Tag Archives: housing

Looking at how consumers are the major beneficiaries of fixed-rate mortgages

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The historical development of the fixed-rate mortgage, usually 30 years in the United States, helped contribute to the post-World War II suburbanization boom in the United States. Several scholars take a look at who exactly benefits from the fixed-rate mortgage (FRM):

The FRM clearly occupies a central role in the U.S. housing finance system. It has been the dominant instrument since the Great Depression and currently accounts for more than 90 percent of mortgage originations. The FRM is regarded as a consumer-friendly instrument, which is one reason why it enjoys enduring popularity. But the instrument can cause problems for both current and prospective borrowers. And part of its popularity is due to government support as well as past regulatory favoritism. The FRM is heavily subsidized through the securitization activities of Fannie Mae and Freddie Mac. These subsidies, which lower the relative cost of the instrument, are an important factor in its popularity. The FRM also imposes costs on the mortgage industry and on investors in mortgage securities—costs that are likely to rise as the economy recovers. Importantly, the FRM is a onesided design. Consumers, particularly those who utilize the prepayment option, benefit while investors and taxpayers bear the cost.

The PDF file linked to from this document has a lot of interesting information. A few thoughts about this:

1. The fixed-rate mortgage came about because of particular historical conditions and interests. Prior to World War II, other kinds of mortgages were sold.

2. The fixed-rate mortgage is not as common in lot of other countries around the world. There are other ways the mortgage market could be set up.

3. The authors suggest that the FRM is the primary mortgage instrument in this country because of governmental approval. Here are the final two sentences in the conclusion of the PDF:

There is nothing so special about housing finance that necessitates the government absorbing the credit risk of the vast majority of the mortgage market or underwriting the interest-rate risk of the that market. Two episodes with massive taxpayer loss should convince us of that fact.

But I think this may be overlooking the cultural and symbolic value Americans place on owning a home. While this scheme may put taxpayers on the hook, Americans also value homeownership, particularly as a lynchpin of the American Dream. Most (if not all) presidents since Calvin Coolidge have pushed policies that would boost the homeownership rate. From FHA and VA loans to Fannie Mae and Freddie Mac, the government has poured billions into homeownership. So while consumers might benefit from this setup, would we be willing as a nation to push for different types of mortgages that might make it more difficult for Americans to purchase a home?

Posting good online pictures of homes for sale

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Having moved in the last two years and as someone who studies housing, I have recently seen a lot of online pictures of homes for sale. The pictures should help a potential buyer make a decision about a home: does it have the features one wants? But often, one finds pictures that are completely unhelpful: they are taken at a bad angle, highlight some of the worst things about a home, or really don’t offer much information at all. Here is one example of a picture I found on Redfin.com for a home for sale in Downers Grove, Illinois:

Perhaps the back door couldn’t be opened because the home is a foreclosure. But really, can’t the photographer open the screen door and take a picture of the back yard (which has a nice deck and swimming pool – though it does back right up to a set of townhouses) that actually shows its good features?

This is not just an isolated shot. While there is a picture of the living room, kitchen, one part of the bathroom, and the basement, one of the seven pictures total also features the laundry room:

Of all the shots I could have in order to assess whether I might want to purchase what looks like a nice house, seeing the laundry room doesn’t help much. And it appears the seal of the door into the room is coming off.

I don’t mean to pick on this particular house; this is a problem for many houses listed online. I have heard of realtors using photographers to get the best shots – I bet this makes a difference in the long run. Since much of homebuying seems to be about impressions (at least in the initial whittling-down phase online), these kinds of bad pictures don’t help.

(A side note: I would be interested to hear from realtors on whether these online pictures make their job easier or harder. On one hand, it limits their corner on information – now the average consumer can do some of the searching themselves while the information available to the average homebuyer was more limited before. On the other hand, perhaps this is a more efficient use of realtor’s time as homebuyers already have whittled down their list of options before asking the realtor to show them homes. This could be an interesting research project.)

