Mar302015
Affordable housing in California requires ignoring the NIMBYs
Curbing the power of NIMBYs at local government is essential to providing more housing to alleviate shortages in California.
California house prices are high relative to the rest of the nation for two reasons, one fundamental, and one not. First, California wages are higher than most of the rest of the nation, so people who live in California qualify for larger loans and use those loans to bid up prices — the fundamental reason. Second, California has a chronic shortage of housing, which forces buyers to compete with each other for the available housing stock — a reason that is not fundamental, but political.
The market for housing in most of the United States is much more stable, and house prices are much less inflated because the local political system does not restrict new home development near as much as it does in California. As soon as house prices rise above the cost of construction in the rest of the country, builders respond by building more houses and selling them for a profit. In California builders are not allowed to do that, so shortages persist, prices get inflated, and everyone suffers a diminished quality of life because they must substitute down to a lesser quality home.
The problems with chronic shortages, inflated house prices, and the substitution effect to lower quality housing is a direct result of the development approval process in California being 100% in the hands of local politicians. In California no State or regional entity has the power to mandate that any local political body must provide sufficient housing to meet local demand. Further, since local governments are highly dependent upon commercial and business tax revenue, they are always keen to zone for more commercial than residential land uses, which in turn creates imbalances between the number of jobs and the number of available housing units.
The only way California will ever have housing that’s affordable in a free-market, non-subsidized way is to shift some power away from local governing bodies — a course of action that will not be popular on the local level. This could take the form of direct approval override of local governments by a State or regional decision-making body, or it could take the form of mandates for development. In whatever form, some State or regional body must be given power to stop NIMBYs from lobbying local government officials to stop development that benefits everyone.
How to fix Silicon Valley’s housing crunch: Increase regional power and stifle NIMBYs
Greg Baumann, Editor in Chief- Silicon Valley Business Journal, Mar 26, 2015, 7:25am PDT
Silicon Valley is experiencing a housing crisis, and leaders should seize the moment to take emergency action to address the problem
Ask business leaders how big a problem high housing prices are in Silicon Valley, and you’ll get different answers from different kinds of CEOs. In sum, the smaller the company, the bigger the problem.
So what’s to be done? One option is to do nothing. The surging economy will eventually correct itself into a downward spiral, and most people left with a job again will be able to afford a home.
Alternatively, the Bay Area could take an aggressive approach to constructing enough new housing inventory to match demand. The laws of supply and demand indicate that’s the only solution.
The only long-term solution to California’s housing problems is to increase supply. How this is accomplished is less important than accomplishing the task. If more supply is not added, people will continue substituting down in quality to obtain a place to live. This downward substitution effect lifts house prices at every level of the housing ladder and prices out the lowest tier of the housing market. California is already the least affordable housing in the US, and this problem will only get worse.
But it isn’t that easy. The California Analyst’s Office recently found that resistance from local communities is a primary impediment to creating new housing.
NIMBYism is the primary cause of all California housing shortages because everyone wants to be the last person who moved into their neighborhood.
Whenever someone buys a new house, the only reason that house exists is because there was not a local opposition group strong enough to prevent its construction; however, once a new homeowner moves in, many immediately adopt the belief that traffic congestion is out of control and any new development will ruin the character of their neighborhood, so they band together to prevent others from obtaining the benefit they get to enjoy. The hypocrisy of this attitude and behavior is completely lost on them.
What makes matters even worse is that once these local development opposition groups get entrenched, their success inflates house prices in the area and gives the NIMBY owners the added benefit of inflated house prices, house prices that were affordable when they moved in because the NIMBY group was not strong enough to prevent their house from being built.
To solve that problem, veto power over local planning decisions that have harmful regional effects must be granted to regional authorities. Of course, legal opposition from local groups is also an impediment that must be legislated into rational dimensions.
The only way to solve the NIMBY problem is to take away their ability to block new development.
This is not to say local communities should be stripped of local determination. Rather, local decision-making authority must be calibrated to account for regional needs. Where local decisions force negative effects onto their neighbors, regional considerations must outweigh micro interests.
This could be accomplished by mandating a certain number of housing units, mostly likely linked to the quantity of commercial and industrial space in the area to match job creation and housing opportunities.
