high-opportunity neighborhoods 
  2. Establish state and local laws banning “source of income” discrimination by landlords and property owners 
  3. Balance the allocation of Low-Income Housing Tax Credits and other federal subsidies to both high-opportunity neighborhoods and low-income communities, while creating more opportunities for mixed-income developments 
  4. Establish inclusionary zoning rules at the state and local levels 
  5. Establish state and local regulations that encourage innovation and promote the cost-effective development of multifamily housing 
  6. Incorporate affordable housing considerations into local and regional transportation planning through equitable transit-oriented development

II. PROMOTE COMPREHENSIVE PUBLIC AND PRIVATE INVESTMENTS IN LOW-INCOME NEIGHBORHOODS

  1. Make the public and private investments necessary to preserve existing affordable housing while creating mixed-income communities 
  2. Build capacity of public, private and philanthropic organizations at the local level to pursue cross-sector solutions to the problems facing low-income communities 
  3. Create state and local land banks and other entities to return vacant and abandoned properties to productive use 
  4. Make permanent and significantly expand the New Markets Tax Credit 
  5. Create a new federal tax credit for private investments in community development financial institutions and other community development entities 
  6. Establish federal regulations that encourage “impact investments” in low-income communities by individual and institutional investors

III. RECALIBRATE OUR PRIORITIES IN HOUSING POLICY TO TARGET SCARCE SUBSIDY DOLLARS WHERE THEY’RE NEEDED MOST

  1.  Reform the Mortgage Interest Deduction and other federal homeownership subsidies to ensure that scarce resources are targeted to the families who are most in need of assistance 
  2. Gradually double annual allocations of Low-Income Housing Tax Credits and provide additional gap financing to support the expansion 
  3. Significantly expand funding to Section 8 vouchers to ensure that the most vulnerable households in the U.S. have access to some form of rental assistance 
  4. Expand funding to the Housing Trust Fund and the Capital Magnet Fund as part of any effort to reform America’s mortgage finance system 
  5. Break down funding silos to encourage public investments in healthy and affordable housing for recipients of Medicaid 
  6. Create permanent funding sources at the state and local level to support affordable housing

IV. IMPROVE THE OVERALL FINANCIAL STABILITY OF LOW-INCOME HOUSEHOLDS

  1. Establish minimum wages at the federal, state and local levels that reflect the reasonable cost of living for each community 
  2. Expand the Earned Income Tax Credit, the Child Tax Credit and other essential income supports to America’s low-wage workers 
  3. Create a new federal fund to help test and scale innovative financial products that encourage low-income households to save, with a primary focus on unrestricted emergency savings 
  4. Help more low-income families build strong credit histories 
  5. Establish strong protections against predatory financial products

Not sure if I could really categorize this as “bold.” “Unrealistic” seems more apt in today’s political environment. Indeed, it reads like a wishlist drafted by a committee.

That being said, I think that Enterprise’s vision is helpful in a variety of ways. First, it offers a pretty comprehensive list of policies and programs that that can be used to  make housing more affordable. Second, it recognizes income inequality is a big part of the problem for low-income households. Third, it acknowledges that current federal housing policy favors wealthy households (cf. mortgage interest deduction) over the poor. Finally, it acknowledges that restrictive local land use policies inflate the cost of housing.

I wonder if a bolder plan would be just to fully fund Section 8 so that all low-income households were able to afford a safe and well-maintained home. Probably just as unrealistic as Enterprise’s vision, but it has the virtue of being simple to understand and execute.

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February 9, 2016 | Permalink | No Comments