Originally posted on Rooflines the blog of the National Housing Institute, January 30, 2009.
CDCs Must Recognize Changing Conditions
It was announced this week that new home sales dropped 15 percent in December. This follows a year of similar news. Earlier in the week everyone was pleasantly surprised by sales of existing homes, but in general sales in that category have also been in decline since the summer of 2007. The collapse in the housing market has been precipitous. In fact, it is the worst such collapse since the Great Depression.
The blame for this collapse has been attributed to any number of factors. The Progressive Left has generally blamed Wall Street greed and predatory lending. The Right has implausibly blamed CRA, Fannie and Freddie. These accusations shed more heat than light on the issue.
At the most basic level, a recession is caused by a mismatch between the goods and services being provided and the goods and services that are in demand. The obvious culprit for this recession is a mismatch in housing. The specifics of this are unclear and localized, but in general this means that either the wrong housing is on the market or there is too much housing on the market.
The mismatch was primarily created by access to cheap credit. This is not inherently a bad thing, but it can be used in many ways. Banks and developers used cheap credit to get rich while shifting risk onto unwitting investors and homeowners. Community developers have also used cheap credit in order to build housing. The primary difference with community developers is that they are attempting to use housing production to develop community assets and secure community well-being rather than get rich.
That community developers have managed to tap this flood of credit for community benefit is something to be celebrated. Constructing the apparatus to do so and adapting CDCs to the purpose took considerable insight and work and it is an achievement that community developers are justifiably proud of. Nonetheless, it is essential that practitioners be very clear-eyed about how conditions have changed.
In building housing, community developers have been directing the flow of cheap credit. If we think of credit as water under pressure that enables the intensification of land use (buildings) and asset price growth, community developers are the hoses and funnels that direct the water to uses that benefit the community. They funnel it into specific lots and types of housing that will yield the most benefit for the community in question.
However, this whole process is still ultimately dependent upon the flow and the flow has dried up.
In the absence of this flow of cheap credit community developers need to understand how much their work needs to change. The funnels and hoses of community development now have much less pressure in them and, consequently, their ability to transform communities by directing the flow of credit is significantly reduced.
Second, the flow of credit has effectively acted like a rising tide to all asset prices, including housing values. Now that the flow is being turned off, all asset prices are declining. The impact of this decline on communities will be profound and the effects are already evident: mass foreclosure, collapsing equity, extensive budget crises and diminishing services, unemployment, rising crime, and distressed schools.
What is most worrying is that some community developers still believe the funnels and hoses have pressure in them and that whatever trickle comes out will make up for the receding tide of credit that has resulted in collapsing housing prices. To put this in perspective, the banking industry is now expected to have $2.4 trillion dollars in writedowns. Taxpayers have already forked over $800 billion to rebuild the equity of the banks and it isn’t nearly enough. It is this situation that is determining the flow of credit and housing prices. The idea that building a handful of new houses in a neighborhood can in any way stem this outflow is not so much wrong as delusional. It represents a complete failure to grasp the scope of the current crisis.
So what should community developers do?
- Community developers need to recognize that the hoses are dry. If they want to fill them up again it will take government intervention to do so. However, community developers should be cognizant that even if such intervention happens, housing markets have a long way to go before they are capable of significant appreciation. Nonetheless, doing things like weatherization or green upgrades to existing housing fits the community development mandate well and falls within the skill set of existing CDCs. Such efforts reduce monthly expenses and employ people as well as improve the underlying asset. It helps that it might be possible to secure state-financing for such projects.
- Community developers need to anticipate the consequences of this collapse in credit. For example, rental prices are likely to spike as foreclosed homeowners seek rental housing. There will be a rapid growth in demand for rental units. Community developers should work to provide such housing. This will entail a significant reorientation of both the nature and scope of current housing policy.
- If foreclosures are not halted, declining home prices are very likely to decline at least through 2011, which is when the last slug of ARM resets is due to occur. Community developers should work to support any possible mechanism for stopping foreclosure. They should also be looking for alternative ways of dealing with the balance sheet of families by reducing household debt and increasing household income and equity.
- Community developers need to recognize the extent of the mismatch between available housing and demand, not just by building new housing, but by getting rid of unwanted housing. Cities that see the writing on the wall are already spending money they don’t have on housing demolition because they correctly recognize that unoccupied housing is often a lot worse than an empty lot. However, there are also efforts to leverage housing deconstruction for community benefit. These models should be developed and extended.
- Community developers need to restock their portfolio of tools for intervention into community problems. For two decades now community developers have treated real estate market intervention as a catch-all mechanism for solving all community problems. This was never really true, but it prompted too many CDCs to have too singular a focus on housing production. CDCs need to redevelop their skill set so that they can be more adaptable to specific problems and less reliant on capital-intensive uses of land.