By Guest Columnist RAY CHRISTMAN, retired CEO of the FHLBank of Atlanta who
currently is involved in a variety of housing/banking-related consulting and civic activities, including the Peachtree Corridor Partnership, the ULI Terwilliger Center for Workforce Housing, and the Livable Communities Coalition.
While there are reasons to be optimistic that an economic recovery is beginning to take hold, both locally and nationally, the housing industry remains mired in a deep depression.
Despite the conventional wisdom that housing will rebound ahead of other sectors, it’s possible that the industry’s comeback will be protracted and anemic and, indeed, will be a drag on the overall recovery.
Moreover, it’s a sure bet that as the economy stabilizes, the housing industry – and the mortgage financing system that supports it – will function much differently than they have in the recent past.
It has become painfully obvious that the problems facing the housing and banking systems are deeply intertwined. And the changes affecting these symbiotic sectors aren’t merely cyclical, but are structural in nature, and will have long-lasting effects.
Mortgage credit will be more expensive and harder to obtain. In addition, more conservative bank lending practices, likely to be required by new regulations, and higher interest rates will impact housing demand.
To put this situation in perspective, there are today, according to the National Association of Homebuilders, 2.1 million excess houses on the market for sale or rent nationally – units that are vacant because of foreclosure or other reasons.
And the foreclosure tide has not yet abated; during the first three months of 2009, over 12 percent of all outstanding mortgages in the US were delinquent or in foreclosure. As unemployment has risen – nearly six million jobs have been lost since the recession began 18 months ago – even those with conventional, prime mortgages face mounting risk of foreclosure, creating further downward pressure on home prices.
As a result, the homebuilding industry is in freefall decline. Annual levels of new home starts nationally have fallen by 75 percent from over 1.5 million per year to just 360,000. And in the Atlanta region, new residential permits are projected to be a paltry 4,000 this year – a decline from over 60,000 only two years ago!
Meanwhile, another key driver of change will be the evolving demographic characteristics of American families.
The marketplace has already seen an increase in the number of seniors, single heads of households, and households without children, all of which are predicted to accelerate and all of which will impact the type, size, and cost of housing that people need and can afford, particularly for low income and workforce families who represent two-thirds of metro Atlanta’s population.
What this means is that a lasting recovery for the region’s housing industry must satisfy the demand and need for rental housing, smaller units in denser developments, and housing inside the Perimeter that is closer to job centers and public transportation.
It also means that we must contend with emptied urban neighborhoods and failed suburban subdivisions in need of complete redevelopment because of the foreclosure crisis. The response to this new paradigm will again eventually create jobs and help reinvigorate the housing industry, but the climb back to prosperity will be long and hard.
In order to engineer a successful recovery, the region must stand prepared to address three major challenges:
First, credit will be more difficult to obtain and will cost more, reducing the opportunities for homeownership for many families.
As banks eventually recover from this period, they will almost certainly apply more stringent underwriting standards and offer more limited and more conservative mortgage products than in the past.
Meanwhile, new regulatory proposals are being discussed regarding “suitability standards” around mortgage origination and requiring “risk retention” (i.e. some participation or continued ownership by lenders when selling mortgages to the secondary market).
And Fannie Mae and Freddie Mac – which own or guarantee over 70 percent of all mortgages being originated in the US today – are in public conservatorship, their futures uncertain.
The resulting combination of all these factors could result in fewer mortgage originations and home sales over time. Indeed, it would not be surprising to see the homeownership rate in the country decline from its recent all time high of over 69 percent to less than 65 percent over the next five years, which would translate into millions of fewer homeowners.
Second, American desires and needs for housing are rapidly changing, irrespective of the current housing decline.
It is projected that over the next 20 years that fewer than 20 percent of the households in the country will be comprised of the “traditional” nuclear family of two parents with children.
The implications for housing are profound particularly when combined with a desire among many of these households for shorter commutes from home to work and easy accessibility to amenities associated with urban lifestyles. This likely means more demand for multifamily housing (whether for sale or rent), smaller unit size, and housing in mixed-use settings.
Granted, suburban housing is not going to disappear. The suburban advantage has been measured by the availability of a bigger house on more land and access to better schools which will continue to be meaningful to many people.
But in a future likely characterized by gasoline prices at $4 a gallon or more, many other households, particularly those without school age children, will be searching for alternatives that reduce the time spent in a car and that provide other intangible benefits.
Third, the growing need to provide affordable housing to low-income and working class families will only grow.
Even during the last several decades of relative economic prosperity in this country, the gap between affordable housing need and availability continued to rise. It is now at risk of exploding into a national catastrophe. Why? Because of a toxic brew created by a bad economy, worsening exacerbating unemployment, decreasing public subsidies for affordable housing, and a foreclosure epidemic that has destroyed home values and reduced the quality of life in many neighborhoods.
As just one example, the principal national housing subsidy program for affordable housing in the United States – the Low Income Housing Tax Credit Program – will generate just half its normal production this year due to the fact that its traditional investor base, large financial institutions, are fewer in number, and the survivors largely unprofitable.
Also, Fannie Mae and Freddie Mac, in recent decades a primary source of affordable housing finance for communities and developers, are too crippled to provide meaningful support. That condition is unlikely to change in the near term.
The Obama administration and Congress have been working creatively to fill these gaps through stimulus funding and special programs directed toward acquiring and rehabbing foreclosed properties.
But the needs are enormous and outpace available resources. Moreover, the growing national deficit will make it harder, not easier, to access federal dollars for these purposes in the future.
Looking ahead, the solutions to these challenges will be determined in large part by market responses over time – by the homebuilding industry itself and by banks and other providers of mortgage financing as they address the new market environment.
But it wouldn’t be surprising in the years ahead to also see additional federal governmental actions to provide support through regulatory actions and through creating new housing incentives through the tax code.
The thorniest problem to address, however, will be the need for more affordable housing, not just for the poor but for policemen, firemen, hospital workers, retail employees, and thousands of other “workforce” families.
The reduced value of housing caused by the current downturn will not alone solve the affordability challenge of these households, particularly when balanced against rising mortgage rates and the desire to live in often more costly housing near job centers and near limited public transportation services.
Affordable and workforce housing almost always requires subsidy from some source. And federal dollars – the primary current source – are not likely to materially grow in the future. This means that local public and private leaders – government, business, and philanthropy –will need to find new, creative ways to expand opportunities.
With a few notable exceptions, such as the efforts of Atlanta Mayor Shirley Franklin, affordable housing has not been a priority on the regional and state agenda in the past.
But if the region’s housing industry is going to recover and thrive once again, it will need to take steps necessary to meet the changing needs of metro Atlanta’s working families.