Aug222014
Chronic shortages of housing supply inflates California house prices
Empowered by State regulations, local development opposition groups prevent construction of much-needed home supply creating shortages that inflate prices.
When any commodity is in short supply, prices tend to rise; houses are no exception. Beginning in the 1970s, California produced more high paying jobs than it did houses. As a result, there were not enough houses to go around, so people began 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.
This phenomenon has been going on for so long, that most Californians resign themselves to the idea of living in lesser quality housing than they could obtain elsewhere based on their income. I remember when I first moved to California: I made 50% more than I did in Florida, but I went from an 1800 SF 4/2 on a third of an acre to a 950 SF condo. That’s a huge drop in housing quality despite a major increase in salary.
Unfortunately, the forces that create this situation show no signs of changing; in fact, it’s getting worse.
San Pedro project illustrates a cause of limited housing affordability
By Andrew Khouri, August 8, 2014
At a groundbreaking ceremony in May, neighborhood activists and local government officials celebrated Ponte Vista, a development of 676 homes in San Pedro.
A white-robed Roman Catholic priest thanked God for the “gift of Ponte Vista,” a welcome addition to a community starved for housing options.
But officials also spoke of the decade it took to get construction started, amid neighborhood protests over the size and style of the homes and the traffic they would bring.
One of the biggest obstacles to getting new construction approved is dealing with the traffic. The traffic systems in California are already overburdened, and some freeways are congested nearly all the time. When we already have bumper-to-bumper traffic, it’s difficult to convince citizens more housing, and thereby more traffic, is a desirable end.
Original plans called for a multifamily development with three times as many homes, with many more affordable options.
Now, with plans modified to include 208 single-family homes, prices will range from about $400,000 to $1.1 million.
The lack of supply is the primary reason prices are so high. When supply is limited, people substitute downward in quality just to obtain any housing at all. It’s why an income in Southern California that barely affords a condo would buy a McMansion anywhere else in the country.
The Los Angeles project highlights what economists and housing experts call a major contributor to Southern California’s housing affordability problems: Developments routinely get delayed, scaled back or killed amid strong opposition from community groups.
Years ago I worked on a large residential project in Calimesa, California. There is a local opposition group that wants the area to remain rural. We arranged a meeting with them to hear their concerns, and the first words they spoke to us was that they would sue us if we proposed anything with lots smaller than 2 acres; no compromise, just threats — and we took them seriously as they previously sued other developers proposing projects near their area.
The phenomenon cuts back the supply of new homes and drives up prices, said Christopher Thornberg, founding partner at research and consulting firm Beacon Economics.
“The problem is every single major development goes through that same process: from 800 to 400; from 600 to 300,” he said. The high cost of housing is “a supply issue — period.” …
Just as lenders used restricted supply to reflate the housing bubble, a lack of supply has inflated California house prices since the mid 1970s. Unless many more dwelling units are approved, the shortage will continue, and probably get worse — and there is no sign of this changing.
The difficulty in winning construction approvals, however, is a trend that long predates the housing meltdown and will probably continue long after. California has failed to build enough homes, relative to population growth, every year since 1989, according to a November 2013 report from a state Senate committee. …
“It’s sort of the desire to keep L.A. a certain way — that is not compatible with it being affordable,” said Richard Green, director of USC’s Lusk Center for Real Estate. “You can have sprawl or you can have density or you can have very expensive housing.”
These community groups who oppose development win two ways: first, they maintain the status quo in their neighborhoods, and second, they inflate the value of their own real estate by choking off the supply. Once set in motion, this kind of opposition spirals out of control.
It will take “many years” of brisk construction — at a much faster pace than California has seen for decades — to make housing significantly more affordable, said Jed Kolko, chief economist of real estate firm Trulia. …
That simply isn’t going to happen.
Also, the landmark California Environmental Quality Act, or CEQA, gives opponents a powerful weapon to block or delay developments through lawsuits, even after they receive planning approvals. CEQA supporters, however, say the state’s environmental law has led to better-designed projects while saving crucial habitat. …
CEQA is partially responsible for the problem, but the law is widely misunderstood. CEQA merely mandates study and disclosure. An environmental impact report — the product required by CEQA — is a thorough examination of the physical and cultural impacts of a proposed development. It takes a long time to do a thorough study, and it costs a lot of money, which is why developers whine about it, but the findings in the document do not approve or disapprove a project. That is at the discretion of local government officials.
