June 23, 2021

Summer Studies

Housing Policy
Capital Commentary

The start of summer provides us the opportunity to step away from the hubbub of our daily work lives and reflect a bit. As we mark the summer solstice this week, Capital Commentary is using this opportunity to review a potpourri of noteworthy housing analyses that caught our eye but perhaps not the eyes of local or national news editors. Two items feature new research authored by recent Arch MI PolicyCast guests — Richard Green of the University of Southern California’s Lusk Center and Edward Pinto of the American Enterprise Institute. The Capital Commentary Contest is found under Item 5.

1. Homeownership Solves Affordable Housing

When it comes to addressing affordable housing challenges, the nation’s policymakers usually focus their attention on rental housing. Among typical recommendations are:

  • More public housing.
  • Higher subsidies for builders of affordable apartments.
  • Increased use of vouchers that pay landlords a portion of the rent.

But policymakers have it all wrong, argues Urban Institute Visiting Fellow Mike Loftin in his paper “Homeownership is Affordable Housing,” published last month.

  • “These approaches fail to take advantage of America’s biggest source of affordable housing: homeownership,” writes Loftin, who is also CEO of Homewise, Inc., a nonprofit that promotes sustainable homeownership.

Owning one’s home is frequently more affordable than renting, according to Loftin. He criticizes those who “cling to the idea that homeownership is reserved for people who achieve some arbitrary level of financial success and that homeownership is not ‘appropriate’ for people who are still on their path to financial security.”

Loftin acknowledges we need affordable rental housing but contends rental strategies can be “short sighted.”

  • Vouchers, for instance, require a monthly check to a landlord “under no obligation to renew a tenant’s lease.”
  • There also is no guarantee the federal government will continue voucher programs from year to year.

Homeownership, however, “gets more affordable over time and the housing is more stable because there is no landlord to evict you.”

Loftin concludes:

  • “The most promising long-term solution to our country’s affordable housing crisis sits right under our noses. Most Americans live in homes they own. They pay, on average, 16% of their income for their home, far less than the 30% benchmark generally used to define an affordable housing payment. Yet when we think about affordable housing for families who are struggling, we do not think about how to help them own their homes. We instead think about building new subsidized apartment buildings or providing more rent vouchers.”

2. Don’t Tinker with Policies, Go Big

We can’t solely tinker around the edges if we are going to solve pressing housing challenges, suggests a new report from UC Berkeley’s Terner Center for Housing Innovation. To adapt a sports phrase, we need to “Go big to go home.”

  • The Terner report’s authors cite previous research showing that children growing up in housing that is secure, stable and in a safe neighborhood stand to experience better educational, physical, mental and economic outcomes than children living in dilapidated homes.

But too few people are benefiting because “policy has not adequately addressed the scale of the challenge or its inherent inequities,” argues the report, “Building a Better Ladder of Housing Opportunity in the United States.”

  • The Terner writers contend a solution will “require systemic changes to the ways the U.S. plans for, invests in and expands access to housing. And not just subsidized housing for those with the least resources. All types of housing.”

What are some of its recommended changes?

  • Create a flexible pool of federal subsidies from existing programs to enable the production and preservation of a more diverse set of housing options than the status quo.
  • Use federal agencies such as the GSEs, FHA and the Federal Home Loan Banks to support moderate- to middle-income housing options that are affordable without government subsidies.
  • Condition existing funding to support the adoption of pro-housing policies, including those that allow for a mix of housing types and advance fair housing.
  • Create a targeted renter’s tax credit for those phasing out of eligibility for rental assistance as their incomes rise. This could help mitigate unintentional work disincentives as earnings increase.

3. Housing Matters Less … to the Economy

For many years, housing was considered a leading indicator of the U.S. economy.

  • UCLA Economist Edward E. Leamer wrote in his 2007 paper “Housing IS the Business Cycle”: “Of the components of GDP, residential investment offers by far the best early warning sign of an oncoming recession. Since World War II, we have had eight recessions preceded by substantial problems in housing and consumer durables.”
  • On the other hand, when housing boomed, so did the economy.

But the linkage is fraying, according to Dr. Richard K. Green of USC’s Lusk Center for Real Estate. Green was a recent guest on the Arch MI PolicyCast“Addressing Housing’s Shortcomings.”