The dropping of two-story ceilings

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One commonly cited architectural feature of McMansions are two story ceilings, often in the entryway to the home or in the family/great room. A new survey suggests that builders are pulling back on these tall ceilings as people alter their priorities:

Now, trends are more down to earth, another sign of the times. Yes, high ceilings open up living spaces. But many homebuyers want to take advantage of the wasted space on the second floor with perhaps another bedroom. Issues concerning energy inefficiency, sound transmission and a lack of coziness also pointed to the desire for lower ceilings.

Builders have gotten the message. A survey of builders across the country revealed that 14 percent of homes this year will be built with two-story foyers and 12 percent with two-story family rooms, a substantial decline from previous years, said Stephen Melman, director of economic services for the National Association of Home Builders…

“Customer feedback describes two-story open spaces as cold and austere,” Parkman said. “That goes against the current trend toward warmer and more functional spaces. Rooms with two-story ceilings actually can be a negative for some buyers.

This change goes along with plans builders have to construct smaller and greener homes.

What will be interesting to watch is to see how the architectural profile of the McMansion changes in the coming years. The two-story foyer is common but so are other features like a multiple-tier roof (many gables), a brick or fake stone facade, and more. If future McMansions lose these features and for good reasons (such as wanting to be a bit smaller or greener), will they no longer be called McMansions? Or will there be other features of such homes, such as their size or neighborhood, that will still invoke the term?

Contracting Youngstown

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With dwindling populations in Rust Belt cities (as an example, population loss in Chicago), some have suggested that urban contraction would be the best option. Youngstown, Ohio, which has dropped from a peak population of 170,002 in 1930 to 66,892 in 2010, has been demolishing empty houses and encouraging people to move to neighborhoods where more people live:

In 2006, the city abandoned all that. And Youngstown walked away from the most fundamental assumption of economic development and city planning: The idea that a city needs to grow…

But without the dream of growth, Youngstown just had a bunch of empty houses that no one was ever coming back to. So the city started demolishing thousands of empty houses…

The problem with shrinking cities is that they don’t shrink in a smart, organized way. It’s chaotic. Thousands of people will leave one neighborhood, and maybe a dozen people will stay behind.

So Youngstown has been offering financial help for those people left behind, offering to move them to a place with more neighbors.

The twist to this story is that a number of people were not interested in moving as they talked about how they had lived in their homes and neighborhoods for years. Due to this, the contraction plans have slowed down a bit. This is not too surprising: many people are attached to their homes and settings, even if presented with what outside observers would see as better options.

You can read more about this on Youngstown’s website. In their Youngstown 2010 plan, the first statement of the Vision talks about seeing the city as a smaller place:

1. Accepting that Youngstown is a smaller city.

The dramatic collapse of the steel industry led to the loss of tens of thousands of jobs and a precipitous decline in population. Having lost more than half its population and almost its entire industrial base in the last 30 years, the city is now left with an oversized urban structure. (It has been described as a size 40 man wearing a size 60 suit.) There are too many abandoned properties and too many underutilized sites. Many difficult choices will have to be made as Youngstown recreates itself as a sustainable mid-sized city. A strategic program is required to rationalize and consolidate the urban infrastructure in a socially responsible and financially sustainable manner.

If all goes well in Youngstown over the coming years and the city successfully transitions to a smaller city, they may just serve as a model for a number of other cities facing similar concerns.

It would be interesting to know how communities reach a point where they are able to truly realize that growth is not going to happen. Youngstown has been losing population for 50 years; what pushed them to the point of action in the mid 2000s? This is an important point to reach: cities and suburbs are supposed to grow over time. We have less clear ideas about communities that are on a slow decline – what do we do with the people there? Should we try to revive these communities? Can we admit that something went wrong? Is it acceptable or right to perceive places with massive population loss as “failures”?