This does not mean unleashing developers to build pell-mell with the same disregard for smart planning that turned Silicon Valley into what it is today: A sprawl lacking in urban amenities, connected by clogged freeways. …
If implemented, developers would shift their lobbying to this regional authority, and this authority would likely be “captured” by the developers they are supposed to regulate. Keeping this regulatory body independent would be a significant challenge, and it might doom the whole idea.
The principles articulated here (curbing the power of Not-In-My-Backyard obstructionists and requiring local jurisdictions’ housing decisions to take into account regional impacts) aren’t new. But the need to make them priorities and carry them forward is acute.
California may never have affordable housing. It certainly won’t as long as all development approvals are 100% determined locally. The problem of NIMBYism and the desire of each homeowner to be the last person to move into their neighborhood will cause this problem to get worse and worse over time.
The Bay Area is where these problems are the most acute, and any real action to solve these problems will likely start there. If something is not done, home ownership will be relegated to only the wealthy and the highest of high wage earners in the area. Everyone else will be transitory renters who overpay for housing and never get ahead, at least until they give up and move out of state. The American Dream will truly be dead.
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Pending home sales rise in February
This despite continuing declines in purchase applications
Pending home sales in February surged to their highest level since June 2013, continuing the record high set last month, according to the latest report from the National Association of Realtors.
This is good news for the industry as it heads into the spring homebuying season, especially given that 2015 is off to a bad start for housing in terms of housing starts, completions and permits. Existing home sales tumbled in January, and mortgage applications have been spiraling downward in February, giving away most of the gains made in January.
The Pending Home Sales Index, a forward-looking indicator based on contract signings, grew 3.1% to 106.9 in February from a slight downward revision of 103.7 in January and is now 12% above February 2014 (95.4).
The index is at its highest level since June 2013 (109.4), has increased year-over-year for six consecutive months and is above 100 – considered an average level of activity – for the 10th consecutive month.
“Pending sales showed solid gains last month, driven by a steadily-improving labor market, mortgage rates hovering around 4% and the likelihood of more renters looking to hedge against increasing rents,” said Lawrence Yun, NAR chief economist.
New home sales projected to increase
Rising sales typical of seasonal pattern
New home starts will rise steeply in the next two months, as construction gets underway this spring, according to an analysis of builder applications and housing start report from January and February, according to the Mortgage Bankers Association.
“Single family housing starts, an important indicator of US economic health, fell by more than 15% (not seasonally adjusted) over the first two months of the year,” the MBA report says. “MBA’s Builder Application Survey Index and estimates of new home sales rose in January and February, however.”
Home prices essentially flat in January
Price growth still sees 4.6% rise over last year
Home prices ticked up 0.1% for the month and rose 4.6% on a year-over-year basis, according to the Data and Analytics division of Black Knight Financial Services and its latest Home Price Index report, based on January 2015 residential real estate transactions.
In New York state, home prices were up 0.8% in January, hitting a new, post bubble/crisis high.
On the other hand, prices in the NYC metro area – while also up 0.8% for the month – are still 9.4% off their July 2006 peak.
Florida home prices saw a monthly decline at the state level, as did prices in all of the state’s major metro areas; many remain about 30% off their pre-crisis peaks.
Connecticut home prices dropped 1.1% year-over-year, making it the only one of the 20 largest states to see a yearly decline.
Of the states where home prices were hit worst by the crisis, California has made the strongest comeback. California is now down around 20% from its peak in May 2006, whereas other hard-hit states (Arizona, Nevada and Florida) remain 30% or more off their local peaks.
Freddie Mac Announces Sale of Deeply Delinquent Loans Totaling $985 Million in UPB
Expect large, illusory declines in reported delinquency rates soon
Freddie Mac sold 5,398 deeply delinquent non-performing loans with an aggregate unpaid principal balance (UPB) of $985 million through an auction on March 25, according to an announcement from Freddie Mac on Friday.
The loans were sold in three pools, and the winning bidder for all three was GCAT Management Services 2015-13. The loans were an average of about three years delinquent, meaning it is likely that all the borrowers have been evaluated for or are in some stage of loss mitigation, or are in foreclosure. Nearly one-quarter of the loans sold (24.7 percent) were previously modified and later became delinquent.
