The nation’s housing markets remain depressed. If most everyone agrees that reinvigorating construction is an important goal, why aren’t we aggressively pursuing it?
This blog shows how America can reignite the housing market:
- by reforming mortgage underwriting rules to make building more energy efficient, and
- by making "location-efficient" homes affordable to far more Americans.
A recent Wall Street Journal article points out just how surprisingly weak the market for new homes is: America built less than half as many new homes between 2009 and 2013 as we did in the decade 1992 to 2002, before the housing bubble and its collapse.
This is a problem both for the economy and for the environment. As the New York Times argued in a 2011 editorial, “until the [housing] market recovers, the entire recovery is imperiled”; and analysts still understand this to be the case. Without new housing, jobs in construction and in construction materials and related industries won’t come back and wages will remain low.
It’s a problem for the environment because to wean Americans from excessive dependence on the car, we must build new location-efficient neighborhoods that are walkable and have good transit access; and to cut utility pollution we must make our homes more energy efficient.
The weak housing market extends to existing home sales, too, and the same reforms would encourage energy retrofits and mitigate the problems of gentrification of urban neighborhoods.Feds not using all their tools
Despite the housing slump, federal policymakers have only employed one or two tools: First, they used federal guarantees to backstop the federal mortgage programs (FHA, Fannie, Freddie) and saved their mortgage-backed bonds from collapse. Second, policymakers appear to be hoping that home buyers, borrowers, and builders will be jolted into action by low interest rates and a rising tide of employment. But hope is not a policy, and low interest rates haven’t spurred a recovery.
Federal agencies, recognizing the severity and persistence of the problem, should open the tool box and stop ignoring, or dismissing, their other available tools.
Mortgage lenders need to recognize that housing markets have fundamentally changed – many more homebuyers want more energy efficient houses – this trend is definite and increasing. Borrowers do not want to continue to waste money on energy that goes out the window. Another big change – people desire more location efficient housing: studies show Americans want far more compact development than currently exists, and that sprawl housing is already oversupplied compared to projected demand in 2030-35.What are the elements of affordability?
The Wall Street Journal article asserts “the chief culprit in the recent slowdown is affordability…” but then, echoing conventional wisdom, it limits its definition of “affordability” to the ability to pay off the loan over 30 years at this year’s interest rates, which are slightly higher than last year’s, although still far below the long-term average.
But today’s buyers know affordability means a lot more than loan payments. A typical new mortgage loan is about $150,000-$200,000, but over the 30 years of the mortgage a homeowner will also have to pay utility bills of $75,000 to keep the house livable and over $350,000 to drive to and from it, if it is located in suburban sprawl, which most new housing has been in over the last 50 years.
Both energy and transportation costs vary a lot – and in systematic ways. A house with energy waste could easily have $150,000 in utility bills, while the bill for an efficient one would total $25,000 or less. While the cost to get to and from the sprawl house averages $350,000, the amount would be less than $100,000 for a house in a transit-rich, compact neighborhood.A conclusion
This difference in the energy and transportation components of affordability swamps the difference in costs that result from small changes in mortgage interest rates.
If we built new homes to be more efficient, it would increase real affordability, as well as providing buyers what they want. Why don’t lenders consider these costs?
Experts I have talked with believe that lenders are worried that considering these costs may create risks. But they seem content to ignore the greater risks of making new loans to people who can’t afford utility and transportation costs.
This strained definition of risk reminds me of a heavy smoker who refuses to quit because of the risks of overeating in response to cigarette withdrawal.
But doing nothing carries more risk than making needed adjustments; even assuming that anyone could make the case that there is any risk at all to the reforms.Consider the numbers
Optimists in the real estate and lending industries keep pointing out every month of data that shows new housing is recovering, noting only in passing that the rate is 5% a year or worse—in the good months—and ignoring the bad months (such as March 2014 when housing declined 13%).
But even assuming the 5% gain, do you know how long it would take for new housing construction to return to 2002 levels? 14 years! (Simple math: a quantity that increases at 5% per year doubles every 14 years.)
Do we really want to wait until 2028 for a full recovery?
Enabling buyers to buy location- and energy efficient housing gives consumers what they want, and responds to the fundamental market changes underway. It is the most sensible way to help the market get out of the current 7-year slump.
NRDC’s analysis predicted the current problems years in advance. My colleagues and I presented the evidence to Fannie Mae well over a dozen years ago on why location efficient lending was needed: I still have in my files a PowerPoint slide from 2002 predicting the problem of location-related defaults when conventional wisdom argued that it wasn’t a problem. Four years ago, I pointed out that economic recovery, especially in housing, would be self-extinguishing to the extent that it occurred at all, and this is what we are seeing now. Since then, two analyses have shown strong correlations between poor energy and location efficiency, and defaults. And I also predicted the failure of the Fed’s policy of lowering mortgage interest rates to encourage construction almost two years ago.
We have the opportunity to reignite housing markets and spur job creation, all the while cutting greenhouse gas emissions dramatically and for free, by considering location efficiency. Let’s take it!