National Association of Home Builders survey on homes in 2015: smaller, more green

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The National Association of Home Builders (NAHB) recently published findings of a survey about what “builders, designers, architects, manufacturers, and marketing specialists” think homes will be like in 2015. Two results from this survey were reported elsewhere:

The McMansions of the boom era are quickly losing their style.The NAHB reports that the builders they “surveyed expect homes to average 2,152 square feet in 2015, 10 percent smaller than the average size of single-family homes started in the first three quarters of 2010. To save on square footage, the living room is high on the endangered list – 52 percent of builders expect it to be merged with other spaces in the home by 2015 and 30 percent said it will vanish entirely.”

Also a heavy influence on the housing front are green and eco-friendly features. The NAHB reports that “in addition to floor plan changes, 68 percent of builders surveyed say that homes in 2015 will also include more green features and technology, including low-E windows; engineered wood beams, joists or tresses; water-efficient features such as dual-flush toilets or low-flow faucets; and an Energy Star rating for the whole house.”

These two changes by 2015 were the leaders by far: 74% said smaller single-family homes were most probable or probable and 68% said it was most probable or probable that “green” features would increase in homes. This news is not too surprising: the square footage of the average new American home dropped recently and more eco-friendly homes are on the way (read about LEED certified homes here). What is interesting is that these conclusions are from members of the home building industry who likely are responding to what they think the market desires.

(Going back to the original NAHB report, something else caught my eye. Here is a short description of the methodology behind this survey:

NAHB’s The New Home in 2015 survey was sent electronically to 3,019 builders, designers, architects, manufacturers, and marketing specialists. The sample was stratified by region of the country (to be proportional to housing starts in each of the four Census regions) and, among builders, by their number of units started.

A total of 238 responses were received, of which 30 percent came from single-family builders, 19 percent from architects, 26 percent from designers, 7 percent from manufacturers, and 18 percent from “other” building industry professionals.

On one hand, the stratification of the survey is good to try to get results proportional to builders and areas of the country where building starts are taking place. On the other hand, the response rate to this electronic survey is 7.9%. With such a low response rate, how do we know that these findings are representative of the home building industry at large?)

Australian commentator: movies don’t depict the suburbs

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A writer in The Daily Telegraph suggests that Australian films have not told the stories of typical, suburban life:

Yet it’s not the working class who are neglected.

In fact, according to our films, these are the only people who inhabit Australia.

For all the frustration that exists among moviegoers as to an over-representation of bleak morality tales, it’s this unspoken class warfare that goes unchecked.

From salt-of-the-earth drovers to down-on-their-luck-gangsters, we’re traditionally very fond of our battlers. It’s the prospect of venturing near a McMansion, 4WD or flat-screen TV that seems to paralyse our finest scriptwriters.

The aspirations of families in tree-lined suburbia all too rarely catch the eye of local filmmakers. Perhaps it’s all a bit common.

We pride ourselves on telling real tales, but we don’t want to get too real…

We have been too busy wallowing in the down-and-out to delve into where and how most of us actually live.

An interesting take. I have had the impression that Australia is more suburban than other industrialized nations but it is difficult to find data to back this up. (I spent about 25 minutes searching the Australian Bureau of Statistics website and it appears that at least part of the issue is how the Bureau defines suburbs. While the American Census Bureau essentially says suburbs are the spaces between central cities and rural areas, it appears that Australia tends not to make these clear distinctions. There may be Inner Sydney and North Sydney and Outer South Western Sydney but they are all part of Sydney.) We do know that in late 2009, the average new Australian home was bigger than the average new American home.

More broadly, this doesn’t seem to have been a problem in American media and entertainment. Whether we look at novels or TV shows or movies, the suburbs are a common setting. We could argue about whether these depictions of suburban life are accurate. There is a long history of suburban stories serving as suburban critique: the characters are often portrayed as being unfulfilled, shallow, and unsophisticated. Additionally,  the “typical” TV sitcom or movie family tends not to be that typical: their homes are fairly large, money or subsistence issues rarely come up, and the family always end up in wacky situations.

