Ziman Center Panelists on Prospects to Address LA’s Housing Supply & Affordability Challenges

Tia Boatman Patterson, Executive Director, California Housing Finance Agency: Let’s come at it from the whole spectrum of housing, from low to moderate income. David, on the single-family side, what lessons have we learned on credit standards and how we are making those financing decisions?

David Battany, Executive Vice President, Capital Markets, Guild Mortgage: One of the key takeaways from the housing crisis is that the ability to repay really matters. In the years leading up to the crisis, we saw many mortgage products that did not require as much documentation, such a no underwriting. In a lot of cases, we had a lot of borrowers that did not have the income to make the monthly payments.

There was one example of a Los Angeles taxi driver buying multiple properties at a time at a new Las Vegas subdivision. He was buying 4 properties at a time, repeatedly. That is just an extreme example of how the market did not price risk accurately. If you saw the movie The Big Short, it accurately described how the end investors in the securities did not understand the risk that they were buying. The market did not price risk correctly. These products, pay-option arms or teaser-rates, ended up creating scenarios when the interest rates went up and home values did not continue to appreciate, borrowers were now underwater with payments that they could not make.  This had a significant impact on low-income and middle-income borrowers who used these products to qualify for homes.

The future of affordable housing is one that is based on solid financial footing, providing stability to both the markets and to the individuals purchasing these homes. The costs need to be set so people can afford the housing costs and have enough money to afford other aspect of their lives.

Tia Boatman Patterson: Stuart, how is the issue of constrained supply fitting in with credit standards?

Stuart A. Gabriel, Arden Realty Chair, Professor of Finance, UCLA Anderson School of Management; and Director, UCLA Ziman Center for Real Estate:  Over the past decade, academic studies and experts have been able to pinpoint the role of the largess of credit in facilitating the crisis. We had a lot of credit and much of it went into unsustainable homeownership. The idea was to create sustainable homeownership, and instead we created a generation of transitory home dwellers. The low and middle-income people that credit programs were trying to help were actually the people ultimately run over worst by this failure. Additionally, many of the underserved neighborhoods suffered the worst during the crash.

Coming out of the crisis, we are admonished to be very cautious about the use of credit in facilitating homeownership.  We went from 64% homeownership to 70% right before the meltdown, and now we are back at 64% today. It is not likely that we are going to move the needle much beyond that number.

Regarding constraints to supply, I think the challenge comes down to one word: materiality. The salience of the programmatic initiatives that we put forward is not comparable with today. Much of the historic national initiatives, such as public housing and public works programs, they are not able to keep up with the changing world. Public housing in Los Angeles is less than 2% of the housing stock. Your chance is obtaining a voucher in Los Angeles is one-third of one percent. That’s 0.33%.

If you are talking about inclusionary zoning, the cost of an inclusionary unit in Los Angeles is roughly $250,000 on the lowest end. If each unit is $300,000, that means we need $30 billion in funding to create one million units. Now, California’s housing deficit is less than one million units—but you get where I am going.

The existing demand and supply programs, coupled with extreme jurisdictional fragmentation, along with regulatory restraints make supply ‘the’ issue. The question is how to increase supply? Densifying major thoroughfares in Los Angeles, transportation-oriented development, transportation infrastructure investment and innovation, all of these are ingredients to provide supply. 

In speaking about transportation innovation, the coming of autonomous vehicles within a decade will strongly reduce the demand for parking and parking structures. Recycling and reusing parking structures for housing development will create supply.

As Los Angeles invests in public transportation, we can work with the market and open tracts of land to new housing. We have to solve the issue of getting populations to and from those areas. And coming from where LA is starting, significantly bereft of public transportation compared to the east coast megacities, we will need to find first and last-mile solutions to jobs and amenities. Brining amenities to new development both inside and outside of the city will help build vibrant communities, we can look to transportation as a methodology for creating a supply of housing.

Tia Boatman Patterson: That helps us transition from single-family to multi-family developments. We want to promote higher density and housing around jobs, but the price is often what prevents these middle-level projects. We need to reduce costs to get at supply. What are the biggest drivers in increasing costs? 

Jeff Kearns, Senior Vice President, Walker & Dunlop: The labor shortage that exists in California—from general constructors to building specialists—have driven up the costs of building. Regulatory factors include holding costs to getting entitlements and other hurdles from the state or municipality. We have property buyers who will not buy a property until it is entitlement-ready and they know they can close on it. 

In some of the new legislation, such as SB35, we have the prevailing wage requirement. Now that requirement might have been necessary to get the bill through the legislature, but prevailing wage will increase your hard costs by anywhere from 20-35%. For many folks that come to us for project financing, prevailing wage can derail a project pretty quickly.

Robin Hughes, President and Chief Executive Officer, Abode Communities: Thinking of this perspective from a specific project, let me walk you through the process of a project that started in 2010. 

First, the parcel is in a hotly gentrifying part of the region, so we are competing against other developer for this high cost of land. Not only is it the high cost of land, but the 18-24 months of entitlements and 18-24 months of layered financing.  We wisely did a 9%, a 4%, a new market tax increment, and got to the community amenities that were needed. 

Folks will argue about prevailing wage and sustainability requirements. These things will always raise costs. Our mantra in our office is to keep units between $330,000 and $340,000. But now, we are somewhere between $400,000 and $450,000. It has significantly increased the cost of housing.

What makes it more complex is that rents are not increasing because incomes are not increasing, so there is still a limited amount of mortgage we can take on the property. The Federal tax reform has an impact on tax credit markets. So, we are layering on public subsidies to make the transaction work. Overall, we are probably producing less affordable housing because of those factors.

Having low cost acquisition funds—whether through the California Community Foundation, LA Metro or some other entity—can provide a platform to bringing the costs down. Everything that we do now seems to be based on discretionary approval. We spoke about permanent supportive housing before. The siting of those projects takes time, and as the policies get into place (such as with Permanent Supportive Housing or Transit Oriented Communities) the process will get easier. 

Audience Question: What is the potential for working with community land trusts going forward?

Robin Hughes: We are working with a community land trust in South Los Angeles. I am not sure it takes the cost of land of the equation, unless you have another way of buying and holding the land at a concessionary rate. Unless it is publicly owned land, it only puts control in a certain place. The control changes, but economics do not.

Tia Boatman Patterson: We at the California Housing Finance Agency have been working on increasing the utilization of any state or municipally owned land for decades. The priority for any surplus property is supposed to be given to affordable housing. How do you develop a finance mechanism to write down those land costs?

Recently, CHFA has partnered with community land trusts and Fannie Mae so that single-family homes built on community land trusts will be able to use a conventional mortgage. This program was a decade in the making, and we recently rolled that out. Looking at surplus property to do land write-downs is something that we will continue examining going forward.