The breakdown of the three pools of loans sold is as follows:
Pool No. 1 included 3,577 NPLs ; an aggregate UPB of $629.6 million; and a BPO LTV of 74 percent
Pool No. 2 included 1,331 NPLs; an aggregate UPB of $235.9 million; and a BPO LTV of 84 percent
Pool No. 2 included 490 NPLs; an aggregate UPB of $120.0 million; and a BPO LTV of 74 percent
The average loan size for the aggregate of the three pools of loans was $182,562, and the note rate was 5.5 percent. Based on Broker Price Opinions (BPOs) of the underlying properties, the average weighted LTF was 76 percent of the property value.
To rent, or not? Depends on your ‘horizon’: Economist
in 2005 there was “hysteria, and people didn’t do the math
Should you buy or rent? To answer that question, ask yourself where you will be in 28 months.
Zillow Chief Economist Stan Humphries tells CNBC’s “On the Money” that home ownership is a good bet when “buying is more advantageous than renting.” On a national level right now, he says, that number is on average just 2.3 years.
“Everyone understands if you’re going to be in a house 20 years, you should buy a house,” Humphries says. “And if you’re going to be in a house for six months, you should rent it.”
Still, there is a caveat: “What they don’t understand is when those two lines cross,” Humphries said, calling that the “Breakeven Horizon.” That is the gray area in which consumers should make the decision whether to rent or purchase, when the accumulated costs of renting exceed those of buying.
With mortgage rates so low, “nationally you don’t have to be in a house very long to make that decision,” he says. Although the average “break-even” point across the country is just over two years, there’s a big variation depending on where you live, Humphries added.
According to Zillow research, in New York City (Manhattan), the “break-even horizon” can be five to seven years. In Miami or Detroit, however, that number is closer to one year.
Humphries is co-author of a new book, “Zillow Talk: The New Rules of Real Estate.” He writes that before the real estate bubble crashed, conventional wisdom was heavily tilted in one direction. He explains that in 2005 there was “hysteria, and people didn’t do the math.”
With home values constantly rising, “appreciation was so high people didn’t even think buying versus renting, like they should have. Everyone thought the default decision was always buy the house.”
That, however, turned out to be the wrong assumption. Shortly thereafter, the housing crisis sent the global economy into a tailspin, and sent foreclosure rates skyrocketing.
Historically, four to five years is the normal break-even number, Humphries says, especially when buying is a better deal.
Negative Equity a Drag on Home Sales
While existing home sales are up nearly 5 percent from last year, economists say activity would likely be more brisk if it weren’t for the negative equity overhang that has lately worsened in many markets.
Completed sales on existing homes rose 4.7 percent in February compared with a year ago, reaching an annual rate of 4.88 million, according to the National Association of Realtors, a 1.2 percent increase over January. But Mark Fleming, the chief economist at First American Financial Corporation, a national provider of title insurance and settlement services, says his research tells him that home sales ought to be even higher. The labor market has improved considerably. And home prices are higher, which, though it may sound counterintuitive, have historically correlated with rising home sales, he said.
[Mr. Fleming clearly does not understand that housing markets fundamentally changed when affordability products were banned. Rising house prices will no longer correlate with rising home sales.]
“Rising prices only crimp affordability for the first-time buyer who doesn’t yet own the asset,” Mr. Fleming said. “But the vast majority of home sales are to existing homeowners. And for existing homeowners, what changes affordability is their own income and the price of money.”
Both of these factors are running in homeowners’ favor. The problem, though, is that many are still unable to participate in the housing market because of insufficient equity.
Generation deferred: Millennials’ perspective on home affordability
The long-term cost of high house prices in California is a loss of young families and future talent
Despite being saddled with criticism ranging from narcissism to laziness, many millennials have stuck with the plan. You know the plan: Work hard in school, go to college and maybe grad school and you will end up with a well-paying job and a home of your own.
Somewhere along the line this plan became more of a fantasy, especially in California. Over the last 30 years, the precipitous rise in the state’s housing prices has far exceeded the change in median income. Compared to other states, California home prices appear untethered to the incomes actually earned by residents. The lack of affordable housing has caused California to lose some of its best young talent.
