Location, Location, Location Efficiency: Can Smart Growth Help Beat the Mortgage Crisis?

New Report Highlights "Location Efficiency" as Predictor of Mortgage Default

Chicago, IL/ San Francisco, CA (January 27, 2010) -- As the American economy continues to be dragged down by the mortgage crisis, a new report shows a direct link between the transportation costs associated with a given neighborhood or community and its foreclosure rate, according to experts at the Natural Resources Defense Council. The report, entitled Location Efficiency and Mortgage Default, outlines how this link may provide policy makers and the lending industry with new tools to address the continuing mortgage default problem.

"Add urban sprawl to the list of sources for our current financial mess," said David Goldstein, co-director of the Energy Program at NRDC. "It’s not just predatory lending or lax standards. The connection between transportation costs and mortgage default cannot be ignored. The sooner we address it in our lending and development practices, the sooner we will start to see a more stable real estate sector."

The report focuses on the impact of “location efficiency,” a concept pioneered by NRDC and other groups in the 1990’s, on mortgage performance in key cities. It shows that rates of vehicle ownership -- largely determined by neighborhood compactness, walkability, and access to public transit -- is key to predicting mortgage performance and should be taken into account by mortgage underwriters, policymakers, and real estate developers. Transportation costs are a significant financial impact, accounting for roughly 17 percent of the average American household’s income and these costs are made more acute by the fluctuation of gas prices.

Location Efficiency and Mortgage Default delves into data culled from 40,000 Chicago, San Francisco and Jacksonville, FL mortgages which showed that the probability of mortgage foreclosure decreased in neighborhoods with characteristics that enable less reliance on cars, after accounting for important factors like income.

“In all three cities, the results were the same -- if your only choice is to drive, you have much less economic flexibility -- flexibility that can protect you from foreclosure in tough times,” said Jennifer Henry, real estate sector manager in the Center for Market Innovation at NRDC. “Knowing that now, aggressive investment in public transportation and walkable communities make even more sense. And investing in transit will not just improve our economy by avoiding future foreclosures -- but create jobs to get things humming right now.”

The effect of location efficiency is clear when comparing foreclosure probabilities for two homebuyers with exactly the same profile in terms of credit score, debt-to-income ratio, and loan-to-value ratio in differing neighborhoods. The research shows that the buyer in the more location efficient area will be less likely to default. For a dollar and cents example, check this blog post.

In tumultuous economic times, understanding this important factor can lead to new policies for lenders, developers, and government that can be positive for both the economy and environment. NRDC suggests that further research is necessary, but the study’s strong results point to the need for:

  • public policies that encourage location efficient land use; infrastructure and transportation that support location efficient communities to help reduce foreclosures. This includes a “Fix-It-First” focus on existing transportation systems.
  • mortgage underwriting practices that provide access to proportionally better qualifying terms for purchasers of location efficient homes.
  • more research and analysis to develop and refine tools to assess the impact of location efficiency.

This study has been peer-reviewed and accepted for academic journal publication. A briefing document is available for press and public consumption.

David Goldstein’s most recent blog post on this study can be found here.

NRDC staffers were joined by experts in the field and Congressman Earl Blumenauer for a telebriefing about the implications of this report earlier today. A recording of their comments can be found here.