Julián Castro got a close-up look at the affordability crisis when he relocated his family to Washington, D.C., earlier this year.
The newly appointed Department of Housing and Urban
Development (HUD) secretary balked at the price of his two-bedroom apartment in
the Woodley Park area of the District after moving from San Antonio.
“I’ve had a front-and-center seat to the challenges of
rental affordability out there,” he jokes.
The average effective rent of an apartment in San
Antonio, where Castro served as mayor, is about $906, compared with $1,614 in
the Washington, D.C., metro, according to Dallas-based research firm
Axiometrics. Castro, who owns a four-bedroom home in San Antonio, would have
similar sticker shock were he looking to buy: The median price of an existing
San Antonio home was $166,700 this year, against a median price tag of $346,500
in the nation’s capital, according to -Metrostudy, the research arm of MFE
parent company Hanley Wood.
Castro purchased his San Antonio home in 2000 after
graduating from law school. And he hopes to make the dream of homeownership
come true for many other hardworking Americans.
“Right now, across this country, there are responsible
families thinking and talking about owning a home,” he says. “But they
shouldn’t have to wait for a miracle to secure this dream.”
Yet, as the nation’s homeownership rate continues to decline—from
a high of 69.2 percent in 2004 to today’s 64.4 percent—Castro finds himself in
something of a bind. How can he spur homeownership at a time of tight mortgage
restrictions while also promoting a more affordable rental market that, as he
recently discovered, is anything but affordable? He’s smack-dab in the middle
of the rent versus own tug-of-war, a referee in a mutually exclusive battle
that the multi-family side has been winning for years.
Whether the rental industry continues to win hangs in the
balance of Castro’s priorities.
“The rental market is just as important as the single-family ownership market because, for many folks, the rental market is their starting point,” Castro diplomatically says. “Even for families that are well established, they are renters, and we want to ensure that there’s affordability there. I see HUD’s role as helping to spark greater opportunity in people’s lives, whether they’re a renter or an owner.”
The Subprime
Death Spiral
Castro will seek to strike an equilibrium in federal
housing policy, after years of a steady, some would say myopic, focus on
homeownership from the Clinton and George W. Bush administrations.
That heavy-handed push for single-family housing was
damaging in more ways than one, says Stan Humphries, chief economist at
Seattle-based Zillow. Beyond promoting an unsustainable homeownership rate—and
thousands of unsustainable mortgages—the lack of federal attention paid to the
rental industry has trapped many would-be homeowners in costly rentals.
“The
fact that we’ve ignored affordable rental housing for so long is coming to
repercussion now for homeownership,” Humphries says. “Today’s renters are
tomorrow’s buyers. The fact that rents are unaffordable makes it very hard for
them to save up and get a down payment.”
Daniel
Bachman, senior U.S. economist at New York–based -Deloitte, says it’s overly
difficult for potential home buyers to get a mortgage in a market where lenders
are still feeling burned from the last downturn. Tweaks to underwriting
standards aren’t enough: Regulators and policymakers need to figure out how
best to securitize mortgages, he says.
“There’s some attempt by the regulators to reduce the
down payment a bit, but a lot of them are working around the edges, in
particular, without a long-term answer to the question of how we repackage
mortgages so they’re acceptable securities and competitive in financial
markets,” he says.
The credit standards coming from today’s shell-shocked
lenders have forced many single-family home builders to concentrate on the
higher end of the market, forgoing the production of more entry-level homes.
“Builders are building homes for those who can get
mortgages,” Humphries says.
First-time home buyers make up about 33 percent of
today’s new-home purchase market, down from the traditional 40 percent,
according to the National Association of Realtors. Castro, of course, aims to
reverse that trend. During an address at the Bipartisan Policy Center’s annual
housing summit in September, he noted how the average FICO score for a Fannie
Mae or Freddie Mac home loan is hovering around 750.
“Currently, there are 13 million people with credit
scores ranging from 580 to 680. Many of them are ready to own but are being
left out in the cold,” Castro said. “The truth is that the dream of
homeownership is out of reach for too many Americans.”
Castro
urged policymakers to bring housing finance reform to the forefront of the
national agenda. But analysts and industry officials aren’t optimistic about
seeing any kind of movement in the near future, at either the legislative level
or the lender level.
“The problem is that lenders don’t want put-backs,”
Humphries says. “Fannie and Freddie will guarantee, but when it goes into
default, they’ll put it back to the lender and tell them to eat it.”
Mel Watt, director of the Federal Housing Finance Agency,
the conservator that oversees Fannie Mae and Freddie Mac, made a step in the
right direction by trying to clarify the rules surrounding warranties and risk
in an address at the Mortgage Bankers Association’s annual conference in
October. Still, a change in lender appetites won’t happen overnight.