In the last 20 years, California has seen an exodus of almost 4 million people to other U.S. states. Most of those leaving were young families, the group most likely to become first-time homebuyers. The general lack of affordability has been driven not only by the state’s desirability and low inventory in many areas, but its tax policies. Proposition 13, in particular, primarily benefits current homeowners, inheritors, and real estate investors. The 1978 law, which originated as a ballot initiative, assessed property taxes based on a home’s 1975 value while allowing a 2 percent annual increase. A change in ownership or the completion of new construction are the only criteria for reassessment.
Entrenched homeowners, on the other hand, are in no hurry to see their multidecade windfall end. They’ve benefited not only from hot property markets and low taxes, but density limits. Culturally speaking, Californians oppose denser development, especially in the big cities. Zoning standards are restrictive, by and large, and heated battles over density have been fought in San Francisco, Napa County, Los Angeles, and Hollywood.
Without substantial new home building, demand will outstrip supply for the foreseeable future. In California’s metro areas, the younger workforce is virtually priced out of the property market, forced to dedicate greater portions of their incomes to rent and commute from longer distances.
For California, the policy challenge lies in fitting together a more nuanced approach to housing density, social mobility, and tax policy. A solution that links property taxes to today’s values could help keep prices in line with household incomes. Crucially, it would also provide an opening to an excluded population, a generation that has been deprived of the benefits of homeownership and membership in the middle class.
Reality is, there is something seriously wrong systemically if the fed cannot raise the FFR after 6+ years of ZIRP.
Problems:
1)asset deflation and speculative loans made on the underlying
2)total carry costs of propping-up the sector have far exceeded its total output, hence, subsidies MUST increase or the entire ediface will implode; ie., see 08 implosion
3)home price keeping up with inflation is NOT being compensated for risk exposure
4)asset holders will pay for the next bail-out
So buy a house to live-in. Forget the myth of ‘investing’ in a home. That is a sell-side lie that has been sold to the populous for far, far too long.
I appreciate the important caveat at the end. I would add, “So buy a house THAT YOU CAN AFFORD to live-in.”
I still think it’s likely that the federal reserve will be forced to raise rates sooner than housing will be able to absorb the impact. Perhaps by early to mid 2016, we may actually have some inflation, and the federal reserve will respond by raising rates. The rest of the economy will be strong enough to absorb rising borrowing costs, but housing will not because market pricing is completely dependent upon low rates.
Do you think interest rates will increase faster than real house prices decrease? I have enough saved for a down payment and with a new baby on the way my wife and I are thinking about buying a house, but frankly everything here worth anything goes in a bidding war and I’m not interested in that kind of stress. I’d rather wait until the internet boom here cools and housing settles down.
Do you think that’s a mistake? Since the object of the exercise is to obtain adequate housing at minimum monthly cost, do you expect conditions for buyers to worse when the Fed finally raises rates?
With all the forces at play your biggest risk is the following scenario:
The mistakes of the last bubble are repeated and the housing bubble is blown again. Prices don’t increase so much, but due to higher interest rates your monthly cost of ownership is 30% higher by 2022. You look back at 2015 and wish you bought when rates were so low. Next crash comes. 2025 is when housing is finally affordable, but your job is unstable due to the shaky economy. Your kid is 10 years old now and you wonder if you’ll ever be able to own a house.
No one knows the future, but if you intend to stay for 7+ years in your new home I say you should buy. Sure, prices may decrease due to rising interest rates, but the monthly cost of ownership is unlikely to decrease.
“…do you expect conditions for buyers to worse[n] when the Fed finally raises rates?”
Do you expect conditions to get better? I don’t. Between Prop 13 and low fixed-rate mortgages, I would expect listing volumes to remain very low. Trading sub 4% rates for 5+% rates and/or low basis for higher is a hard pill to swallow. I see supply falling, and demand rising from household formation. Low-unemployment, if sustained, will result in more marriages/dual-incomes. Some of these dual incomes will be high. The ratio of high dual-incomes to listed supply will determine property values as the supply contracts.