McMansions a legacy of the 1980s?

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A Philadelphia man who loves the 1980s suggests that one of the legacies of this decade is the McMansion:

Remember the ’80s? Greed. Narcissism. Size.

“Everything was big — really big,” Sirota writes. “Big hair. Big defense budgets. Big tax cuts. Big shoulder pads. Big blockbuster movies. Big sports stars. The Big Gulp.”…

Sirota (who was born in 1975) says the ’80s speak to us today for one simple reason: “Because it’s still the ’80s. The calendar doesn’t say ’80s, but we’re still looking through an ’80s mind-set.” Think Charlie Sheen. Think Lehman Brothers. Think McMansions.

I don’t know if this guy is right or not about these specific links between the 1980s and today. I suspect people growing up in different time periods (whether it is was the 1980s or 1960s) would suspect that the periods of their early lives are most consequential for subsequent events.

But, we could examine more closely his idea that the 1980s gave rise to the McMansions of recent years. Let’s first look at the average square footage of new homes. Here are the increases over the decades (US Census data):

1973-1979: from 1,660 to 1,760 square feet – increase of 100 (5.68%)

1980-1989: from 1,750 to 2,035 square feet – increase of 285 (14.00%)

1990-1999: from 2,080 to 2,223 square feet – increase of 163 (7.33%)

2000-2009: from 2,266 to 2,438 square feet – increase of 172 (7.59%)

So it appears the 1980s did see a larger increase in the size of new homes.

Second, we could look at when the term McMansion entered the popular lexicon. From news sources that I have looked at (this is not one of them but it does give a similar idea), the term really started picking up steam in the late 1990s. Even if the houses started getting larger in the 1980s, it wasn’t until the late 1990s and early 2000s that people frequently started calling them McMansions. In this case, perhaps the term took some time to develop or McMansions really originated in changes of the 1990s.

Overall, these sorts of sweeping ideas (everything was BIG in the 1980s!) could use some more nuance.

Can a McMansion be rated LEED Platinum?

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There are 64 LEED-certified houses in Missouri, with 51 of these built by Habitat for Humanity in recent years. The director of the St. Louis office for Habitat says, “Actually, right now, we’re the largest LEED Platinum builder in the U.S. for single-family detached homes.” But within this discussion, the St. Louis director talks about why it would be difficult for larger homes to be certified as LEED Platinum:

Hunsberger said the investment for Habitat is fairly minimal. He estimates LEED adds about 5 percent to the cost of a standard home.

He said some of the organization’s costs are offset by partnerships with providers of energy-efficient products. Plus, there’s an advantage to Habitat’s houses — size. LEED applies a home-sizing ratio that makes Platinum certification easier to achieve for smaller structures.

“In essence, they don’t want McMansions,” Hunsberger said. “They don’t want 10,000-square-foot single family homes that may have two people living in them to reach LEED Platinum because it’s kind of anti what the movement is.”

This is interesting – so I did a little checking into LEED certification. According to “LEED For Homes Ratings” (a PDF file) from the US Green Building Council, the square footage of a home does factor into its ratings. There is a neutral home baseline and smaller homes have lower thresholds to reach certification levels (Certified, Silver, Gold, Platinum) while homes larger than the baseline have higher point thresholds to reach. The neutral home size is 900 square feet for 1 bedroom or less, 1,400 for 2 bedrooms, 1,900 for 3 bedrooms, 2,600 for 4 bedrooms, 2,850 for 5 bedrooms, and 250 square feet for each bedroom after this. The rationale behind this is explained on page 42 of the PDF file:

These data were simplified and generalized to the assumption that as home size doubles, energy consumption increases by roughly one-quarter and material consumption increases by roughly one-half; combined, these amount to an increase in impact of roughly one-third with each doubling in home size. Thus the point adjustment equates to one-third of the points available in the Materials & Resources and Energy & Atmosphere categories combined for each doubling in home size.

