by guest contributor, Peter Fugiel, Ph.D.
The current housing price recovery in U.S. housing markets is being blocked from any full recovery by the continuing huge lender inventories of late and very late home loans. While the upscale and severely distressed sub-sectors are performing well, the broad middle market is way off its pre-bubble price levels in many markets. State governments are ready to address the lender stall out, and collaborate with all parties to restore home prices in the middle market.
State Housing Programs Can Make the Difference
State housing programs can be designed to help both federal agencies and regulated lenders to re-capitalize distressed home units. In that way, state programs can begin to restore local housing prices, by reducing the shadow inventory. Not unlike in the 1980s, the broad range of the U.S. housing economy is impaired. Back then, it was record high interest rates. Nowadays, it is stranded middle-market home units affected by unresolved lender dispositions.
The new national housing goal that the states can help pursue is not primarily to help first-time buyers. It is to preserve housing units that are deemed strategic community assets.
These middle market units can be recapitalized by state and local programs, using federal and capital market credit innovations. New state and local programs can match the incomes of younger buyers to the current market prices of these distressed units. While there is no doubt that there will be long-term demand for middle market distressed units in most urban communities, the units have to be preserved now. No one wants to see their pre-bubble value lost permanently.
The Municipal Market Has Helped Before
Back in the 1980s, virtually all state governments sponsored significant, decentralized housing efforts that, over two decades, financed hundreds of thousands of first-time homebuyers. The states relied upon the municipal bond market to finance what was essentially a well-defined segment of the starter market only. Federally-mandated unit price and household income requirements had to be followed.
It was exactly these kinds of common sense home price and household income requirements that were subsequently ignored by federal agencies and the national banks during the housing bubble finance craze. As a result, the state and local decentralized approach to community housing has had a better track record than have the federal agency and national bank efforts.
Save These Home Units Now; We Will Need Them for the Millennials
From what the U.S. Census reports are telling us, the Millennial generation is larger than the Baby Boom generation. This is because the children of the Baby Boom (the Echo Boom) are being joined by huge numbers of young immigrants. The two populations now comprise what is termed the Millennials. In the next decade, it will matter less whether saved housing units are owner-occupied or rented. What will matter is that the units remain occupied, and that they are maintained according to professional community standards.
Units That Are Saved Are “Strategic Community Assets”
Unlike the federal mortgage pools that financed most any and all home units using superior federal guarantees, state programs should only finance needed, market-worthy assets.
It was estimated …. that the American middle class has lost one half of its home equity due to the real estate bubble.
Communities now want to preserve such assets as the key to a new public sector unit preservation program. And while lenders may still not want to face today’s lower market prices, it is really too late for them to stall out on the disposition of such units any longer.
“Strategic Community Assets” Should Be Correctly Priced and Monitored Over Time
Unlike the ’too- big-too-fail’ federal credit scheme of the past, state and local programs should be more transparent from the get-go. The value of the saved community assets should be market-based and the asset value has to be monitored from day one. The secondary market in any new securities should rest upon a solid foundation of price-relevant information about asset value, household credit profiles, and mortgage pool financial performance. In the past, ’too-big-to-fail’ usually meant not enough asset and performance information as well.
Community Tax Bases Are at Risk
The new national housing goal that the states can help pursue is not primarily to help first-time buyers. It is to preserve housing units that are deemed strategic community assets. Even though the economy has yet to produce enough jobs to allow the Millennials to form many new households, preserved units will have long-term demand. The units now at risk of deterioration are local community assets. If these units continue to deteriorate, they will affect whole neighborhoods, then they will affect the local tax base. Ultimately, tax base losses will affect state government school aid formulas. The states cannot afford to allow these vital local assets to remain on lender balance sheets while the properties deteriorate. The states are in a position to collaborate with local communities to identify those housing units that can be designated as ’strategic community assets.’
Connection Between Property Tax Assessments and Market Prices
In the home real estate market, it has always been a rule that property values in the real estate market would be in sync with how any one property was assessed for tax purposes. With the gigantic price adjustments that have occurred in many markets, tax assessments are no longer a reliable indicator of market value. That has to be a concern to county assessor offices, responsible for maintaining fair tax values. And before too many assessments are appealed and lowered, communities have to be given a chance to correct home prices that have over-adjusted in the past two years.
Every community has a good sense notion of what local properties are worth, and what the property produces in terms of property taxes. Communities knows when blight is affecting local property values and how much of the long-term value of a unit might be lost. When a community designates that a property is a strategic community asset, that simply means that the unit needs to be preserved. Its long-term market value needs to be re-established. State programs should respect what communities are saying right now. The concern today is that too many distressed units are deteriorating and affecting long-term local home values. Price drops have been way beyond what anyone expected when the real estate bubble first burst.
Restoring Middle Market Home Values Should Be a Federal Priority – Implemented in a Decentralized (Market-Based) Manner
It was estimated in the federal agency report issued last year that the American middle class has lost one half of its home equity due to the real estate bubble. That amounts at least five trillion dollars in middle class net worth. Over time, if local taxes bases have to adjust all the way back to reflect the value lost by deteriorating middle income units, state school aid systems will be devastated. It is to the direct interest of state governments to prevent the local real estate markets from over-adjusting and thereby, impairing local home values and the tax bases that rest on them.
A New National Goal: Recapitalizing Local Home Inventories to Preserve Needed Units
When the capital markets were in the doldrums in the late 1970s, the sheer promise of the Baby Boom was overlooked. The same is true now. We will have the demand for middle-market units. But we need to preserve those still-distressed units that communities deem strategic. We need to reposition these units now, in 2013, so that their prices better match the long-term demand from new buyers.
The U.S. home markets are staging an encouraging recovery. It is happening in both the high-end creditworthy sector, as well as in the cash buyer low-end market. What is missing is bigger sales volume in the middle income market. As long as the shadow inventory lurks in the broad market, non- distressed buyers will continue to wait for lenders to take the first step in re-establishing middle-market prices. And with the goal of rebuilding local home prices, the state governments are prepared to collaborate both with federal agencies and bank regulators to re-capitalize this really unprecedented distressed home inventory. Unlike lenders, the states and their communities cannot afford to wait any longer.
About the Author
Peter Fugiel, Ph.D., a housing and public finance consultant in Chicago, is a frequent contributor to MuniNetGuide.com. His firm, PMN Community Services, provides research services to Chicago-area communities based on platform that combines real estate market analysis with municipal bond research.
Disclaimer: The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column. This column does not reflect the position or views of RICIC, LLC or MuniNetGuide.
The opinions and statements expressed on this website are for informational purposes only, and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned. Opinions and statements expressed reflect only the view or judgment of the author(s) at the time of publication, and are subject to change without notice. Information has been derived from sources deemed to be reliable, but the reliability of which is not guaranteed. Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professional and advisors prior to making any investment decisions.
PMN Community Services hosts a public finance/housing research website, at USAPublicSectorMetrics.com.