Housing dominates the news these days. We read about the homeownership slump and how the rate recently fell to 65.4 percent, a 15-year low.
Are these figures good news or bad? What should the government do, or not, about foreclosures? What are the appropriate credit standards and downpayment requirements for families to qualify for a mortgage? Should Congress modify the mortgage interest deduction? What about the government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac; the Federal Housing Administration (FHA); the Federal Home Loan Banks?
Housing, considered the wunderkind of the past decade's economic spurt, is blamed for this decade's economic downturn. Candidates and policy wonks are proffering solutions, but they're talking about the single-family market. The multifamily market garners scant attention.
But multifamily housing touches most Americans. Today, we're approaching 40 million renter households—more than one-third of all households. According to the Harvard Joint Center for Housing Studies, renter households increased by 1.1 million in 2011, the largest annual increase since 2007. The Urban Institute estimates that between 5 million and 6 million renter households formed between 2000 and 2010. Indeed, the spike in foreclosures has turned owners into renters. And the supply of “affordable” units has shrunk. Today, one in four renter households spends more than 50 percent of their income for housing; one in two spends more than 30 percent. Not surprisingly, the market is reaching a crossroad in financing.
An Exodus of Capital
Until the latest Great Recession, the $800 billion multifamily housing market was financed by a variety of private sources, including life insurance companies, investment banks, thrifts, commercial banks, and mortgage conduits. Then, the downturn hit and spurred an exodus of private capital; today, the GSEs and the FHA are the primary—and, sometimes, the only—sources of financing. Private investors are now gingerly, but slowly, re-entering the market.
Both the left and the right agree that government should reduce its substantial footprint. But to do so bluntly would be perilous. If government precipitously withdraws from the multifamily market, we can expect a drop in new construction (except for the luxury-market properties), higher rents, and even fewer affordable units. We need private capital to re-enter this market, but we need government to prompt it. The debate about the future of multifamily financing shouldn't be held hostage to the painstakingly slow deliberations around the future of the single-family market. It's not too early to redesign the multifamily finance market.
As a start, we should be clear about the rationale for government intervention in the multifamily market and set forth some basic principles:
1Safeguard affordability. If government is guaranteeing loans, developers must construct, or preserve, multifamily units that are affordable to low- and moderateincome households.
2Limit risk. Government support should be explicit, prudently underwritten, transparent, limited to catastrophic risk, and actuarially sound. The private sector should be required to have risk retention for top-level losses. The Federal Housing Finance Agency has just directed the GSEs to undertake a market analysis of the viability of their multifamily lines of business; this is a useful first step.
3Provide a safety net. The federal government must continue to be a liquidity backstop during economic crises. Indeed, without federal support, multifamily financing would have disappeared between 2007 and 2009.
4Partner with HFAs. Federal government engagement should encourage risk-sharing partnerships with state and local housing finance agencies (HFAs) to address local housing needs. The FHA risk-sharing agreements with state HFAs would be a good place to start.
Future generations of Americans will depend upon multifamily housing. At this crossroad, we must establish a government commitment that is sustainable, cost-effective, and worthy of taxpayer support.
Nicolas P. Retsinas is a senior lecturer of business administration at the Harvard Business School in Boston. He served as assistant secretary for housing–federal housing commissioner from 1993 to 1998.