The environmental impact report may find significant impacts that cannot be mitigated, and the local government may approve it anyway. Conversely, the report may show no impacts, and the local government may reject it. It’s a completely political decision, and if people don’t like it, they can replace the officials, but the people elected still have discretionary approval powers.
Many environmental groups take these projects to court challenging the findings in the environmental impact report, and they may be able to overturn an approval based on challenging the document. However, that doesn’t end the matter. The developer can go back, revise the report, and try again. Most often developers give up at that point as the political winds blow against them, but some projects get approved and built even after they’ve lost challenges in court.
The bigger point here is that opposition groups prevent the kind of development necessary to make housing affordable in California. As was stated above, you can either have sprawl, density, or high real estate prices. For better or worse, Californians generally chose high real estate prices.
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If you don’t want to pay artificially inflated housing prices, what is the alternative for fiscally prudent Southern California residents. Renting? Or is moving out of California the only true remedy?
Even renting is expensive (see article below). Realistically, there are only two ways to combat high housing costs in California: (1) Buy with a fixed-rate mortgage and wait for inflation to make the payment less painful, or (2) move out of the state. Based on the conditions outlined in the post above, I don’t see any way we will ever have affordable housing costs in California.
To remain fiscally prudent, I’d add to (1) above, “Buy a house substantially below your means with a fixed-rate mortgage …” You can obtain a mortgage for that house you really want, but you should buy the house that keeps your total housing costs below ~25% of your household income.
What is the alternative? Perspective!
Homedebtor = renter
Homedebtor:
*rents the capital needed to buy
*rents for the price of the mort paymnt/trades paper for lodging
plus…
*carries HEAVY debt burdon/financial obligations/risk
*
amortizationforced savings*responsible for upkeep, insurance (multiple), fees, taxes, ++
*immobility for an extended period
*bad neighbor(s) move in; homedebtor is stuck, must endure them
*fixed target (fully exposed to future tax increases)
*property reverts back to its rightful owner (the state) if unable to pay taxes.
Renter:
*trades paper for lodging
plus…
*no heavy debt burdon
*no risk
*mobility
*generates residual savings vs amortization because the cash outlays tied to housing purchase, taxes, maintenance, and consumption are much lower
*free to invest residual savings in something that generates a positive real return, instead of negative
Reality is, renting should cost a lot more than buying, but it doesn’t.
So why didn’t you buy more real estate when houses could be had for less than rents a few years ago? Enquiring minds want to know…
Everything El O said it true, and it’s applicable during times when the cost of ownership greatly exceeds rent. In today’s market where these costs are generally in balance, the long-term advantages of home ownership make the burdens worth while.
Huge tax bill for homeowners who receive BofA settlement?
The relief could be too good to be true
As part of the record $16.65 billion settlement between Bank of America (BAC) and the U.S. Department of Justice, approximately $7 billion is designated to provide relief to consumers.
In a statement, the U.S. Department of Housing and Urban Development outlined how some of that money will be disseminated to the consumers.
“The $7 billion in consumer relief will focus on areas that were hardest hit during the housing crisis,” HUD said. “Consumer relief will take various forms including loan modification for distressed borrowers, including FHA-insured borrowers, and new loans to credit worthy borrowers struggling to get a loan in hardest hit areas, borrowers who lost homes to foreclosure or short sales, and moderate income first-time homebuyers.”
But for the borrowers that reap the rewards from BofA, there could be something that severely dents the promised relief funds, a huge tax bill.
The Washington Post highlights the seriousness of this issue.
In 2007, Congress adopted a law that spared homeowners from being taxed on the amount of the loan that was written off. But that tax break expired in December, and now that kind of relief can be counted as income by the Internal Revenue Service.
“That’s why the Department secured a commitment from Bank of America to pay a portion of the settlement – over $490 million – to defray some of this tax liability,” U.S. Attorney General Eric Holder said. “And our settlement requires the bank to notify all consumers of the potential tax liability.”
Holder went on to warn that unless Congress acts, “the hundreds of thousands of consumers we have sought to help through our settlements with JPMorgan Chase, Citigroup, and now Bank of America, may see a significant tax bill just as they are beginning to see the light at the end of a dark financial tunnel.”
“…And our settlement requires the bank to notify all consumers of the potential tax liability…”
Let me guess: B of A will gladly lend those affected loan-owners money to pay aforementioned tax bill.
