REFinBlog

Editor: David Reiss
Brooklyn Law School

October 20, 2017

The Long-Term Effects of Redlining

By David Reiss

Daniel Aaronson et al. have posted The Effects of the 1930s HOLC “Redlining” Maps to SSRN. The paper provides empirical support for the argument that discriminatory government policies have consequences that can last for decades, including increased segregation. The abstract reads,

In the wake of the Great Depression, the Federal government created new institutions such as the Home Owners’ Loan Corporation (HOLC) to stabilize housing markets. As part of that effort, the HOLC created residential security maps for over 200 cities to grade the riskiness of lending to neighborhoods. We trace out the effects of these maps over the course of the 20th and into the early 21st century by linking geocoded HOLC maps to both Census and modern credit bureau data. Our analysis looks at the difference in outcomes between residents living on a lower graded side versus a higher graded side of an HOLC boundary within highly close proximity to one another. We compare these differences to “counterfactual” boundaries using propensity score and other weighting procedures. In addition, we exploit borders that are least likely to have been endogenously drawn. We find that areas that were the lower graded side of HOLC boundaries in the 1930s experienced a marked increase in racial segregation in subsequent decades that peaked around 1970 before beginning to decline. We also find evidence of a long-run decline in home ownership, house values, and credit scores along the lower graded side of HOLC borders that persists today. We document similar long-run patterns among both “redlined” and non-redlined neighborhoods and, in some important outcomes, show larger and more lasting effects among the latter. Our results provide strongly suggestive evidence that the HOLC maps had a causal and persistent effect on the development of neighborhoods through credit access.

The paper’s conclusion is just as interesting:

That the pattern begins to revert starting in the 1970s is at least suggestive that Federal interventions like the Fair Housing Act of 1968, the Equal Credit Opportunity Act of 1974, and the Community Reinvestment Act of 1977 may have played a role in reversing the increase in segregation caused by the HOLC maps. . . . We believe our results highlight the key role that access to credit plays on the growth and long-running development of local communities. (33)

October 20, 2017 | Permalink | No Comments

Friday’s Government Reports Roundup

By Jamila Moore

  • The Consumer Financial Protection Bureau (CFPB) recently released a report detailing its consumer protection principles. In the report, the CFPB lists their grounds for authorizing “financial data sharing and aggregation.” The agency’s goal is to improve the market by enhancing financial services and products, fostering competition, and enabling consumers to fully own their financial choices. The agency notes, while these principles provide for great practice, they are not intended to override or overturn any existing statutes or rules in the financial industry.
  • The U.S. Commerce Department recently released a report regarding new residential construction across the Nation. In various pockets throughout the U.S., building permits among other indicia of building new homes have declined. According to the report by the Commerce Department, new home construction is well below the homebuilding percentages of 2006. Moreover, homebuilding is in its third month of decline. Similar to building permits and new home construction, housing stocks are also decreasing.

October 20, 2017 | Permalink | No Comments

October 19, 2017

Housing Pays

By David Reiss

photo by BDS2006

The Los Angeles Business Council released its Housing Pays Report: Capturing the Economic and Fiscal Benefits of Increased Housing Production in L.A. LA has been taking serious steps recently to deal with its housing crisis and this report describes those steps and argues that increased housing production has a net fiscal surplus. The Executive Summary reads,

Recent reports have consistently ranked Los Angeles among the most unaffordable housing markets n the nation, with rents and housing values growing at a rapid clip even as incomes remain stagnant. In LA County about 6 in 10 renters are cost-burdened, paying at least 30 percent of their income on housing each month, and nearly one third of county renters spend more than 50 percent of their income on housing. The outlook is grim even for middle-class families looking to buy, with a median home value of over $550,000.

Although there are many factors contributing to Los Angeles’ affordability crisis, it can largely be boiled down to an issue of supply and demand: Housing production has not kept up with population and job growth. For decades the region has operated under the false premise that “if you don’t build it, they won’t come,” and the housing shortage that’s followed has had disastrous—and yet predictable—results. Vacancy rates have fallen to historic lows, forcing residents to pay more each year just to secure their place in the city.

Recognizing the importance of housing production for stabilizing rents for residents at every income level, Los Angeles Mayor Eric Garcetti set a goal to build 100,000 new housing units in LA by 2021, including 15,000 homes affordable to low-income households. To meet the Mayor’s 2021 goal, the market will have to produce an average of 12,500 new units annually between 2013 and 2021—5,000 more, each year, than were developed between 2000 and 2010. The city is currently on pace to achieve this goal, but we are expected to experience an economic downturn and depressed development cycle before 2021, and recently passed initiatives, such as Build Better LA, have added significant regulation to future development. To ensure that the 100,000-unit goal is met, the city must enact reforms that allow us to make the most of a strong market, and help us weather the years ahead as the current development cycle runs its course.

