October 19, 2017
Housing Pays
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
- 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
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
Wednesday’s Academic Roundup
- Local Logit Regression for Recovery Rate, Gao, Sopitpongstorn, and Silvapulle
- The Regulation of Mortgage Servicing: Lessons from the Financial, Garcia-Feijoo, McNulty, and Viale
- The Politics of Foreclosures, Agarwal, Amromin, Ben-David, and Dinc
- A Shortage of Short Sales: Explaining the Under-Utilization of a Foreclosure Alternative, Zhang
- Modeling Adam Smith’s Analysis of the Very Severe, Negative Impacts of ‘Projectors, Imprudent Risk Takers and Prodigals’ on the Macro Economy in the Wealth of Nations Using a Modified Lotka-Volterra Non Linear Coupled Model of Differential Equations, Brady
October 18, 2017 | Permalink | No Comments
October 17, 2017
Evidence and Innovation in Housing
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
Tuesday’s Regulatory & Legislative Roundup
- In a unique display of camaraderie, Philadelphia’s Housing Authority reopened a school closed by the Philadelphia School District. The city agency bought the school outright. After purchasing the school, the city’s housing agency engaged a renowned non-profit education operator to manage the day-to-day function of the school. However, before the agency engaged the non-profit organization, it refurbished the school which will soon be home to ninth graders. This educational rebirth is part of their Neighborhood Transformation Plan geared towards assisting families in public housing with skills necessary for them to increase their income and reduce homelessness.
- Philadelphia is relentlessly working to turn their housing conditions around. Philadelphia’s Council Member, Cherelle Parker, introduced a bill which intends to release $40 million for housing repair loans. These loans would be solely for homeowners and landlords with the goal of preserving the city’s affordable housing stock. If passed, homeowners and small landlords “earning up to 120 percent of the area median income…” ,may take advantage of this loan. Further, Parkers goal is to support the city’s goal in creating and preserving the city’s affordable housing inventory.
October 17, 2017 | Permalink | No Comments
October 16, 2017
The Next Taxpayer Bailout for the Mortgage Market?
The HUD Office of the Inspector General issued an audit on Nonbank Oversight by Ginnie Mae. This audit is one of those dry government documents that contain whispers of crises to come. The worrisome sentence is buried at the end of the audit: “If disruption in servicing occurs, Ginnie Mae may need to request additional funds from the U.S. Treasury to pay investors.” (8) To understand what is at stake, it is worth reviewing the background of the audit:
The Housing and Urban Development Act of 1968 created the Government National Mortgage Association (Ginnie Mae), a wholly owned U.S. Government corporation within the U.S. Department of Housing and Urban Development, to pursue the creation of a mortgage-backed security market for government-insured loans. Through its mortgage-backed securities programs, Ginnie Mae guarantees securities backed by pools of mortgages and issued by mortgage lenders approved by Ginnie Mae. Ginnie Mae refers to these mortgage lenders as Ginnie Mae issuers.
Ginnie Mae depends on its issuers to take full responsibility for servicing, remitting, and reporting activities for the mortgages in every pool. If the borrower fails to make a timely payment on its mortgage, the issuer must use its own funds to ensure that the investors receive timely payment. If an issuer cannot ensure the timely payment of principal and interest to investors, Ginnie Mae, in accordance with its guaranty, defaults the issuer, acquires the servicing of the loans, and uses its own funds to manage the portfolio and make any necessary advances to investors. Ginnie Mae’s risk for loss occurs almost entirely at the point of issuer default, when Ginnie Mae must step in and exercise its guaranty. Counterparty risk refers to the risk of issuer default.
Following the financial crisis, the demand for government-insured loans increased, which created an increased demand for Ginnie Mae’s product. Ginnie Mae’s total remaining principal outstanding increased from $427.6 billion in 2007 to $1.7 trillion in 2016. This represents a 300 percent increase. The chart below shows the growth of the outstanding remaining principal balance of Ginnie Mae’s mortgage-backed securities programs from 2007 to 2016.
In addition to an increase in demand for Ginnie Mae’s products, Ginnie Mae’s issuer base had shifted dramatically since the financial crisis. Banks retreated from mortgage lending, causing a shift in Ginnie Mae’s issuer base from banks to nonbanks. For the purpose of this report, a bank refers to an institution licensed to receive deposits and make loans, whereas a nonbank refers to institutions that offer only mortgage-related services. In 2014, Ginnie Mae reported that 6 of its top 10 issuers were nonbanks. The chart below illustrates the shift in Ginnie Mae’s issuer base since 2010.
When banks dominated Ginnie Mae’s issuer base, Ginnie Mae outsourced a significant portion of its risk management to bank regulators, such as the Federal Deposit Insurance Corporation, the Federal Reserve, the Office of the Comptroller of the Currency, and the National Credit Union Association. While the Consumer Financial Protections Bureau regulates nonbanks for consumerrelated issues, nonbanks are not subject to the same safety and soundness regulation as banks. No equivalent regulator exists for nonbanks. Therefore, Ginnie Mae must function as the first line of defense to evaluate nonbank institutions for financial and operational soundness. Ginnie Mae’s Office of Issuer and Portfolio Management is responsible for overseeing Ginnie Mae issuers concerning all matters related to participation in its mortgage-backed security programs, including monitoring issuer participation and executing issuer defaults.
Unlike banking institutions, nonbanks tend to have complex financial and operating structures and frequently use subservicers instead of servicing the loans in their portfolios. Additionally, nonbanks rely on credit lines for funding, which may limit a nonbank’s access to liquidity to meet the financial obligations of being a Ginnie Mae issuer. Banking institutions have standardized corporate ownership and lines of business, substantial liquidity, and the ability to service the loans in their portfolios.
Our audit objective was to determine whether Ginnie Mae responded adequately to changes in its issuer base. (3-4, charts omitted)
Unfortunately, the audit found that Ginnie Mae has come up short in dealing with the risks that it now faces. Time will tell whether it meaningfully responds to these deficiencies.
October 16, 2017 | Permalink | No Comments
