There is an NBER working paper by Sven Damen, Matthijs Korevaar, and Stijn Van Nieuwerburgh, titled, “An Alpha in Affordable Housing?” (hat tip: Scott Sumner)
Thanks for this. I am on the board of our local Habitat for Humanity, and our goal is to get people into affordable homes as homeowners. The problem we are having right now is that the costs to build and the resulting insurance are so high that even with volunteer help and discounted contractors, the homes are still out of reach for many in our target groups.
Part of the problem is ours - our donors and board members are typically upper-middle class, and they're used to a quality and size of home that doesn't make sense for our target group, but the pressure and bias is there to increase costs.
We are actively looking at modular construction as an alternative to both lower costs and remove the temptation to add more bells and whistles that do nothing but make the homes too expensive.
If you are asking about credit constraints the prospective homeowner has, Habitat is the mortgage holder, so credit underwriting is done by us. We don't look at credit score as much as excessive existing debt and available income to service the mortgage. We also offer financial and homeowner counseling and training to make sure our new homeowners have the best chance at success. In your Odd Lots interview, you mentioned the problem of non-W-2 income not getting considered. Being the lender we are able to consider those unique situations and income.
As for our credit constraints, up to this point we have not leveraged credit to start builds. Since we are "living on the edge" a bit anyway, it hasn't been considered prudent. We build when we have the cash flow to support it.
Interesting. The 2015-2019 period is interesting to me because homes for the residents served by Habitat were generally very cheap by any measure relative to their rental value. But it appears to me that lending constraints kept low tier tenants from bidding the prices higher.
Were the economics of projects unusually good over that period for Habitat, and you were mainly limited by your organizational footprint and capital base? Or were there other reasons keeping Habitat from facilitating more ownership then?
Our constraints are our organizational footprint and capital base. And the capital base issue is driven in a big part by our policy of interest-free loans. Habitat's "business model" is to take mortgage repayments and turn those over into new builds. But we aren't realizing the full return on those loans because of the missing interest. So we try to make it up with volunteer time an donor/grant funds. But that is very limiting.
I would love to be able get some of that capital back into the mix, but not put too much of a burden on the homeowners in the short term as they are getting established. Maybe some sort of a shared equity model where Habitat keeps a shared ownership in the property and benefits from any gains that happen at its eventual sale, to make up for the lost interest payments.
“ Consider how diabolical it is that in the US, in 2008, we decimated the affordable single-family housing market by legally barring many of its potential owners from buying”. What was the legal bar to buying?
Okay but cutting off federal backing for mortgages is not a legal bar to homeownership. It’s not even a legal bar to getting a mortgage - a bank could loan $ without depending on Fannie/Freddie if it wanted to. You’re talking about removing a subsidy.
The regulations on the banks are even more onerous than the underwriting standards being enforced on the agencies. Underwriting mandates, limits on spreads, ability to repay standards, vague liabilities on future defaults. Banks aren't willing to take default risk because of the regulations.
And, the agencies aren't a subsidy any more. They make a hefty profit for the federal government.
The financialization of mortgages into CDOs among other financial "innovations", and in particular the practical consequences of the major players' theoretically gussied-up attempt to insure against the inevitable "in the long run" equating risk with gain was what gave us that 2007-2008 crash. *That* was the systemic risk sensitive to what might have been otherwise a tolerable housing cycle. IMO.
I'm no finance wizard, but ... assigning blame to the entire population of borrowers by stuffing the miscreants with cash and further restricting loan qualifications rather than simply resuming the standards that were violated by the financializers was a devil's bargain, forced by the systemic risk world-wide. Now, the world system has too much cash (the unwinding of quantitative easing didn't remove the multiplier effect of the cash infusion) seeking desperately *anywhere* to go and no outlet in the high-volume small residential loan sector.
Whew. That was the too-long background to your main theme, as I see it.
Times have changed. The current qualification standards as they are practically applied *now* are in need of review and overreaction to the crash removed, an important component of the response you're calling for, as I see it.
Getting that excess cash out of the system is another topic entirely.