So it is not as if larger homes can’t be LEED certified but they have to meet stricter guidelines. Ultimately, I want to know whether a McMansion, say a home of 4,500 or 5,000 square feet, be LEED certified by making up for its size sufficiently elsewhere?

(I am also intrigued by this Habitat director tying the size of a McMansion to 10,000 square feet. That is not just a McMansion: it may very well be a real mansion. How exactly how large a home has to be in order to be deemed a McMansion is unclear but 10,000 square feet seems on the high end.)

Emphasizing the McMansion interior

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Many times, McMansions are defined by their exterior: a many-gabled roof or a mish-mash of architectural styles or a cookie-cutter home or a large home that seems to overwhelm its relatively small lot or doesn’t fit into an older neighborhood. But a Sarasota blogger suggests that one could have a small home with a “McMansion interior”:

They have a new development out at Lakewood Ranch called Central Park, and even though it’s very generic and a little closely packed for my taste, they have finally done what I have been hoping somebody would do for years—build a small, inexpensive house that suggests a McMansion inside, but on a tiny scale. By that I mean it has things like a particularly nice master suite and fancy master bath, high ceilings—many coffered and trayed, lots of windows, imaginative layouts, big, well-integrated kitchens, cute little dens and lanais, entrance foyers—all for well under $200,000.

This definition suggests that McMansions can be more about the luxurious interior appointments than the garish or ostentatious outside.While the exterior qualities tend to draw negative attention, would this interior flourishes get the same criticism? I would guess no for several reasons. The interior is not as obvious to outsiders and so it is harder to call it ostentatious. Also, there seems to be a higher level of tolerance for interior appointments: the Subzero refrigerator or Viking stove or 60″ LED TV seem more acceptable as consumer items that are still useful.

Additionally, this story hints at what is likely already a trend: smaller homes with luxury upgrades. A homebuyer no longer needs large amounts of money to buy the square footage typically associated with luxury. Although your home might be just over 1,300 square feet (the size of the model reference above), you too can feel like you live in a mansion.

A-Rod real estate tax flap tied to incentive to construct affordable housing

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It appears that a number of luxury housing owners in New York City, including Yankees’ star Alex Rodriguez, are getting a major real estate tax break. While this is creating a stir, there is more to this story: these luxury units are getting a tax break because the developers have promised to build affordable housing elsewhere in the city.

Rodriguez and all the residents of his posh high rise will get tax breaks for 10 years under the city’s 421A tax abatement program. Luxury developers get tax breaks in exchange for making sure affordable units get built elsewhere. Rodriguez is one of some 45,000 New Yorkers who have scored the tax break.

“I think it’s outrageous,” Lewton said.

When Rodriguez’s moves into his $6 million, five-bedroom penthouse his tax bill will be $1,150. In contrast, Stephen and Phyllis Franciosa pay $3,100 in taxes one their one-family home in the Pelham Bay section of the Bronx…

The councilman said the law needs to be changed because this year alone the program will cost the city $900 million in lost revenue.

A-Rod’s taxes are so low that if he paid the going rate his tax bill would be 50 times higher. He should get such a break when he faces the Red Sox pitching staff.

City officials claim the tax breaks on Rodriguez’ building helped build over 575 units of affordable housing in the Bronx.

This is not an uncommon tactic for communities to encourage affordable housing: grant some tax breaks in exchange for the builder or developer constructing some units of affordable housing. It is often a struggle to get developers and builders to construct affordable units on their own as profit margins are lower. So communities have searched for incentives that would still allow builders to make their money while also providing for the public good.

In the long run, will this story simply be commentary about how the rich and famous get to play by different rules (and New York loves to pick on A-Rod) or can there be a reasonable discussion about how cities go about promoting affordable housing? I am guessing that the first option will easily win out. Why can’t New York news organizations go to those 575 units of affordable housing in the Bronx and talk to the other people who benefited from this tax break?