Getting off the Stick to Drone On About Affordable Housing

Earlier this week I was annoyed to learn there is a new “selfie” drone that should make those using a selfie stick reassess their lives. Imagine if all the effort used towards the development of these “must have” tools were channeled into resolving America’s affordable housing crisis. I’d even accept the fact that my Instagram feed would be even more boring.

But I digress…

This just in…Brooklyn median rental price just set a new record high.


And Manhattan median rents year-over-year have been rising for 14 consecutive months…


Tight Residential Mortgage Credit Key Cause of Affordability Crisis

The public’s interpretation and use of the phrase “affordable housing” has somehow morphed from “government assisted” housing to “working and middle class” housing.

One of the main characteristics of the housing market since the financial crisis has been the continuation of tight credit conditions. It has shaped virtually everything that seems odd about housing right now: record rents and sales prices, proliferation of mega-ultra-super-luxury homes, a shortage of first time buyers, low inventory and the proliferation of bidding wars.

In the tight credit category, I’m not talking about things like auto loans, student loans and credit cards, which may all be in a bubble at this point. I’m specifically referring to residential real estate, whether looking at end loans or construction loans. My use of the word credit refers to qualifying for mortgages through credit scores, ratio requirements and underwriters’ willingness to make exceptions. For all of those that say “credit is easing” or “credit is not tight” are confusing the fact that system is getting a little more efficient but is still perceived as irrational by borrowers. It shouldn’t be this painful to get a mortgage.

Most major metro areas are trying to come up with a solution but they all seem a long ways off. If mortgage credit were to rapidly ease over the next few years, I suspect some of the worst extremes of the affordable housing crisis would begin to wane. Of course I can dream.

Banks as Game Show Participants (perhaps it’s ok to confuse this with ‘game theory‘)

Those who have heard me speak at events may have heard my favorite, but admittedly simplistic perspective of how banks see mortgage lending today. Mortgage lenders remain extremely risk adverse, a key characteristic of the financial crisis hangover. Why are banks so worried about mortgage lending risk? Namely, the legacy of bad lending decisions from the housing bubble era is still haunting them as well as the false promise of low mortgage rates.
DOJ Litigation: Every week or two we seem to be reading about a Department of Justice lawsuit and settlement for billions of dollars. I’m curious as to why these actions took more than 5 years to begin with earnest and I’m not buying the excuse of keeping the banking sector stable.
GSE Buybacks: The former government sponsored enterprises known as Fannie Mae and Freddie Mac continue to force banks to buy back loans sent to them during the housing bubble. (I’ve been retained as an expert in various litigations and the appraisal quality submitted by mortgage brokers back then was complete and utter crap). Like the DOJ, why did it take so long for the GSEs to begin this process? I seem to recall this catching steam as late as 2011.
Low Mortgage Rates/Quantitative Easing: Record low mortgage rates aren’t working. Mortgage volume has been falling for a decade along with rates. When interest rates are too low, there is a minimal spread for the bank to work with. More importantly, low mortgage rates mean that the Federal Reserve (QE) and investors are worried about the future direction of the economy (translation: more risk).


In the “Let’s Make A Deal!” format, the bank has to choose what’s behind the following doors.

Door #1: Borrow for free from the Federal Reserve to grow other lines of business and rebuild their balance sheet essentially risk free.

Door #2: Lend to Joe & Mary Homebuyer for 30 Years. Either Joe or Mary or both could lose their jobs during this period, and/or the value of their home could decline and/or any other possible negative scenario could occur.

The bank, if they want to stay in the mortgage business, can’t look only at Door #1 so they must choose Door #2 but work hard to equalize the risk of choosing Door #1. Joe & Mary have to jump through so many hoops that the process seems irrational – as if the bank is looking for ways not to lend them the money because the banks want no risk at all.

How Does Irrationally Tight Lending Reduce Affordability?

Never during my 28-year career as a real estate appraiser would I have every thought I would live and breath the following statement:

“Tighter mortgage conditions are making housing prices and rents rise.”

It seems illogical at first but here’s what happens:

High Rents
– Tight mortgage lending conditions choke off the supply of first time buyers who would organically transition from the rental market to the sales market. Their bounce back into the rental market create a “logjam” as supply isn’t elastic enough to meet demand quickly. Most of the positive results from Census’ new housing starts data is centered within multi-family, not single family construction.
– Tech Bubble financing providing upstarts like Airbnb to wreak havoc on high cost rental markets like San Francisco and New York allowing landlords to generate more income from tourists than renting to longer term tenants. The tech bubble capital flow is a product of global investors seeking at higher returns in a low interest rate world.

Low Sales Inventory
– Many home owners with low equity (in addition to those with negative equity) are unable to trade up, make a lateral move or even downsize because they don’t qualify for a mortgage. If you can’t buy something then you won’t sell. For those owners who are not credit impaired, they won’t list their homes until they can find a home to buy.
– MOP (Money on Paper) is the condition where a homeowner may have enjoyed a large gain in equity as their home value increased. Unfortunately for many, the home to trade up to also increased so they can’t afford to make the next step and just sit.
National existing inventory has begun to slip on a year over year basis. Existing homes will have more upward price pressure placed on them as the economy slowly improves.

New Development Targeted to High End Product
– Tight credit conditions have favored consumers that can use more cash or all cash in a transaction. They tend to win bidding wars and get the home they want because the terms are now as important as the price. Buyers of higher end homes tend to have more cash or be less depending on mortgage financing. It’s no surprise that national home builders like Toll Brothers who focus on more upscale product have been in a better position.
– The global search for a safe haven, especially by investors looking in urban markets have been buying the world’s most expensive bank safety deposit boxes.

Rising home prices and rents contrast with a decade’s worth of stagnant wages and tepid household formation and you’ve got a housing affordability crisis.

And there’s no way I am spending $500 on a selfie drone. I simply can’t afford it.

Jonathan Miller, CRP, CRE
Miller Samuel Inc.
Real Estate Appraisers & Consultants

ps Please feel free to share.  If you get tired of all the charts, real estate commentary and articles presented in each weekly note, just opt out.  I always appreciate feedback so please email me.

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