Sustainable Housing for FHA Borrowers

photo by Michael Daddino

Federal Reserve Bank of New York

Donghoon Lee and Joseph Tracy of the NY Fed have posted a staff report, Long-Term Outcomes of FHA First-Time Homebuyers. It opens,

The Commissioner of the Federal Housing Administration (FHA), David Stevens, in remarks delivered on December 12, 2009, defined the purpose of the FHA as follows. “As a mission-driven organization, FHA’s goal is to provide sustainable homeownership options for qualified borrowers.” These remarks followed a remarkable increase in the scope of the FHA mortgage insurance program in response to the financial crisis and housing bust. This comment by Commissioner Stevens is important in that it clarifies a goal of the FHA program. However, this clarity was not followed up by the FHA with a definition of “sustainable homeownership.” Nor was there any documented attempt by the FHA to develop metrics to track their progress toward this objective, or a commitment by the FHA to make this information available to the public in the future.

Program evaluation is an integral part of any effective program—government or private. We illustrate in this paper that advances in data availability offer the opportunity for the FHA to both define what it means by sustainable homeownership and to measure its progress against this definition. We believe that it would be beneficial for the FHA to be transparent in this effort and to report on not only its definition and metrics, but also on its progress on an annual basis. Improved tracking of long-term outcomes of FHA borrowers will better help inform the FHA on program design. This should lead to improved outcomes over time and enhanced public support.

We focus our analysis on first-time homebuyers who are an important market segment for the FHA. The mission of sustainable homeownership is particularly relevant for these new homeowners. The benefits of a government mortgage insurance program that helps to facilitate the transition from renting to owning rests importantly on the success of these new borrowers in remaining homeowners in the future. However, to date, the FHA has not systematically tracked the progress of its first-time homebuyers after they pay off their credit risk to the FHA. We use the New York Fed’s Consumer Credit Panel (CCP) data to do this analysis starting with the 2002 cohort of FHA first-time homebuyers. (1, footnotes omitted)

This is inarguably right. The FHA should set forth performance metrics and provide annual progress reports for them. For too long, the FHA has cherry-picked metrics without providing a holistic perspective on its performance. The authors conclude,

A stated mission of the FHA mortgage insurance program is to support sustainable homeownership. An examination of the history of the FHA program illustrates a strong initial focus on sustainability, but legislated changes in the 1950s and early 1960s shifted the focus to affordability. If sustainability remains an important goal for the FHA, then it would be desirable for the FHA to define what they mean by sustainability and to track their performance over time. Only by being transparent and holding themselves accountable can the FHA improve on this objective over time. (14)

Amen to that.

Homeowner Nation or Renter Nation?

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.

Reiss on “Generation Rent”

MSN Real Estate quoted me in ‘Generation Rent’ trend changes the housing game.

Tougher lending requirements, a transient lifestyle and seeing mortgages throw their
parents’ finances in turmoil are causing more millennials to rent instead of buy a

“This attitude shift on homeownership and the rise in demand for rentals is directly influencing the growth of private firms looking to fill out real estate portfolios as well as property management groups that have scooped up business from investors who have no interest in the day-to-day of being a landlord,” said Don Lawby, president of Real Property Management in Utah.

Some 82% of consumers believe owning a home is a critical part of wealth building but 18% said they are not willing to assume the risk of a mortgage, according to a National Foundation for Credit Counseling (NFCC) survey.

“The unwillingness to take on a mortgage loan may be a smart decision for some, as many borrowers have learned the hard way that homeownership does not come with a guarantee of continually increasing equity,” said Gail Cunningham, spokesperson with the NFCC.

The “Generation Rent” phenomenon is not just about younger Americans. As a societal shift has slowly emerged to redefine the American Dream, many older Americans with empty nests are also exploring apartment living.

“Apartments are a maintenance-free alternative to single-family homes and retirement communities,” said Abe Tekippe, a spokesperson with Waterton Associates, a national apartment investor and operator. “They also allow residents to move closer to shopping, dining and entertainment venues, making them more accessible to aging Baby Boomers.”

For many years, homeownership was a policy objective of the federal government, which symbolized a level of achievement for a person or family but these days many are taking a closer look at whether the costs and benefits of home ownership outperforms the cost of renting.

“People are realizing that coming up with funds and motivation each month for maintenance and up-keep isn’t feasible for economic, medical, lifestyle or other
reasons,” said Dillon Baynes, co-founder and managing partner with Columbia Ventures in Atlanta.

If generation rent continues, a slow down in home sales is bound to have a ripple effect. “If renting remains a popular choice, it will certainly have an impact on the broader economy starting with the home building industry,” said David Reiss, professor with Brooklyn Law School.

“There would be a move away from single-family construction to multi-family.”