Ivy Zelman, one of housing's most influential voices, is on a mission.
She's looking at what is, what should be, and a clock that's ticking toward nothing that's good for just about anyone, and has decided to act.
Yesterday, in this space, we wrote that local regulation is the new, uglier, more daunting version of last year's challenge for home builders---labor capacity constraints. Effectively, every new home built comes laden with 24.3% of its final price tag consisting of governmental fees and taxes, not to mention delays that cost money.
At that very moment, Zelman dispatched a manifesto to the Federal Housing Administration, the Federal Housing Finance Administration, and the Department of Housing and Urban Development, that decries the absurd Catch-22 that exists between these heavy, heavy regulatory burdens on development and a hard-and-fast clamp on the one recourse a potential young, first-time home buyer would use to counter the "impact" of those fees, so to speak: an FHA mortgage.
At the crux of Zelman's analysis are a couple of insights that seldom get attention.
One is that FHA loan limits are a broad brush that don't factor in two critically important issues in how they're derived and applied. The first issue is sheer geography. The FHA limits--which range as high as $625,000 in markets like San Francisco, Los Angeles, and Washington, D.C., and as low as $271,000 in many other markets--apply by market, not by submarket. So, for example, a county in Southern California that has a huge footprint and a bifurcated--wealthy vs. non-wealthy--real estate segmentation, may have a very low FHA limit of $271,000, whereas many of the homes in areas nearer to job centers cost much more than that. This rules out attainability for would-be FHA buyers.
Secondly, FHA limits derive from prices of existing home stock and comps, ignoring the fact that new homes can only come online with an average of $84,671 (nationally, per respondents to the NAHB/Wells Fargo March 2016 HMI surveys), in regulatory costs--costs that existing homes that form the basis of FHA comp analysis don't pay.
What this means is that residential builders' and developers' risk grows, because they front-load all their investment into putting value on top of a lot that housing finance regulators rule out in their FHA limits policy. Here's how trying to build a home in California's Inland Empire city of Corona "pencils" or fails to do so, as an example from Zelman's research.
For comparison, Zelman zeroes in on markets and submarkets that are showing strength in lower-priced, FHA-backed home sales, and low-and-behold, in those markets the impact of local development impact fees on final home prices is far, far less significant. She writes:
Single-family housing permits currently stand at 41% of peak levels across the country. However, many markets with low impact fees as a percentage of FHA loan limits have rebounded to 60% or more of peak levels, including key MSAs in Texas and the Carolinas. On the other hand, many markets with above-average permit fees as a percentage of FHA loan limits have seen more muted recoveries, including the Inland Empire, Sacramento, Fresno, Chicago, Las Vegas and Phoenix.
Clearly, impact fees are not the only driver of growth in a housing market; however, we do believe that municipalities with more accommodative development policies and fewer density restrictions have provided a favorable environment that has spurred job relocations, expansion in affordable housing stock and meaningful economic growth. Interestingly, when we have asked builders why they do not attempt to offset high impact fees with denser product, we often hear that municipalities are unwilling to budge on density requirements and favor traditional single-family detached product rather than townhomes that would cater to more entry- level buyers.
One more point here. Time is of the essence. How much longer interest rates will be as historically favorable to a jumpstart in home buying is uncertain. What is certain is that when borrowing costs start inevitably to reverse and start to climb, the impact on monthly payments will be real, and it will be daunting, especially in light of wage growth trends coming out of the Great Recession.
So, while housing finance policy and local, county, state, and national regulatory burdens remain stuck in a Catch-22 feedback loop, time may be running out on an opportunity for anything but this most "muted" of housing recoveries.
Here's the deal. There are two ways for builders to get at this Catch-22, which on its surface impacts only the lower price tiers of the housing market, but in fact dominos up and down the supply and demand chain in a real and profoundly destructive way: One is to try to gut it all out as an individual company.
The other is to collect our resources, efforts, initiatives in a unified call--as Ivy Zelman has--for 1. the the FHFA, HUD, and FHA to revisit its loan limit rules in a way that gives fairer treatment both to new home development and to homes in submarkets that are much higher price points than other submarkets in the same county; and 2. for local lawmakers and policy-setters to look for creative new ways to finance schools, roads, parks, water, environmental safety, rather than to put the cost of all of those worthy resources on the shoulders of the young adults who are trying to get their own fair shot at community-making.