Recovery from the recession of 2007 seems to have been predicted for the very next quarter ever since 2009, even as the problems of joblessness continue without improvement. Housing construction, down by 75% since the crash, is a focus of the concern: The New York Times editorialized on 25 May 2011[1] that “Until the [housing] market recovers, the entire recovery is imperiled.”
But recent data show housing construction continues at its lowest level since data began being collected.
What would it take to allow housing to recover? As I will show, it won’t happen on its own. But a few simple and powerful policy changes—changes that increase consumer choice and create jobs—can solve the problem.
The problem with housing is that it was built in the wrong places. As soon as the default crisis began, it became apparent that defaults were occurring in areas of urban sprawl—in developments with large lots and no transit service. This first impression was soon confirmed by statistical analysis: it found that a typical house with poor location efficiency is over 35% more likely to default (for the same borrower characteristics) as a house with moderate location efficiency.
This should not have come as a surprise. Even at the peak of the housing bubble, the median cost of a house was $225,000. So if the borrower was able to borrow the whole $225,000, he or she was “qualified” by the lender considering their ability to pay this amount alone, ignoring the fact that the costs of transportation to a house in sprawl were over $300,000 (and over $350,000 at today’s gas prices). It was these houses where traveling to the house cost more than owning it that made up the bulk of the default problem, and it is these sprawl neighborhoods where the distressed, foreclosed-upon, or underwater houses are now concentrated.
It is clear that it will take years to work off this inventory. But it is now also clear that even a few years won’t be enough: it will take several decades! A recent study from the Urban Land Institute shows that shifting housing preferences based on well-established demographic and economic trends mean that California has already overbuilt the large-lot suburban market compared to likely demand in 2035. Similar demographics also apply to America as a whole.
We simply have more housing in sprawl than current or future markets will demand. Where the growth in demand will be, even without a change in preferences away from sprawl, is in more compact suburbs and urban properties. But these homes cost more to buy, and as I will show, will continue to cost more, than their sprawl alternatives. And under current mortgage underwriting rules, this means that the target market for the new housing will be unable to “afford” to live there. Add to this overly burdensome parking requirements, a more challenging underwriting process for infill, and the reality of NIMBY attitudes towards infill development, and it’s no surprise more Greenfield sprawl gets built. And this is tragic—a true lose-lose outcome. Because a more expensive house that can save even half of the projected $350,000 in transportation costs is actually MORE affordable than its sprawl alternative.
The current underwriting rules that determine who is “qualified” for a loan are failing the nation and failing the investors in the mortgage itself. They are failing the nation by making it impossible to build and sell new homes in the places that people want them. They are failing consumers by forcing them to buy sprawl housing that they really wouldn’t prefer and then to pay the extortionate costs of transportation that such options impose on them. And they are failing investors because no matter how conservative the loan qualification rules appear to be, if they ignore a family’s ability to pay over $350,000—over twice the amount of a median new home loan—they are still prone to default.
The problem is easy to fix. The main players in the secondary mortgage markets—and there are only a handful of them-- could decide tomorrow to consider transportation costs (and utility costs as well—another $75,000) on an equal basis to loan payments in loan qualification. This simple change would make an efficient house in moderately smart growth affordable to a buyer of a given income even if it cost another $200,000, which is far, far more than the difference in costs today.
This change, along with loosening local regulation of density and parking in new housing developments, and updating lending rules that make it harder to finance the more affordable developments that provide less parking than is now typical, would enable housing where people actually want it to be financed and built. And as we start constructing new housing in places where it is in demand, we will cut the cost, as current high costs of compact housing developments are high because of the imbalance of supply (now pretty much fixed) and demand (growing).
One simple package of policy changes can help to ignite real economic growth and job creation, while also reducing oil dependency and climate pollution. What are we waiting for?
[1] NY Times Lead Editorial “As Housing Goes, So Goes the Economy."