Streamlining LA’s development process to sustain high levels of market-rate housing production benefits the city’s financial bottom line, provides new revenues that may be re-invested in affordable housing, and creates thousands of privately-funded housing units for low- and moderate-income households by leveraging the state’s density bonus law.

The LABC Institute has long made the case for the economic, environmental, and equity benefits of increased levels of housing production, particularly near LA County’s major transit hubs. Housing Pays seeks to demonstrate the fiscal benefit of increased housing production, and how that fiscal surplus can support important city priorities including affordable housing. The report analyzes the net fiscal impact of new market-rate housing production on the city’s general fund budget, which considers the revenues new housing generates through taxes and fees, and the expenses incurred for services directly related to supporting new residents, such as police and fire department services, to estimate the net impact to the general fund. (5, footnotes omitted)

I am not in a position to evaluate whether the report’s conclusions about the the net fiscal impact of housing development, but it is clear that this is a useful exercise. Communities often focus on the costs of hew construction — strain on roads, mass transit and schools — without considering the gains. This report should help those in LA who seek to increase the supply of housing to benefit both the city’s residents and the city’s economy.

October 19, 2017 | Permalink | No Comments

Thursday’s Advocacy & Think Tank Roundup

By Jamila Moore

  • Fannie Mae’s, Economic and Strategic Research Group released their October 2017 Economic and Housing Outlook (EHO). According to their study, the hurricanes which hit the Nation’s southern coasts did not negatively impact the economy as anticipated. Though there were decreases in residential investment and spending, business investment and trade balanced the decline. Further, October’s EHO projects mortgage loan rates will increase one additional time, likely in December.
  • It seems as if the political demographics of neighborhoods are changing. A study by Redfin found that 7.4% more people moved out of blue counties while red counties experienced a move-out percentage at 1% in the first half of this year. Nela Richardson, a data analyst at Redfin, cites affordability of blue counties as the cause for the shift in the neighborhood dynamics. Further, the states most affected by the affordability issues in blue counties are Colorado, Oregon, and Washington while Louisiana, New Mexico, and Indiana are not experiencing the same issues regarding blue counties’ housing costs increase.

October 19, 2017 | Permalink | No Comments

October 18, 2017

The Economics of Housing Supply

By David Reiss


chart by Smallman12q

Housing economists Edward L. Glaeser and Joseph Gyourko have posted The Economic Implications of Housing Supply to SSRN (behind a paywall but you can find a slightly older version of the paper here). The abstract reads,

In this essay, we review the basic economics of housing supply and the functioning of US housing markets to better understand the distribution of home prices, household wealth and the spatial distribution of people across markets. We employ a cost-based approach to gauge whether a housing market is delivering appropriately priced units. Specifically, we investigate whether market prices (roughly) equal the costs of producing the housing unit. If so, the market is well-functioning in the sense that it efficiently delivers housing units at their production cost. Of course, poorer households still may have very high housing cost burdens that society may wish to address via transfers. But if housing prices are above this cost in a given area, then the housing market is not functioning well – and housing is too expensive for all households in the market, not just for poorer ones. The gap between price and production cost can be understood as a regulatory tax, which might be efficiently incorporating the negative externalities of new production, but typical estimates find that the implicit tax is far higher than most reasonable estimates of those externalities.

The paper’s conclusions, while a bit technical for a lay audience, are worth highlighting:

When housing supply is highly regulated in a certain area, housing prices are higher and population growth is smaller relative to the level of demand. While most of America has experienced little growth in housing wealth over the past 30 years, the older, richer buyers in America’s most regulated areas have experienced significant increases in housing equity. The regulation of America’s most productive places seems to have led labor to locate in places where wages and prices are lower, reducing America’s overall economic output in the process.

Advocates of land use restrictions emphasize the negative externalities of building. Certainly, new construction can lead to more crowded schools and roads, and it is costly to create new infrastructure to lower congestion. Hence, the optimal tax on new building is positive, not zero. However, there is as yet no consensus about the overall welfare implications of heightened land use controls. Any model-based assessment inevitably relies on various assumptions about the different aspects of regulation and how they are valued in agents’ utility functions.

Empirical investigations of the local costs and benefits of restricting building generally conclude that the negative externalities are not nearly large enough to justify the costs of regulation. Adding the costs from substitute building in other markets generally strengthens this conclusion, as Glaeser and Kahn (2010) show that America restricts building more in places that have lower carbon emissions per household. If California’s restrictions induce more building in Texas and Arizona, then their net environmental could be negative in aggregate. If restrictions on building limit an efficient geographical reallocation of labor, then estimates based on local externalities would miss this effect, too.

If the welfare and output gains from reducing regulation of housing construction are large, then why don’t we see more policy interventions to permit more building in markets such as San Francisco? The great challenge facing attempts to loosen local housing restrictions is that existing homeowners do not want more affordable homes: they want the value of their asset to cost more, not less. They also may not like the idea that new housing will bring in more people, including those from different socio-economic groups.