Can you explain what you mean by this?: "stuffing the miscreants with cash and further restricting loan qualifications rather than simply resuming the standards that were violated by the financializers"
I suspect that we wouldn't agree on some of the specifics, but I'm not sure exactly what you mean.
And, are you unfamiliar with what I have written on that, or are you familiar with it and striking out a position against it?
Unfamiliar. I'm arguing that the loan restrictions implemented post-crisis were a bad idea and that loan qualifications pre-run-up to the CDO craze is a good place to revert to, perhaps with minor tweaks. Seems like things were going OK before the mess.
If it wouldn't be too much trouble, pointers to your articles you think would be relevant would be helpful.
Ah. Yeah. That's basically where I would land too.
I have some pedantic points about CDOs, but they aren't particularly relevant to the point, now that you've clarified.
In my early research that sort of drew me into my current work, I concluded that the privately securitized loans weren't as big of a part of the price boom as has been attributed to them. They were more about risky terms than a change in borrower characteristics (avg. homeowners from 1990s to 2000s had higher income, more professional career, etc.). Homeownership was declining during the private securitization boom. The CDOs came later, and were more timed with the early phase of decline. They were really motivated by an intense demand for safe securities and a lack of mortgage borrowers to use the funds, so the new CDOs were engineered to mimic that. I think part of the moral panic was interpreting a surge of demand for AAA-rated securities as a mania instead of as a dire warning that "animal spirits" were already in the tank and that stability was called for rather than liquidationism. They weren't cyclically unstable because investors were recklessly risk-blind. They were cyclically unstable because investors were clamoring so hard for safety that there weren't any safe assets left to invest in, so new products were being created to meet the demand for safe assets, with diminishing quality.
The CDO market called for stimulus.
Probably my books are the best collection of my writing on that case. But, in any case, certainly any pre-subprime lending standards would be fine, and much better than the current standards, whatever one thinks of my pedantic issues with subprime & CDOs.
"AAA-rated securities as a mania" pretty much covers my thinking. As you suggest, why that demand existed isn't immediately relevant to CDOs as a call for stimulus of the "animal spirits".
Thanks for this. I am on the board of our local Habitat for Humanity, and our goal is to get people into affordable homes as homeowners. The problem we are having right now is that the costs to build and the resulting insurance are so high that even with volunteer help and discounted contractors, the homes are still out of reach for many in our target groups.
Part of the problem is ours - our donors and board members are typically upper-middle class, and they're used to a quality and size of home that doesn't make sense for our target group, but the pressure and bias is there to increase costs.
We are actively looking at modular construction as an alternative to both lower costs and remove the temptation to add more bells and whistles that do nothing but make the homes too expensive.
Great interview on Odd Lots by the way.
Thanks, Bob.
I'm curious. How much of a role do credit constraints play in whether these projects can proceed?
If you are asking about credit constraints the prospective homeowner has, Habitat is the mortgage holder, so credit underwriting is done by us. We don't look at credit score as much as excessive existing debt and available income to service the mortgage. We also offer financial and homeowner counseling and training to make sure our new homeowners have the best chance at success. In your Odd Lots interview, you mentioned the problem of non-W-2 income not getting considered. Being the lender we are able to consider those unique situations and income.
As for our credit constraints, up to this point we have not leveraged credit to start builds. Since we are "living on the edge" a bit anyway, it hasn't been considered prudent. We build when we have the cash flow to support it.
Interesting. The 2015-2019 period is interesting to me because homes for the residents served by Habitat were generally very cheap by any measure relative to their rental value. But it appears to me that lending constraints kept low tier tenants from bidding the prices higher.
Were the economics of projects unusually good over that period for Habitat, and you were mainly limited by your organizational footprint and capital base? Or were there other reasons keeping Habitat from facilitating more ownership then?
Our constraints are our organizational footprint and capital base. And the capital base issue is driven in a big part by our policy of interest-free loans. Habitat's "business model" is to take mortgage repayments and turn those over into new builds. But we aren't realizing the full return on those loans because of the missing interest. So we try to make it up with volunteer time an donor/grant funds. But that is very limiting.
I would love to be able get some of that capital back into the mix, but not put too much of a burden on the homeowners in the short term as they are getting established. Maybe some sort of a shared equity model where Habitat keeps a shared ownership in the property and benefits from any gains that happen at its eventual sale, to make up for the lost interest payments.