“Lenders
are only going to start lending once they get comfortable,” Humphries says.
“That trust is really going to have to come from experience, which means it’s
going to come over time. I don’t think there are any documents the GSEs can
give lenders to make them more trusting.”
Retention
Attention
As Castro tries to sort out the subprime fallout, multifamily
owners, developers, and managers are toasting to the economic recovery.
The single-family market doesn’t pose much of a near-term
threat, says Ken Veltri, senior vice president of asset management at AMLI
Residential. The Chicago-based company reported a minimal increase in residents
moving out to buy a home this year. In 2013, about 14 percent of the company’s
renters moved out to buy a home; this year, that number rose to about 18
percent.
But Veltri sees a difference in losses to homeownership
when comparing suburban versus urban renters. In 2013, AMLI lost 20
percent of its suburban renters to houses. By late this year, the company was
losing 30 percent of its suburban renters to the white-picket-fence space.
In downtown Chicago, however, says Veltri, “we have
renters by choice—people who aren’t generally looking to move into a
house.” In fact, the percentage of urban renters moving out for
homeownership has actually declined, from 10 percent last year to 8 percent
this year. While Veltri isn’t sounding the alarm just yet, he’s keeping a close
eye on national job growth.
“What’s been starting to bite us here in the last few
months has been people moving for job transfers,” he says. “It’s causing a lot
of turnover with people who aren’t even having lease expiration. Most job
transfers are going out of state, they’re not staying in the Chicagoland area.
A lot of Illinois jobs have been lost to Texas.”
To address the problem, the company has been doling out
smaller, and fewer, rent increases to keep occupancy stable, a trend many
operators are following as the upturn matures and retention takes on greater
importance.
Renters by
Choice?
San Francisco area renters would surely welcome a pause
in rent growth. In many ways, the Bay Area is ground zero for the nation’s
affordability problem.
“While home prices aren’t affordable, the rental prices
are even less affordable,” Humphries says. “All the households we’ve been
creating there have been overwhelmingly renter households.”
But are they renters by choice? One of the factors
holding back the for-sale industry is the pace of Millennial household
formation, or the lack thereof. Many in that generation are delaying the
decision to get married and have children, says Glenn Brill, a manager at
Baltimore-based FTI Consulting.
“I think Millennials, once they [mature], will form
households and families, and you may see them return to the suburbs,” he says.
High-end, luxury product, especially in urban cores,
tends to have more renters by choice, says Darren Pierce, director of
multifamily asset management at Charlotte, N.C.–based Crescent Properties.
“In our suburban, garden product, people are there
for a year and then they buy a house,” he says. “In our urban product, people
are there because they want the lifestyle of a rental. We provide the
higher-end apartment communities, and that attracts a lot of renters by choice.
Some of them lost money in the downturn on a house, and some choose to live
with us because they like the flexibility.”
Although Pierce says owning will always appeal to
families, he’s noticed a change in attitude and preferences among young, small
families.
“We’ve even seen people who have one kid and are still
choosing to live in a two-bedroom apartment because they love that lifestyle,”
he says. “People have a lot of options. They may want to put their money
elsewhere besides into a house.”
Toward a More
Perfect Policy
But multifamily developers shouldn’t get too
overconfident: Eventually, a large amount of Millennial renters will make the
transition.
The “accepted wisdom” in the multifamily industry has
been that Millennials aren’t as interested in owning a home as their parents.
“And that may be true, but I think we’re too early in the
game to definitely determine that there’s been some change in taste,” says
-Deloitte’s Bachman. “I’m always skeptical that the Millennials are going to
behave differently, because I’m a Baby Boomer, and if you go back in history
and look at what was said about us, it’s that we were going to be different. We
don’t know, and I have no reason to think, that Millennials will not go through
some similar kind of cycle.”
David Olney, chief investment officer at Boston-based
Berkshire Group, says that part of the reason Millennials are delaying their
decision to form new households is the financial instability many of them face
due to student loan debt.
“Millennials are carrying a lot of debt on their balance
sheets already,” Olney says. “One of the mistakes made by the government in the
boom period was to push a lot of people into the market to own a home who
shouldn’t have been owning a home.”
Indeed, federal housing policy will need to be much more
balanced going forward, but there are some inherent challenges. Nearly
three-quarters of federal housing subsidy goes to homeowners (think of the
mortgage interest deduction), yet the average income of a homeowner is more
than twice that of a renter.
“I think the government needs to be very careful as to what programs they put in place to support any one initiative,” he says. “Their push to have everyone own a home created much of the problem we saw in 2008. It’s taken us a very long time to recover from that.”