Barring another recession, I don’t see how prices could fall in this environment. And until rates are significantly higher, putting more than 20% down is a waste of resources.
Purchasing power will take a hit as rates rise, but how much depends on how fast rates rise. How fast rates rise depends on how well the economy is doing which feeds back into purchasing power via wage growth. With the FED riding the brake, I don’t see purchasing power growth lagging rate growth, but the other way round. Show me an example of sustainable inflationary expansion in conjunction with rising rates and falling real incomes; and, I’ll show you a unicorn. Bootstraps meet ground.
MrBahn’s analysis is good. Irrespective of what happens to house prices, I doubt the cost of owning that house will drop because any decline in house prices will be the direct result of rising borrowing costs. I could easily see a scenario coming to pass where prices go down but the cost of ownership goes up.
When the market is at fair value or below, there is no advantage to trying to time the market. Unless the market is overvalued, which it currently is not, then holding off a purchase is the wiser course of action.
Right, at least that’s my hope once I’m “in” and rates start rising. My net costs will be fixed at $X at my purchase price. Someone might buy the house next to me in three years for 10% less than I paid, but their net costs will be very close to mine ($X). Assuming a similar tax situation, the mortgage interest deduction will benefit them more, but my principal will be declining at a faster pace.
Yes. The main compensation going forward won’t be appreciation, but instead it will be a speedy equity build-up from a loan that pays down principal quicker.
Don’t you mean speedy “loan-equity” build-up, not to be confused with actual equity? The way I see it, if you buy now:
Your short-term equity gain will be small due the rates rise, because prices may go down. As such if you intend to stay about 5-7 years or less you would be better off renting for that duration.
However, you will be locked in at a lower monthly cost. As such, holding on for 7-10 years or more will allow you build equity at a lower cost in the long term.
Amortization on the loan is real equity. When you go to sell, the loan balance will be smaller than a loan that amortizes at a higher interest rate. It’s the primary benefit of financing at low rates as much more of the payment is principal.
The big issue is whether or not rising rates causes price to go down. This has the potential to wipe out the equity gained through amortization.
Thank you for the advice, everyone. It does make a lot of sense. I’m probably 9 to 12 months away from looking seriously but since I am in a pretty secure job (whatever “secure” means these days) fixing my family’s living expenses while I can is probably prudent.
Thanks for this great blog. I don’t even live in OC anymore but I still read it almost every day.
I did get a hint of Bay Area from the “internet boom”.
Good luck to you!
Just an observation…
Current 5 Year yld: 1.41; -8 MoM. -33 YoY.
The US 5yr bond is the ‘least interfered with’ unit of the bond complex, so many big-dog money managers look there to gauge marketplace expectations of future economic growth/conditions.
If the economy was actually strengthening or “will be strong enough to absorb rising borrowing costs in the coming months to year, the 5yr ylds should be rising v. falling.
The 5yr treasury yield is low because the price is high. The price is high because of the relative strength of the US economy as compared to Europe, Japan, and others.
Many “big dog” money managers work for insurance companies, pension companies, etc., and as-such have limited investment classes to choose from. Competition to hold a limited number of bonds tends to raise prices and drop yields.
Rates are low across the board (look at how flat the yield curve is right now). Duration doesn’t seem like it’s being compensated for. (30yr at 2.53; 5yr at 1.42). It seems like the low yields are more an indication of what’s going on at central banks than the US economy.
The flatness of the yield curve tells me someone is overpaying. For everyone to be fairly compensated for risk along the curve, we need 30 years of very low inflation. Does that really seem likely?
Unfortunately, current US macro data invalidates your theory.
Speaking of data… I have some new findings regarding your quest to find places that serve XX Amber on tap. I had dinner with the family at el Torito in Cypress the other night and was reminded of you when I saw that XX Amber was being served. Just thought I would mention it in case your fallback tap at the Newland Center isn’t available.
Very nice of you to point that out amigo, the thought is much appreciated.
But, it is the lager that’s hard to find on tap. That’s why I hit the SuperMex on Beach for dinner at least once a week. They’re the only one of all the others who have it on tap. Oh, and my GF loves their chicken bowls
Ah.. Well, they have the lager also.