Location Efficiency Study

This research analyzed a sample of 40,000 mortgages and found the higher the rate of vehicle ownership, the greater the probability of mortgage default. The authors conclude, "location efficiency matters."

Abstract:

Using a sample of over 40,000 mortgages in Chicago, Jacksonville, and San Francisco, we model the probability of mortgage default based on differences in location efficiency. We used two proxy variables for location efficiency: 1) vehicles per household scaled by income and 2) Walk Score. We find that default probability increases with the number of vehicles owned after controlling for income. Further, we find that default probability decreases with higher Walk Scores in high income areas but increases with higher Walk Scores in low income areas. These results suggest that some degree of greater mortgage underwriting flexibility could be provided to assist households with the purchase of location efficient homes, without increasing mortgage default. They also support the notion that government policies around land use, zoning, infrastructure, and transportation could have significant impacts on
mortgage default rates.

Excerpts from the Conclusion:

Our findings indicate that location efficiency matters. Taken together, our results have significant policy implications with respect to lending practices, land use, and transportation planning.

We test our hypotheses regarding vehicle ownership and mortgage default and find that the probability of default does increase with vehicle ownership. Moreover, the impact of location efficiency (as measured by income-normalized vehicle ownership) on default is nontrivial. ... The results strongly suggest that researchers developing and refining automated mortgage underwriting models should seek to test the impact of location efficiency
variables within their models.

It is interesting to note that there is an additional possible explanation for why mortgages for location-efficient homes perform better, beyond the household budgetary savings of lower vehicle ownership. This explanation is that location efficient homes might hold their value better than other homes, and therefore better enable borrowers to avoid foreclosure through alternative measures (such as selling or refinancing the home) if they fall behind on payments or need to manage payment shock from an adjustable rate mortgage.

... our results provide support for policies supporting smart growth development and urban revitalization. That is, designing neighborhoods in such a way that reduces transportation needs is beneficial to borrowers as well as the environment.

Location Efficiency and Mortgage Default (PDF File)
Authors: Stephanie Y. Rauterkus, Grant I. Thrall, and Eric Hangen
Journal of Sustainable Real Estate Vol. 2, No. 1, 2010

Home Value Recovery May Take Decades

...As painful as the decline has been, history suggests home values still may have a long way to drop and may take decades to return to the heights of 2½ years ago.

... values nationally have tumbled an average of 19% from their peak. As bad as that is, prices would need to fall as least 17% more to reach their traditional relationship to household income...

...the typical existing home was worth roughly the same in 2000 as it was in 1950, after adjusting for inflation,...From 2002 to 2006, houses went from being a tortoise to a hare in the investment world...

...Home values floated at about three times average household income from 1950 to 2000. In 2006, the average household income was $66,500. Under the traditional model, home prices should have been about $200,000. Instead, the typical home sold for $301,000.

Read the whole article here.

Foreclosed Homes Shelter Homeless

Sheriff Jones in Butler County has stopped evictions, and then this interesting article in USA Today:

...a homeless advocate, runs a controversial program in Miami that helps families squat in homes vacated because of bank foreclosures. Using Internet listings and a team of volunteers, Rameau and his Take Back the Land foundation matches homeless families with empty homes.

...he doesn't choose homeless residents with severe problems. Families selected for squatting are required to pay to turn on the electricity and water, he says. The family lives in the house until they save enough to move into another home or until the owners show up with police and force them out — whichever comes first, he says.
....
Advocates in Cleveland are trying to use city money to buy abandoned homes and rent them to the homeless...

5 Cities React Against Vacanct Structures

Cleveland, Buffalo, Carbondale, Flagstaff, Los Angeles:

According to federal data, almost $1.6 billion in subprime loans were originated in 2005 in Cuyahoga County, where Cleveland is located. As rates rose, homeowners couldn’t pay, and foreclosures were common. More than 15,000 foreclosures were filed in the county last year.

To mitigate the effects, the city demolished about 800 houses last year, with a goal of 1,000 more in 2008. That will create about 120 acres of vacant land, but mostly in small parcels dispersed throughout the city that aren’t conducive for reuse by developers.

The redevelopment of these properties will be coordinated by the Connecting Cleveland 2020 Citywide Plan, which outlines the strategic building of strong, vibrant, and diverse neighborhoods. On the industrial side, the city created an Industrial-Commercial Land Bank in 2005 to entice developers to redevelop the vast number of abandoned properties for a variety of uses.

