Much has been written about the fact that home prices in places like the San Francisco Bay Area have increased to the point where few can afford to buy. Prices have increased because demand has increased much faster than supply. The effect of this is considerable. “Housing is the chain on the dog that is chasing a squirrel,” said Beacon Economics’ Christopher Thornberg, in a recent article in The Mercury News about the issue. “Once that chain runs out, it yanks the dog back.”
Mortgage loan originators have certainly learned over the past 10 years that although increasing home prices makes life easy at first, the inevitable, eventual decrease in values makes life much more difficult. in the wake of the liquidity crisis that marked the Great Recession, the mortgage industry saw loan-to-value restrictions in counties with declining values, owners walk away from upside-down homes and, in recent years, a dramatic increase in government regulations that originators must now deal with day to day.
The pre-2007 bubble was caused by increased demand generated by several factors, including the U.S. Department of Housing and Urban Development’s mandate to the government-sponsored enterprises to loosen their loan standards, and Wall Street and the debt-rating companies securitizing mortgage-backed securities in a manner that made bad loans into investment-grade securities. Eventually, too many people got mortgages using stated income. You don’t make payments with stated bank balances, so many people had mortgage payments they could not afford.
Today’s stricter underwriting standards should help avoid rekindling those issues going forward. The cycle of increased value we are in at present is not being driven by unchecked demand. It is driven mostly by a lack of supply. Values now are not being driven by stated-income buyers who cannot afford payments, but by an increase in jobs, which is driving an increase in homebuying demand at a time when supply is scant.
It serves the interest of homeowners, borrowers and mortgage professionals to find ways to stabilize values. The best way to stabilize values is to build more housing. Unfortunately, land-use regulations, especially zoning, often can restrain supply, driving prices up to levels that are unaffordable for those borrowers who could take the area’s available jobs. Land-use regulation and zoning are unnatural market forces that can prevent property owners from building needed and wanted housing.
Zoning benefits
Of course, zoning ordinances were not intended to make housing unaffordable, and they serve many positive purposes. Zoning sets the overall plan of a city. It sets building height, use — commercial, residential or mixed — setback, landscaping and even the architecture of properties that get built.
Zoning may even reserve space where nothing can be built and instead is left as urban parks or even undeveloped raw land. Homeowners don’t want to buy a house with a great view only to have someone build a taller building that blocks a view that has aesthetic and financial value.
In addition, zoning gives residents peace and quiet by separating residential from commercial activity and controls traffic flow, thus making streets quieter and safer. It also can prevent homeowners from having the enjoyment of their property compromised by potential development by their neighbors.
Finally, zoning is about public safety. It can prevent people from building homes where flooding is likely or it can require structural modifications in areas prone to earthquake damage. It is hard to see any fault with these intentions.
Unintended consequences
What we see presently is an unintended consequence of zoning. The problem is that some zoning rules can cause prices to become unaffordable to many. Although the physical characteristics of neighborhoods and cities have been preserved, what has been affected is the population.
Cities are valued for their cultural diversity. Diversity is severely mitigated if the annual family income must be $200,000 to buy a median-priced home. Zoning changes can allow clusters of high-rise multifamily buildings to be built where they will have minimal effect on existing single-family housing. Done sensibly a city can retain most of the benefits zoning achieves while creating more housing and preserving cultural diversity.
“ In the past, people moved from rural America to big cities because that’s where opportunities were. ”
Land-use regulations need to be relaxed, however, and before the problem of high values arises in an area. Lack of housing that is affordable to the potential workforce of an area can hold back economic growth. Some would-be workers will choose not to relocate to an area in the first place, and those who do get hired will be deprived of giant chunks of discretionary spending after paying for housing expenses. Zoning changes need to be in place before this occurs so developers can act when the demand for housing exceeds the supply.
The problem is regional and so are the solutions. In the San Francisco Bay Area, for example, high-rise residential condos and apartments need to be built in large cities such as San Jose, San Francisco and Oakland. In the suburbs, residential infill projects should be allowed in places where commercial property no longer makes economic sense.
Originators who want to impact the issue of affordability in their local areas should get more involved in community and professional organizations, as well as their chamber of commerce.
Economic impacts
The term “affordable housing” usually refers to governments forcing builders to build so many units in a development designated to be sold at below-market rates to people whose incomes are below a certain level. In reality this often just makes other homes in the development more expensive.
That is not the kind of affordable housing being discussed here. If the median income needed to purchase an area’s median-priced home translates into residents needing to work 70 hours or more a week to afford a home, then that city does not have housing that is affordable to the average family.
Jobs are being created in Silicon Valley, for example, but potential employers cannot find people who can afford to buy or rent close enough to take those jobs. This is not what people going into the tech industry expect. They picture a prosperous future. They expect to be able to afford a place to live near where they work. They don’t expect to have to commute six hours a day.
The problem is simple to describe. If jobs are created in an area and the people who have the skills for those jobs cannot afford to live close enough to get to work in a reason-able time, those jobs will eventually go elsewhere.
If things don’t change, people will have to commute longer distances on more crowded freeways or pay high prices for the privilege of living near their work.
Regulatory costs
Another issue facing builders that impacts their ability to keep up with the demand for more affordable options are the regulatory costs of construction. The National Association of Homebuilders estimates that, on average, government regulations account for 24.3 percent of the final price of a new single-family home. This is not a new problem. In 2003, Professor Edward Glaeser of Harvard University estimated that 50 percent of the price of building a condominium in Manhattan was attributable to what he called a “zoning tax,” wherein prices increased due to regulations that restricted supply.
Higher housing costs have second-order effects as well. Higher costs translate into higher annual property taxes. More money spent on housing also reduces discretionary spending, which means people have less to spend on other things, which can impact an area’s gross domestic product. High housing costs relative to incomes restrain economic growth.
In addition, the effects of regulations can prevent matching jobs with workers. Restaurant owners express dismay at not being able to find waitstaff and cooks who can afford to work close enough to potential jobs to be able to get there in a reasonable amount of time. In the past, people moved from rural America to big cities because that’s where opportunities were. Regulations often now prevent that. Ultimately, these issues impact the bottom line of everyone involved in the housing industry.
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Making housing affordable to more people is entirely in the interest of mortgage professionals. Higher ownership means more business and a healthier economy as prices stabilize and discretionary income increases. It makes sense for originators and the mortgage companies and lenders they work for to get involved in this issue. It comes down to this question: Do we really want zoning that prevents our kids from living in the city where we grew up?
