In the U.S., most local housing markets are showing signs of stability, if not price growth. As the real estate cycle sees home prices drop below their historic level of support, it may be time to try something new to help solve the foreclosure crisis. A good place to start: the lessons this country has already learned from the federal attempts to stabilize the most impacted communities with a neighborhood stabilization program.
Community focus, professional input, and non-for-profit guidance have each added to the learning curve in terms of what is working in really distressed areas. Those efforts have to continue, using additional housing strategies as well. Rental housing preservation is crucial in all neighborhoods where work force and affordable housing units predominate.
Home values drop below the 40-year average. However, most U.S. housing markets are in better shape than that. And it may be time to allow state and local government to try their hand in resolving the ongoing foreclosure crisis. After all, it is local economies and tax bases that will suffer the most if a new alternative isn’t found soon. Once local home prices have dropped below historical averages, it will be good business sense to re-capitalize those local real estate assets that can be expected to appreciate over time.
Demand for affordable & work force housing is strong. Long-term demand in most markets for affordable and workforce housing is quite robust. For a generation, the press was fixated on how the baby boom could not be supported in its retirement expenses because of a much-anticipated labor force baby bust. Now, it appears that the long-term prospects for the U.S. labor market are positive through the year 2050. This is also an excellent housing story, as long as the housing is not over-priced.
Record U.S. immigration and a backlog of demand from a very large cohort of young Americans under age 25 have helped change the long-term prospects for the U.S. economy. Housing will benefit the most from this steady demographic stimulus.
Many communities need a variety of housing types. The clear majority of U.S. housing markets have recovered from the price declines that occurred between 2006 and 2009. Based on the 40-year home price trend, housing prices are at, or are approaching, their demand-side bottom. But if the real estate recession and the intractable banking crisis continue on into 2013, then local prices – even in good and stable markets – will continue to fall. This is a golden opportunity of re-capitalize distressed properties, and to make them available to those communities that seek a wider diversity of housing types in their housing inventory. For the first time in twenty years, starter and workforce housing may be within reach for those renter and owner households making less than $50,000 a year.
Real estate markets are all different. Unlike the federalized debacle the U.S. markets have just witnessed, when federal conduits dominated all local markets, the solution to the foreclosure crisis has to be focused on local market differences. Not all local markets even need a new federal program, and certainly not all distressed housing units are worth re-capitalizing.
There is a huge difference in the wildly over-speculated Las Vegas market, compared with such stable markets as Pittsburgh, Omaha, Tulsa, and Columbus. How communities want to approach housing market stabilization has to be, in part, their call. It would help if they brought their own financial, credit, or professional know-how to solving their local problems. Of course the federal government and its agencies and departments will have to pioneer new concepts with the states and their local communities. But it is the federal-local collaboration and the blending of resources that will make the difference in solving a housing finance crisis that is as large and complicated as this one.
Four kinds of U.S. housing markets: In terms of the distressed property crisis, U.S. markets break down into four major categories: good, stable, stressed, and bad. How any particular local market found its way into the different categories is subject to local analysis. Obviously, how severe the distressed property problem is in a market will determine its interest in a new federal-local collaboration.
- Good: These are either good job growth or good location markets. Examples of good markets include Austin, Charlotte, Columbus, Houston, and Indianapolis. Prices may have sagged in these markets, and for sure. There may even be a record number of distressed properties, but overall, these markets appear to be well positioned for future economic and housing price growth.
- Stable: These markets are numerous, and are located – literally – all over the country, including such cities as Albany, Baltimore, Philadelphia, Dallas, New York and Washington. Not all of these markets are large; but their diversity helps dictate the political climate in Washington. And currently, the climate is steady as we go. In other words: “The foreclosure crisis is bad, but it can be handled through the banking and lending system.” This may not be reality however.
- Distressed: This is important mix of Florida, California, and Midwestern markets where there is truly an unprecedented ’wave’ of foreclosures. This wave looks to be to be lasting several years longer than the local economies can withstand. In these markets, it will be important to segment out the distressed inventory, and allow the workaday housing markets find their post-recession price levels.
- Bad: These markets are the classic “spec” markets, with high levels of new construction, investor-oriented condo production, and depressed price levels. These include Las Vegas, Phoenix,and Miami. Since most of these markets were once very popular, there is every reason to believe these areas will eventually come back. Still, housing seems to be the major stumbling block in the economic recovery in these markets. They may each need specific and sophisticated remediation that works with natural market forces. High housing costs in California continue to be the most severe long-term local housing crisis in the United States. In California, high population growth has outpaced the local governments’ ability to permit affordable housing production. That is a production problem.
The real policy challenge in Washington is not just with recapitalizing the various owner real estate markets. The challenge is to link recovery of the owner market with the recapitalization of the U.S. rental market. The U.S. tax code has to be put into service of providing for the long-term need for workforce and affordable housing, literally, in every U.S. market.
Rental housing re-capitalization is the key to community housing diversity. Current federal tax policies favor ownership over rental, and ownership is very substantially subsidized by the U.S. tax code. As a rule, the more affluent a household is, the more likely it uses the mortgage interest deduction to subsidize its housing consumption. It could be argued that the federal homeownership subsidy has helped drive U.S. home prices up above their market-based price levels. If ownership prices have been distorted by the tax subsidy, then now is a good time to review that huge expense to the federal treasury, while home prices are depressed, due to the banking crisis.
Localities should not over-tax rental properties. At the same time federal tax treatment of rental properties is re-vamped, local governments need to examine their own tax practices. This is especially true in locales where property valuations have pushed local taxes up higher than cash flow economics would allow. Clearly, localities have to re-assess the market value of rental properties to be more in alignment with those for owner units. To penalize rental properties and to favor ownership is grossly unfair to work force and low-income households, which pay a disproportionate share of their incomes for housing, and property taxes.
The real policy challenge in Washington is not just with recapitalizing the various owner real estate markets. The challenge is to link recovery of the owner market with the recapitalization of the U.S. rental market…
We have had some good experience with community-oriented preservation of marketable units, but in mostly distressed and weak urban markets. It may be time to use the same set of tools, but in better markets, where the demand for a variety of housing types is the key to robust economic growth. Economic growth requires that communities save workforce and affordable units. Once a solution is found for local housing diversity, the drag on the normal real estate market will be attenuated. More local involvement with the re-capitalization of distressed properties will free up federal efforts to concentrate on the most severely impacted financial institutions and in the most severely affected localities.
It may be time to shift U.S. housing investment to rental properties. Shifting real estate investor preference to rental housing, using federal tax incentives, may do more for neighborhood preservation in low-income areas than trying to re-capitalize owner units in what are at best, very thin local markets. Local and state governments can do their part in diversifying community housing types by treating rental properties fairly, and not shifting the tax burden of homeowners onto rental properties, who are already favored under the U.S. tax code.
Housing diversity is the key to continued economic growth in the best U.S. markets. Now that the distressed housing inventory may be reaching its economic bottom, the investment possibilities for making the federal distressed housing inventories available to interested communities makes good business sense. It is only a matter of time before state and local governments discover that the key to ending the foreclosure crisis is held by the very same players who are most affected by abandoned and deteriorating housing assets: U.S. communities.
About the Author:
Peter Fugiel is a housing and public finance consultant in Chicago. He holds a Ph.D. in government from Northern Illinois University. Peter’s latest research specialty focuses on sub-market, (community-based) real estate research, called Metrometrics. It combines community real estate market analysis with municipal bond credit research. Peter was a long time municipal bond housing analyst, who helped pioneer the supplement to federal HUD programs with the self-financed state housing agencies.