In a just-published paper, “Is Housing Still the Business Cycle? Perhaps Not,” Green reports housing is a much weaker leading indicator and explores some of his theories behind the reduced impact on the economy.

  • The main culprit is zoning.

Green points to land use and zoning restrictions to explain why low interest rates and high housing prices haven’t resulted in a significant increase in home building in California.

  • “In city after city, building permits per capita have been falling over time. California’s 2020 population loss — the first since it became a state in 1850 — was partially the result of the fact that it is not building much housing,” he writes.

And interest rates no longer drive housing as they once did. “Rates have become less influential and take more time to exert any influence at all on residential investment. As permitting processes have become more arduous and more stretched out, the ability of monetary policy to influence the business cycle through housing has become attenuated.”

Dr. Richard K. Green

4. Call the Movers

“Green acres is the place to be.
Farm livin’ is the life for me.
Land spreadin’ out so far and wide
Keep Manhattan, just give me that countryside.”

Fans of 1960s television will likely recognize that first stanza from the corny sitcom “Green Acres” starring Eddie Albert and Eva Gabor.

Fiction is now becoming a reality for an increasing number of Americans. The pandemic “appears to have changed preferences for where people want to live with profound implications for the future,” write Edward Pinto and Tobias Peter of the American Enterprise Institute’s Housing Center in “COVID-19 Could Transform How and Where We Live.” Pinto recently appeared on back-to-back episodes of the Arch MI PolicyCast video podcast, which can be seen in part one and in part two.

  • The authors noted that as recently as February 2020, buyers were willing to pay more for homes where the “walkability index” was high.
  • That has given way to living in less walkable areas, particularly in rural and resort communities.

The change is already reflected in home prices.

  • Since the start of the pandemic, there has been a near-180-degree shift, with year-over-year home price appreciation in the least walkable quintile averaging 8.9%, but only 8.3% in the most walkable quintile and the gap has been widening.
  • Due to lockdowns and social distancing, the share of the workforce working from home has grown from 5% before the pandemic to perhaps up to 60% at the height of it. At the same time, the desire for more living space and an escape from crowded urban areas fueled an exodus from the most walkable areas.

A recent New York Times’ article, “The Market Tectonics of California Real Estate,” confirms Pinto and Peter’s findings.

  • “California … saw its population decline in 2020 for the first time since 1850. But while reports of a mass pandemic-induced exodus from California are greatly exaggerated, there is a significant migration afoot. California’s biggest cities are shedding residents, while its suburbs and exurbs are seeing rapid population gains. The shift is fueling a red-hot housing market in areas once ignored by city dwellers and turning some of the state’s secondary cities into small-scale boom towns.”

The Times reported that most Californians on the move are staying in the state. Still, prices are soaring in their new-found communities.

  • One family that moved 35 miles from San Francisco to San Ramon has seen their neighborhood’s home prices increase by $400,000 since the start of the pandemic.

“Goodbye, city life.
Green acres we are there.”

5. Contest No. 9: Less Green for an Acre

Green Acres first appeared in September 1965, when housing — even in Eva Gabor’s beloved Manhattan — cost a lot less.

Take the quiz: Without using the internet, can you correctly guess the average cost of a house in the U.S. during the year 1965?

Multiple Choice:

  1. $14,000
  2. $17,500
  3. $20,000
  4. $35,000

Email your answer to me at [email protected] by midnight June 29 to be entered into the drawing for an Arch MI Capital Commentary mug and saucer.

Answer to Contest No. 8: Name the agency that preceded FHFA in overseeing Fannie Mae and Freddie Mac. Answer: Office of Federal Housing Enterprise Oversight (OFHEO). Because OFHEO was part of the U.S. Department of Housing and Urban Development, give yourself credit if you answered “HUD,” too.

Do you think Capital Commentary offers valuable information on housing policy and its potential impacts? If you do, share your comments with us. Your feedback will help ensure Capital Commentary covers the stories that have the most impact on your business.

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Capital Commentary newsletter reports on the public policy issues shaping the housing industry’s future. Each issue presents insights from a team led by Kirk Willison.

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PolicyCast — a video podcast series hosted by Kirk Willison — enables mortgage professionals to keep on top of the issues shaping the future of housing and the new policy initiatives under consideration in Washington, D.C., the state capitals and the financial markets.

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