Author Archives: David Reiss

Lincoln at Independence Hall

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photo by Jeff Kubina

On President’s Day, it is worth sitting with the words of Abraham Lincoln, spoken at an address at Philadelphia’s Independence Hall in 1861:

I am filled with deep emotion at finding myself standing here, in this place, where were collected together the wisdom, the patriotism, the devotion to principle, from which sprang the institutions under which we live. You have kindly suggested to me that in my hands is the task of restoring peace to the present distracted condition of the country. I can say in return, Sir, that all the political sentiments I entertain have been drawn, so far as I have been able to draw them, from the sentiments which originated and were given to the world from this hall. I have never had a feeling politically that did not spring from the sentiments embodied in the Declaration of Independence. I have often pondered over the dangers which were incurred by the men who assembled here, and framed and adopted that Declaration of Independence. I have pondered over the toils that were endured by the officers and soldiers of the army who achieved that Independence. I have often inquired of myself, what great principle or idea it was that kept this Confederacy so long together. It was not the mere matter of the separation of the Colonies from the motherland; but that sentiment in the Declaration of Independence which gave liberty, not alone to the people of this country, but, I hope, to the world, for all future time. It was that which gave promise that in due time the weight would be lifted from the shoulders of all men. This is a sentiment embodied in the Declaration of Independence. Now, my friends, can this country be saved upon that basis? If it can, I will consider myself one of the happiest men in the world, if I can help to save it. If it cannot be saved upon that principle, it will be truly awful. But if this country cannot be saved without giving up that principle, I was about to say I would rather be assassinated on this spot than surrender it.

Now, in my view of the present aspect of affairs, there need be no bloodshed and war. There is no necessity for it. I am not in favor of such a course, and I may say, in advance, that there will be no bloodshed unless it be forced upon the Government, and then it will be compelled to act in self-defence.

My friends, this is wholly an unexpected speech, and I did not expect to be called upon to say a word when I came here. I supposed it was merely to do something toward raising the flag. I may, therefore, have said something indiscreet. I have said nothing but what I am willing to live by and, if it be the pleasure of Almighty God, die by.

Homeowner Nation or Renter Nation?

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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.

Reverse Mortgage Lowdown

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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.”

Making the Switch to Dirt Law

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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.”

Bold New Housing Plan?

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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.

GSE Reform, by Stealth?

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Photo By Greg Willis

The Urban Institute’s Housing Finance Policy Center has issued its January 2016 Housing Finance at a Glance Chartbook. It opens by noting,

The FHFA recently released its 2016 Scorecard for Fannie Mae and Freddie Mac with updated guidance for credit risk transfer transactions. A year ago, under the 2015 scorecard, the FHFA had required Fannie Mae and Freddie Mac to transfer credit risk on a fixed dollar amount of UPB [unpaid principal balance] – $150 billion for Fannie Mae and $120 billion for Freddie Mac. Both exceeded those targets (Fannie $187 billion and Freddie 210 billion). Additionally, the 2015 scorecard did not indicate how much credit risk should be transferred (expected or unexpected, or a specific numeric threshold for example), instead leaving it to the GSEs’ discretion.
But that changes in 2016. FHFA’s 2016 scorecard is a notable departure from 2015 in that it requires the GSEs to transfer credit risk on “at least 90 percent” of the newly acquired UPB (with exceptions for HARP refinances, mortgages with maturities 20 years and below and with loan-to-value ratios 60 percent and below). Another departure from 2015 is the added requirement to transfer a substantial portion of credit risk covering “most of the credit losses projected to occur during stressful economic scenarios.” In other words, GSEs are required to transfer nearly all credit risk on new production, except for what is catastrophic. These two requirements are highly noteworthy because over time they will put the GSEs (and hence the taxpayers) in a remote, catastrophic risk position, letting private capital bear vast majority of credit losses the vast majority of the time – a key objective of most housing finance reform proposals. (3)
I have been arguing for a long time that the private sector should bear the credit risk in the mortgage market, so I think this is a good thing in principle. The FHFA needs to ensure, of course, that the agencies are pricing the transfer of credit risk properly, but overall this is a step in the right direction. Not being privy to any conversations in the Beltway, I always wonder if things like this happen with some kind of bipartisan acquiescence, but I guess we won’t know until someone tells us what happened behind closed doors.

Movin’ on up with TJ’s and Whole Foods?

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ChadPerez49

TheStreet.com quoted me in Houses Near Trader Joe’s or Whole Foods Reap Better Property Value Returns. It opens,

The internal debate for people who are shopping for a home is never an easy one, as the location and potential for the property value to rise might outrank the appearance of the brick and mortar edifice. But new research from Zillow has reiterated beliefs that resale value should remain the higher priority.

Even first-time home buyers are aware of the importance and value of determining the resale value of a condo or house.

After examining 17 years of housing data from 1997 to 2014, Zillow, the Seattle-based real estate website, determined that homeowners realized greater gains when they were in close proximity to Trader Joe’s and Whole Foods, the national grocery store chains. The analysis included examining the values of condos, co-ops and houses within a mile of 451 Trader Joe and 375 Whole Foods locations, totaling nearly 3 million homes. The median value of these homes was compared to the median values of all homes during the same time period.

“These grocery stores are doing a great job of identifying places ready for quick home value appreciation,” said Svenja Gudell, chief economist of Zillow. “A Whole Foods or Trader Joe’s opening is a signal for home shoppers or homeowners that this is likely to be an up-and-coming location.”

One emerging trend is the desire of homebuyers to live in neighborhoods where walking to local stores and restaurants remain a feasible option.

“As more people are priced out of city centers and head to the suburbs, homebuyers still want amenity-rich neighborhoods and a more urban feel,” she said. “These stores are definitely among those amenities that are attractive to buyers.”

Other Amenities Sought

These two grocery stores resonate highly with consumers, and their preference has increased to the point where they have asked specifically if either one is within walking distance at showings of homes, said Samantha DeBianchi, CEO of DeBianchi Real Estate, a Fort Lauderdale, Fla. real estate firm.

“The old adage ‘location, location, location’ is really true,” she said.

The research conducted by Zillow revealed that through 2014, the homes located a mile of either Whole Foods or Trader Joe’s were valued at more than twice as much as the median home throughout the U.S.

Since these two grocery stores are always constructed in neighborhoods where the gross income is higher than the average salary, whether this phenomenon is simply a self-fulling prophecy is anybody’s guess.

Zillow contends that the stores provide the inertia to push up home prices, even in neighborhoods where the prices were falling behind those in the city itself. They also examined the effect of the construction of the stores on the property value three years before and after the opening of 40 Trader Joe’s locations and 40 Whole Foods stores. After a store opens, the prices of homes start to exceed those in the city overall.

“I am still skeptical of the claim when it comes to those two stores, but I would say that when you buy near a major amenity when it is under construction, you often see a bump when it is complete,” said David Reiss, a law professor at Brooklyn Law School.