“ Consider how diabolical it is that in the US, in 2008, we decimated the affordable single-family housing market by legally barring many of its potential owners from buying”. What was the legal bar to buying?
Much tighter underwriting at the federal agencies.
Here are some back of the envelope estimates of how much mortgage access was cut off:
https://kevinerdmann.substack.com/p/mortgages-outstanding-by-credit-score
Okay but cutting off federal backing for mortgages is not a legal bar to homeownership. It’s not even a legal bar to getting a mortgage - a bank could loan $ without depending on Fannie/Freddie if it wanted to. You’re talking about removing a subsidy.
The regulations on the banks are even more onerous than the underwriting standards being enforced on the agencies. Underwriting mandates, limits on spreads, ability to repay standards, vague liabilities on future defaults. Banks aren't willing to take default risk because of the regulations.
And, the agencies aren't a subsidy any more. They make a hefty profit for the federal government.
The financialization of mortgages into CDOs among other financial "innovations", and in particular the practical consequences of the major players' theoretically gussied-up attempt to insure against the inevitable "in the long run" equating risk with gain was what gave us that 2007-2008 crash. *That* was the systemic risk sensitive to what might have been otherwise a tolerable housing cycle. IMO.
I'm no finance wizard, but ... assigning blame to the entire population of borrowers by stuffing the miscreants with cash and further restricting loan qualifications rather than simply resuming the standards that were violated by the financializers was a devil's bargain, forced by the systemic risk world-wide. Now, the world system has too much cash (the unwinding of quantitative easing didn't remove the multiplier effect of the cash infusion) seeking desperately *anywhere* to go and no outlet in the high-volume small residential loan sector.
Whew. That was the too-long background to your main theme, as I see it.
Times have changed. The current qualification standards as they are practically applied *now* are in need of review and overreaction to the crash removed, an important component of the response you're calling for, as I see it.
Getting that excess cash out of the system is another topic entirely.
Can you explain what you mean by this?: "stuffing the miscreants with cash and further restricting loan qualifications rather than simply resuming the standards that were violated by the financializers"
I suspect that we wouldn't agree on some of the specifics, but I'm not sure exactly what you mean.
And, are you unfamiliar with what I have written on that, or are you familiar with it and striking out a position against it?
Unfamiliar. I'm arguing that the loan restrictions implemented post-crisis were a bad idea and that loan qualifications pre-run-up to the CDO craze is a good place to revert to, perhaps with minor tweaks. Seems like things were going OK before the mess.
If it wouldn't be too much trouble, pointers to your articles you think would be relevant would be helpful.
Ah. Yeah. That's basically where I would land too.
I have some pedantic points about CDOs, but they aren't particularly relevant to the point, now that you've clarified.
In my early research that sort of drew me into my current work, I concluded that the privately securitized loans weren't as big of a part of the price boom as has been attributed to them. They were more about risky terms than a change in borrower characteristics (avg. homeowners from 1990s to 2000s had higher income, more professional career, etc.). Homeownership was declining during the private securitization boom. The CDOs came later, and were more timed with the early phase of decline. They were really motivated by an intense demand for safe securities and a lack of mortgage borrowers to use the funds, so the new CDOs were engineered to mimic that. I think part of the moral panic was interpreting a surge of demand for AAA-rated securities as a mania instead of as a dire warning that "animal spirits" were already in the tank and that stability was called for rather than liquidationism. They weren't cyclically unstable because investors were recklessly risk-blind. They were cyclically unstable because investors were clamoring so hard for safety that there weren't any safe assets left to invest in, so new products were being created to meet the demand for safe assets, with diminishing quality.
The CDO market called for stimulus.
Probably my books are the best collection of my writing on that case. But, in any case, certainly any pre-subprime lending standards would be fine, and much better than the current standards, whatever one thinks of my pedantic issues with subprime & CDOs.
"AAA-rated securities as a mania" pretty much covers my thinking. As you suggest, why that demand existed isn't immediately relevant to CDOs as a call for stimulus of the "animal spirits".
Thanks again for your responses.