Foreclosures Result in Affordable Homes

Ineresting take, from the right- leaning blogger Volokh on the mortgage crisis:

...the government has for too long artificially propped up housing prices through restrictive zoning laws, government subsidization of dubious mortgages and other such measures. Left-liberals who have historically complained (with some justice) about the shortage of affordable low-income housing in these cities should be particularly enthusiastic about the recent decline in real estate prices. At the very least, the resulting benefit to lower-income families gives liberals - and the rest of us - additional reason to be skeptical about the desirability of government-subsidized efforts to prop up real estate prices by guaranteeing mortgages, bailing out lenders and borrowers, and other similar measures that seem to be politically popular at the moment. If we genuinely want to help the less affluent, we should let this market correction run its course.

Shrubbery not Suburbanites

"We should have a countywide goal to tear down two houses for every new home," said Paul Oyaski, Cuyahoga County's development director.

Shaker Heights' move runs counter to urban planning a decade ago, when officials urged development to boost property taxes, income taxes and business traffic. Now, Shaker Heights is at the forefront of a national movement to keep the cleared lots populated with shrubbery, not suburbanites.

-Foster's Daily Democrat, Portland, Maine

Model Looking to Develop Foreclosed Buildings

Model Management has become one of the largest property owners in Over-the-Rhine, and I am always wondering what they are up to. This article, in a national trade magazine is about the foreclosure problem in the Midwest and how some developers like Model are trying to finance the rehab of these foreclosed properties. They fund these projects by syndicating Low Income Housing Tax Credits (LIHTC) and bundle them with Historic Tax Credits. I have never exactly understood how this funding is bundled and syndicated, but it is a mechanism that gets lots of historic buildings rehabbed into low-income housing.

I left the paragraphs in at the bottom about Cleveland, because I was shocked by the huge numbers of foreclosures and abandonned buildings:

Midwest HFAs Focus on Foreclosures
AFFORDABLE HOUSING FINANCE • May 2008
...
In March, The Model Group finished construction on Magnolia Heights, an 18-building, 98-unit scattered site redevelopment in Cincinnati’s Over-the-Rhine neighborhood. All units were Sec. 8 properties, and the work was done in conjunction with 42 market-rate condominiums that The Model Group was renovating in the same neighborhood.

“As the neighborhood started to gentrify we saw that the affordable housing stock was at risk,” Smith said. “We were able to use LIHTCs as an economic stimulus tool for the neighborhood and partner with some local community development corporations (3CDC) to do market-rate condos at the same time.”

Magnolia Heights was financed with $10 million in LIHTC equity and $2.3 million in historic tax credits. ...

The Model Group owned all 98 units in Magnolia Heights. But a scattered-site development of foreclosed properties is a more challenging proposition. Developers would need to negotiate with many different lenders to get the units out of foreclosure— basically developing one unit at a time—and some would likely have to be bought outright.

“The best thing would be if the city were to foreclose on those properties and somehow get them back through a landbank process,” said Jack Kukura, OCCH’s chief of acquisitions. Such a land bank, a fund which the city or county could use to buy foreclosed properties, could make it easier for developers to execute a scattered- site redevelopment of abandoned homes.

Cleveland:

Ground zero for Ohio’s foreclosure problems is Cuyahoga County, where county Treasurer Jim Rokakis is working on a different kind of land-bank proposal. Cuyahoga County had about 15,500 foreclosure filings in 2007, up from around 13,500 the year before. The county is on track to see another 15,000-plus foreclosure filings again in 2008. And the foreclosure crisis has spread out to Cleveland suburbs like Euclid and Cleveland Heights, which contain about 1,200 and 900 foreclosed vacant properties, respectively.

Until recently, Ohio was one of only two states ... that had no regulatory oversight of the appraisal industry...

Cuyahoga County is hoping to stop the blight by creating a local land bank that would allow it to purchase vacant properties for demolition. “We’ve got 10,000 properties that need to be demolished,” Rokakis said. “They’ve been gutted, stripped, and vandalized, and we have to get them down.”

Charlotte Foreclosure Map

 

I have not seen a similar map for Cincinnati, but the reverse doughnut effect is clear on this map of Charlotte North Carolina. The map is from a story in the Charlotte Observer Sunday. I assume it would be similar map in Cincy.

The very center of many cities are strengthening, but the so-called first suburbs are now the ones showing signs of blight.

Update: Here is the link to the article.