Betcha the mailers are already off the printing press. You know, the kind with the stock photo of the deliriously happy family enjoying the free and easy middle class life style.
We examined this issue in depth in the post Despite industry spin, mortgage lending standards are not tight. Apparently, not everyone got the memo.
Has the credit restriction pendulum swung too far?
Current rules and practices regarding credit boxes for both underserved and middle class borrowers have to be reformed, according to several of the leading voices speaking at the Bipartisan Policy Center Housing Commission’s regional forum being held Thursday in Sun Valley, Idaho.
HousingWire is the BPC’s media partner in the mortgage finance trade. The two organizations are joining forces to promote and cover the BPC Housing Commission’s upcoming Housing America’s Future: 2014 Housing Summit next month in Washington D.C.
Housing leaders including outgoing Federal Housing Administration Commissioner Carol Galante; Republican Senators Mike Crapo and James Risch; former Senators Mel Martinez and Kit Bond, and former Clinton administration HUD Secretary Henry Cisneros, led the discussion, with many mentioning the challenge of balancing opening access to credit and not getting into the quicksand of easy credit seen a decade ago.
In the aftermath of the housing crisis, rules were tightened and some say too much. While the Dodd-Frank rules were written with good intent, bankers can’t use good judgment and instead rely on strict rules and algorithms that shut out those on the margin and many in the middle class with good but not pristine credit.
The Federal Housing Finance Agency is already looking at ways to open credit responsibly to lower income and less pristine borrowers.
Crapo said that the lack of GSE reform – discussed here – along with the restrictions from the Qualified Mortgage rule and other credit squeezes is keeping first time buyers out of the purchasing market and in some ways, private capital out of the mortgage market.
“Private capital is on the sidelines. Not seeing the robust investment of capital in housing that should be. Huge issue in terms of what could be lost if we stay with the status quo,” he told HousingWire. “I don’t think the status quo will bring back private capital, and we’ll continue to have political warfare over it. We’re spinning all four wheels and going nowhere.”
“…While the Dodd-Frank rules were written with good intent, bankers can’t use good judgment and instead rely on strict rules and algorithms that shut out those on the margin and many in the middle class with good but not pristine credit…”
Would this author care to share where in Dodd-Frank’s ATR rules there is a credit requirement? There are no minimum FICO score requirements under ATR.
Sounds to me like they are blowing smoke to make it sound like the poor and downtroden middle class is enduring some huge burden. The reality was exposed in the post a few days ago.
It’s officially unaffordable to rent in almost all major cities
Zillow study outlines renting’s deep impact on buying
According to the latest real estate market report from Zillow, homes remain more affordable to buy in 94 of the country’s 100 largest metros compared to historic averages. On the other hand, renting is more expensive than ever in 88 of the country’s 100 largest markets.
“The affordability of for-sale homes remains strong, which is encouraging for those buyers that can save for a down payment and capitalize on low mortgage interest rates. But the health of the for-sale market is directly tied to the rental market, where affordability is really suffering” said Zillow Chief Economist Stan Humphries.
This report confirms the concerns of Shaun Donovan, former Secretary of the U.S. Department of Housing and Urban Development, in March.
Since rents didn’t experience the massive drop that home values witnessed during the recession, rent prices just keep climbing. Meanwhile, home values jumped 6.5% year-over-year, while national rents increased 2.8% for the same time span.
And now due to low mortgages rates and housing affordability, homeowners at the end of the second quarter only have to expect to pay 15.3% of their income to a mortgage, significantly below the pre-bubble days of 22.1%.
“As rents keep rising, along with interest rates and home values, saving for a down payment and attaining homeownership becomes that much more difficult for millions of current renters, particularly millennial renters already saddled with uncertain job prospects and enormous student debt,” Humphries said.
“In order to combat this phenomenon, wages need to grow more quickly than they are, particularly for renters, and growth in home values will need to slow,” he continued.
“15.3% of their income to a mortgage”
Right. Not in California.
With 15.3%, 100k income buys 329k worth of house with 20% down @4.125% 30yrFRM. In this price range, you are sharing a wall with your neighbor, and probably your ceiling and floor too. But, at least your house won’t have wheels. There will, however, be significant HOA fees and taxes pushing DTI up to about 23%.
