From SoCal Real Estate’s September 2018 issue:
There are glimmers of hope on the horizon for this worsening problem
U.S. home prices in the first quarter of the year were at their least-affordable level since Q3 2008, according to a recent report from Irvine, California–based ATTOM Data Solutions. The report also showed that home prices are rising faster than wages in 64 percent of U.S. local markets, including San Diego, Orange, and Los Angeles counties.
Moreover, the report stated that median home prices are not affordable for average wage earners in 75 percent of U.S. local markets, including San Diego, Orange, and Los Angeles counties. The report was based on a 3 percent down payment and a maximum front-end debt-to-income ratio of 28 percent.
“Slowing home price appreciation in the second quarter was not enough to counteract an 11 percent increase in mortgage rates compared to a year ago, resulting in the worst home affordability we’ve seen in nearly 10 years,” said Daren Blomquist, SVP at Irvine, California–based ATTOM Data Solutions, in a statement about the report. “Meanwhile home price appreciation continued to outpace wage growth, speeding up the affordability treadmill for prospective homebuyers even without the rise in mortgage rates.”
Blomquist tells SoCal Real Estate that home-affordability challenges are a sign of a booming economy, attracting jobs and people to come live in that market and pushing up prices. “Affordability challenges are a good problem to have in some ways, but there is a certain tipping point where affordability will basically cause a backlash in the local economy. At that point, you will start to see businesses potentially start moving out because it’s too expensive for their employees to live there, and employees will follow the jobs. Employees will decide they can get a job in another market that’s doing well and will move. One of the reason we attached census migration numbers to our affordability spreadsheet is because there’s a connection there — you will see migration in some high-cost markets.”
He also points out that homelessness becomes a problem in high-priced coastal markets, especially when that is an issue with which these cities are already grappling.
While it’s tough to see this situation turning around, Blomquist says there is one small glimmer of hope. “There are some signs that wage growth is maybe starting to kick in, and we did see it tick up a little bit higher. The most recent wage numbers were around 3 percent growth, which is a little bit of an improvement, but in the majority of markets — 65 percent — we are seeing home prices continue to outpace wage growth.”
On the other hand, there are some markets where home prices are starting to cool off, which could be a good thing for those markets. “Granted, those markets are few and far between: for example, Orange County was down to a 4 percent year-over-year increase in home prices, which is somewhat in line with the cost of living,” Blomquist says. “But for the most part, the inertia of this market is heading toward less affordability, particularly with mortgage rates going up and projected to continue to go up.”
There are some things being done to help alleviate the problem, such as densification—a concept that residents of some areas of Southern California, including San Diego and Orange County, have been slow to accept. But, in California, there have been legislative efforts to streamline the development of land, particularly properties that are close to transportation, Blomquist says. “I think that we haven’t seen a huge impact from that yet — it’s going to take some time — but I think it’s probably a good way to encourage the market to respond by reducing some of the red tape for developers to redevelop land.”
Another solution is providing more financing options for developers of affordable housing. Newport Beach, California–based Sabal Capital Partners LLC was recently approved as a seller/servicer in Freddie Mac’s Targeted Affordable Housing (TAH) Express offering, providing small-balance debt solutions for affordable rental-housing properties in underserved areas. Through this program, Sabal will offer non-recourse mortgages of $10 million or less to eligible borrowers nationwide.
“As a leading small-balance-loan specialist, we are uniquely aware of the unmet demand for debt solutions in the affordable housing sector and of the positive impact this new program will have nationwide,” said Pat Jackson, CEO of Sabal Capital Partners, in a statement about the acceptance. “We have a history of success with Freddie Mac’s Small Balance Loan program, and our team looks forward to assisting in another highly important debt offering designed to ensure affordable housing is available to Americans in areas with great need.”
The Freddie Mac TAH Express program provides faster, simpler and cheaper financing for the preservation of smaller, affordable rental properties. The offering is available to stabilized properties with a loan amount of $10 million or less. In addition, properties must have at least one of the following affordable characteristics: tax abatement, Section 8 Vouchers or Housing Assistance Payments Contract, Low-Income Housing Tax Credit properties in at least year 11 of compliance period, and/or regulatory agreement that imposes rent/income restrictions. An extension of Freddie Mac’s Targeted Affordable Housing platform, borrowers under this program benefit from a condensed prescreen process, simplified legal documents, a standardized underwriting process and a “step-down” prepayment option to provide more flexibility in the prepayment of smaller loans.
Jackson tells SoCal Real Estate that providing capital for debt related to affordable housing is “part of Freddie Mac’s overall mission. Most people think the success of Freddie Mac is large-balance loans and programs put into place for other areas like student housing, senior housing, and targeted affordable. When we looked at how those loans fit in the small-balance-loan space, we realized they didn’t really serve this space; there was a shortfall in workforce and affordable housing. This is a solution for the sub-$10-million space. It works well with the SBL program.”
SBL can’t do loans with regulatory agreements in place, and this program allows Sabal to address a more targeted business plan around providing capital loans for those with regulatory agreements in place. “We are a unique set within the Freddie Mac program,” Jackson says. “Nationwide, we are exclusively focused on small-balance loans below $10 million, with a real focus on efficiencies using our SNAP technology. We have the ability to provide a consistent, reliable solution to our channel.”
With so many pieces to the affordable-housing financing puzzle, how do developers sort it all out and come up with a working financing plan? Jackson says the problem is exacerbated in SoCal, where the availability of places to live — whether renting or owning — at a price point that can meet area median income is only decreasing.
“If you’re a developer, and you start thinking about a business plan to build housing, the sticks-and-bricks cost to build it in today’s market means it’s going to not be affordable,” Jackson says. “You can’t make the numbers work to generate an income. Augmenting with tax credits and subsidies is one way to alleviate that, but a tremendous number of our properties are older units in need of refinancing, a rehab or a facelift, and you’re still not going to be able to command a price point that a brand-new building would have. That’s why having a small-balance loan to meet that space provides competitive solutions for operators who recognize they won’t be able to get luxury pricing.”
Small-balance loans like the ones Sabal provides are reliable and low cost, which is ideal for affordable-housing developers. “When you think about small balance, this is not about a big, brand-new property with infinity pools and workout facilities,” Jackson says. “It’s usually a walk-up apartment building with surface parking. But there’s such an incredible need right now for this product. It’s a market that’s hugely underserved, with high occupancy and low vacancy and likely continued value growth and opportunity to push the rents over the course of a long-term, fixed-rate loan. There’s a niche for small-balance-loan products like this in the marketplace.”