OpinionMortgage

Opinion: Mortgage policies are punishing urban development

Future-Proof: Navigate Threats, Seize Opportunities at ICNY 2018 | Jan 22-26 at the Marriott Marquis, Times Square, New York

Imagine, for a moment, a planned neighborhood in a typical suburban area of your city.

As you drive past the perfectly manicured shrubs and flowers framing the red-bricked entrance, you see the community pool for lazy sun-drenched weekends and a clubhouse for birthday parties and yoga classes.

Drive down the main road, and you find smaller neighborhoods grouped by size, style and price, from the entry-level townhome to the luxury Colonial backing up to the golf course. The planned community model has served as the basis of suburban development for decades.

So when did suburban experience begin? Census data tells much of the story.

Suburbia

From 1920 to 1940, the U.S. population grew by about 25 million. But from 1950 to 1970, it grew at twice that rate — 51 million. The post-World War II “baby boom” meant the U.S. needed to create housing — and fast. Cue the automobile, federal money for roads and tons of cheap land just outside of the city limits — voila — suburbia.

The allure of more land, new and larger houses, and increased privacy was powerful. So not only did suburbia begin to house the rapidly increasing U.S. population, it drew many others out of the cities as well.

4 tips to raise your real estate business’s online profile
As a real estate professional, you know how important it is to get your name in front of prospective clients. With the modern digital world increasingly mobile, the opportunity to create real impact and grow your business is yours for the taking ... READ MORE

The urban experience that had defined America for the prior century was rapidly being replaced by the new suburban one.

While I can speak only about my hometown of Richmond, Virginia, I would imagine other markets behaved similarly. From 1970 to 2000, the population in the counties surrounding Richmond effectively doubled while the city population fell by 20 percent.

For many of us who grew up in suburban Richmond in the 1970s and 80s, we remember watching downtown’s thriving retail base erode, corporate headquarters flee to the office parks, and urban property values plummet.

And as the U.S. (OK, Japan and Germany) perfected the car (OK, minivan and SUV) and widened interstates, suburbia kept right on expanding.

But at some point, the math stopped working. What began as a benign 20-minute commute, slowly crept to 40 minutes or more. A quick trip to the grocery store now meant navigating four stoplights (instead of one) and the afternoon rush hour now began at 4:30 and ended closer to 7:30. It was becoming unsustainable.

Sometime in the early 2000s (at least in our market), the trend toward suburbia began to reverse. For many reasons — walkable amenities; hatred of traffic; proximity to art, culture and quirky shopping; the desire for smaller footprints; the “local” movement; rejection of the prior generation’s ideals — increasing numbers began to seek living options other than suburbia.

Urban centers long in decline began to grow again, and homes in “close-in” mature neighborhoods began to increase rapidly in value. As urban land became more valuable, teardowns, or substantial renovations and additions, increased in frequency, as did instances of infill development.

Although urban revitalization sounds great, it is not without its own set of problems. When the supply of housing is largely fixed (as it is in urban areas) and demand increases, pressure on the existing stock of housing increases with it. Gentrification and affordable urban housing are real issues in almost every metropolitan area, and there are no easy answers.

So how do we supply additional urban housing? Because undeveloped urban land is incredibly rare, the easiest way is to convert economically or functionally obsolete commercial buildings to residential uses.

The brick-and-beam warehouses or midrise office towers of the early 20th century are ripe for conversion, and they make for interesting and engaging living spaces. And in most cases, converting the street-level spaces to retail or creative offices only enhances the mixed-use nature of the urban environment.

So, problem solved, right? Let’s just create living spaces in the old buildings to provide housing in the city, and we’re done. Not so fast.

Do you remember the section in your principles of real estate class on condominiums? Condominiums are properties where the structure is owned collectively and the spaces within owned individually.

The condominium form of ownership (and its cousin, the cooperative) is the only way to create individual ownership in a vertical building or when subdivision is impossible. Just ask your planning department how hard subdivisions can be in areas with archaic zoning rules.

Imagine a four-story warehouse or a 10-story office building — neither can provide an ownership option for individuals who wish to own space in the building unless it is a condominium or co-op.

So what’s the big deal? Let’s use condominium ownership structures to provide housing in tall buildings. So now the problem is solved, right?  Nope.

Ever tried to get a loan for a condo? It is a gross oversimplification to say that mortgage lending in condominiums is extremely convoluted and difficult.

Without boring you with the minutiae, an entire overlay of underwriting exists for condominiums that can disqualify a perfectly good condominium property from being financeable through conventional channels. And these requirements do not exist in single-family home underwriting.

Additionally, condo loan-to-value (LTV) ratios are worse, interest rates are higher, underwriting stricter and income required to qualify is greater than that of a similarly priced single-family home.

Furthermore, guidelines often differ for Fannie Mae, Freddie Mac, FHA and VA. And depending on whether the condo is new, a conversion of an existing apartment or is a “gut rehab,” rules also change.

At the end of the day, the lending rules were written to handle the housing stock and living preferences of a different era. Lending rules still decisively favor the single-family home and make vertical urban housing far more risky for both developers and buyers. This lending bias is negatively impacting the marketplace.

We have an amazing opportunity to provide responsible housing while repurposing underutilized (and often vacant) properties simultaneously.

Creating a lending environment designed to encourage urban residential ownership, and not punish it, would be a huge step toward augmenting the revitalization of our urban cores.

Until significant changes occur, I’ll see you in traffic.

Rick Jarvis is a co-founder of the One South Realty Group in Richmond, Virginia.

Email Rick Jarvis.


Inman Connect San Francisco is right around the corner — register now and save $200!