It’s nice to get the national perspective, but mostly irrelevant here; and it’s probably irrelevant everywhere since property taxes vary significantly state-to-state. Property tax in Texas varies from 2-3%. On the 329k house, this works out to .03*329/100 = 10% of income. So the 15.3% is now 25.3% after property tax. With homeowner’s insurance and HOA this 15.3% is now over 30%.
The house I bought in 2010 was at 15% DTI for us. BTW, the HOA and taxes are not debt and therefore don’t count against DTI.
“HOA and taxes are not debt and therefore don’t count against DTI.”
They should be counted. Any money you owe ( need to pay) is a debt.
Taxes and HOA definately are not assets but liabilites.
It’s like Perspective’s note above about keeping the DTI down. It’s sound advice, but for most middle-class Californians that means living in a tiny condo.
A lot of people are impatient and unwilling to start at the bottom of the ladder. They want a SFR in a good area as their first home and don’t want to spend the years building trade-up equity in a condo. I think this leads many to over leverage. Sometimes this works out fine, but they are basically betting that a job loss or other emergency won’t occur for several decades.
Urban Institute: Qualified Mortgage impact overblown
It turns out that all of the concern and trepidation surrounding the rollout of Consumer Financial Protection Bureau’s new Qualified Mortgage and Ability-to-Repay rules in January wasn’t worth it.
Prior to the new lending standards going into effect, many in the industry worried that mortgage originations would drop sharply due to the new CFPB standards.
But according to new analysis from the Housing Finance Policy Center team at the Urban Institute, there has been “surprisingly little impact” on the mortgage origination numbers since QM went into effect in January.
In a new report authored by Jim Parrott, Ellen Seidman, Laurie Goodman and Bing Bai, the team from the Urban Institute writes that they have seen “almost no impact in the government-sponsored enterprises (Fannie Mae and Freddie Mac) or government agency (Ginnie Mae) market.”
The authors add that there has also been “minimal” impact on the loans that banks are holding in portfolio.
“And, since the GSEs and Ginnie Mae together account for approximately 80% of all originations, the muted impact on their loans far outweighs the slightly stronger impact we found in bank portfolios,” the report states.
According to the report, there are four elements of the QM rule that could have a significant impact on mortgage availability:
The disqualification of loans that are interest-only loans and or have a prepayment penalty might reduce the number of loans made with those features
The limitation of the back-end debt to income ratio to 43% might reduce the percentage of loans to borrowers with DTIs in excess of 43%
The 3% limit on points and fees might limit lender interest in making small loans
The requirement that an adjustable rate mortgage be underwritten to the maximum interest rate that could be charged during the loan’s first five years might reduce the ARM share
“Mitigating the impact of these factors is the part of the QM rule known as ‘the patch,’” the report states. “This allows the GSEs and government agencies such as the Federal Housing Administration to operate under their own standards for seven years or, in the case of the GSEs, when they exit conservatorship, whichever is sooner.”
The report states that the GSEs and the have FHA eliminated the DTI restriction but retained the other requirements.
No reasonable industry folk were claiming there would be a huge impact in 2014. Underwriting standards had already returned to more traditional prudent standards before ATR/QM’s effective date. Also, the basic rule had been published a long time ago, giving everyone lead time to adjust their underwriting guidelines.
Long story short, ATR/QM greatly affects the non-GSE/FHA market, but that market is less than 10% of loans made.
I have made several marathon drives in and out of Southern California on I-15 recently, along the northern edge of the San Gabriel Valley and into the San Fernando Valley (I-15 to 210 to 134 to 101, or the reverse). It is much more crowded at any time of day, than it was in the 1990s, let alone the 1970s, that I wonder when the day of reckoning will come: there will be a point it which the state and the local governments will have to address transportation.
As an aside: the drive from Redlands to Newbury Park is amazing, in terms of the continuous development. With the exception of short stretches in Irwindale, Calabasas, Little Rock, and Thousand Oaks, the development on both sides of the freeway is continuous.
Higher density is the way out of this mess, but transportation is a giant, expensive shadow lurking over the density issue.
People already live on postage-stamp lots or share walls. Even with homes approaching million-dollar price tags, they are right on top of one another; your windows look in on your neighbors.
Higher density? No. It would destroy quality of life, which already is jam packed with annoying people due to overpopulation. Maybe people should stop recklessly breeding, jamming multiple generations into shoddy SFRs.
People on average have stopped recklessly breeding. The population growth in the United States would be negative if not for immigration and the higher birth rates of 1st generation immigrants.
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