There have been some attempts at the state level to soften severe local land use restrictions, but they have not been successful. Massachusetts is particularly instructive because it has used both top-down regulatory reform and incentives to encourage local building. Massachusetts Chapter 40B provides builders with a tool to bypass local rules. If developers are building enough formally-defined affordable units in unaffordable areas, they can bypass local zoning rules. Yet localities still are able to find tools to limit local construction, and the cost of providing price-controlled affordable units lowers the incentive for developers to build. It is difficult to assess the overall impact of 40B, especially since both builder and community often face incentives to avoid building “affordable” units. Standard game theoretic arguments suggest that 40B should never itself be used, but rather work primarily by changing the fallback option of the developer. Massachusetts has also tried to create stronger incentives for local building with Chapters 40R and 40S. These parts of their law allow for transfers to the localities themselves, so builders are not capturing all the benefits. Even so, the Boston market and other high cost areas in the state have not seen meaningful surges in new housing development.

This suggests that more fiscal resources will be needed to convince local residents to bear the costs arising from new development. On purely efficiency grounds, one could argue that the federal government provide sufficient resources, but the political economy of the median taxpayer in the nation effectively transferring resources to much wealthier residents of metropolitan areas like San Francisco seems challenging to say the least. However daunting the task, the potential benefits look to be large enough that economists and policymakers should keep trying to devise a workable policy intervention. (19-20)

October 18, 2017 | Permalink | No Comments

October 17, 2017

Evidence and Innovation in Housing

By David Reiss

Lee Anne Fennell and Benjamin Keys have posted the Introduction to their new book, Evidence and Innovation in Housing Law and Policy, to SSRN. It opens,

No area of law and policy presents more important and pressing questions, or ones more central to human well-being, than that of housing. Yet academic discourse around housing is too often siloed into separate topical areas and disciplinary approaches, while remaining distanced from the contentious housing policy debates unfolding in communities across the nation. In June 2016, the Kreisman Initiative on Housing Law and Policy at the University of Chicago Law School convened a conference in downtown Chicago with the goal of breaking down these barriers and forging new connections – between different facets of housing law and policy, between different disciplinary approaches to housing issues, between academic inquiry and applied policy, and between the lessons of the past and adaptations for the future.

This volume is the product of that conference and the dialogue it provoked among academics, practitioners, and policy makers. Its baker’s dozen of contributions comprises cutting-edge interdisciplinary work on housing and housing finance from leading scholars in law, economics, and policy. The pieces individually and collectively showcase how research and policy can come together in the housing arena. We hope the end result will have lasting relevance in setting the course – and identifying the obstacles – for housing law and policy going forward.

This book is organized around two interlocking roles that housing serves: as a vehicle for building community, and as a vehicle for building wealth. These facets of housing carry implications both for the households who consume residential services and for the larger economic, political, and spatial domains in which housing plays such a primary and contentious role. Cumulatively, the pieces here confront, and respond innovatively to, the dilemmas that these two facets of housing create for law and policy at different scales of analysis. (1)

This collection of papers brings together an all-star cast of housing nerds. While the papers are an eclectic mix, they are pretty consistent in that they ask important questions about housing policy. Even better, the Introduction contains links to open access versions of each paper. They are listed below:

Part I – Housing and the Metropolis: Law and Policy Perspectives

1 – The Rise of the Homevoters: How the Growth Machine Was Subverted by OPEC and Earth Day By William A. Fischel

2 – How Land Use Law Impedes Transportation Innovation By David Schleicher

3 – The Unassailable Case against Affordable Housing Mandates By Richard A. Epstein

Part II – Housing as Community: Stability, Change, and Perceptions

4 – Balancing the Costs and Benefits of Historic Preservation By Ingrid Gould Ellen & Brian J. McCabe

5 – Historic Preservation and Its Even Less Authentic Alternative By Lior Jacob Strahilevitz

6 – Losing My Religion: Church Condo Conversions and Neighborhood Change By Georgette Chapman Phillips

7 – How Housing Dynamics Shape Neighborhood Perceptions By Matthew Desmond

Part III – Housing as Wealth Building: Consumers and Housing Finance

8 – Behavioral Leasing: Renter Equity as an Intermediate Housing Form By Stephanie M. Stern

9 – Housing, Mortgages, and Retirement By Christopher J. Mayer

10 – The Rise and (Potential) Fall of Disparate Impact Lending Litigation By Ian Ayres, Gary Klein, & Jeffrey West

Part IV – Housing and the Financial System: Risks and Returns

11 – Household Debt and Defaults from 2000 to 2010: The Credit Supply View By Atif Mian & Amir Sufi

12 – Representations and Warranties: Why They Did Not Stop the Crisis By Patricia A. McCoy & Susan Wachter

13 – When the Invisible Hand Isn’t a Firm Hand: Disciplining Markets That Won’t Discipline Themselves By Raphael W. Bostic & Anthony W. Orlando

October 17, 2017 | Permalink | No Comments