FEATURED ARTICLE: The New Path Toward Tomorrow's Real Estate Profits
“The laws do not specifically mention race,” said the Washington Post in 2017, “but because African Americans and Latinos have on average far less wealth and income than white people, the laws do tend to drive people of color out and keep neighborhoods more uniform- ly white. That’s in keeping with the racist history of ‘snob zoning.’” Legacy size requirements mean that, by definition, smaller homes are automatically not up to code and therefore cannot be built. However, there are now efforts to overturn older standards, especial- ly in New Hampshire, California, and Florida. In New Hampshire, a law has been passed that allows proper- ty owners to construct accessory dwelling units (ADUs) up to 750 sq. ft. in size regardless of local zoning rules. In other words, the new law allows a second dwelling unit on a property with a traditional and conforming home. The new units can house family members, guests, or be used to provide short-term rental income. ADUs are becoming a big busi- ness. The National Association of Home Builders (NAHB) says that in the first quarter “one-fifth of remodelers undertook projects that created an ADU by converting an existing space over the past 12 months, and close to that percent- age created an ADU by building a new addition.” In too many cases we think of “real estate” as a single-family home on a quarter-acre lot. That’s too little home on too much land in our most desirable locations, one reason for soaring home prices in top metro areas. The New Hamp- shire law is likely the first of many that see traditional lots as un- derutilized.
potential, a zoning revolt could very likely gain traction. Maybe that unused space at the end of the driveway will become three storage units. Perhaps someone will create a list of private storage sites by ZIP codes. And so it goes. MONEY & THE NEWATTITUDE There has been a wholesale shift in the way Americans view money. Prior to the mortgage meltdown, many thought it was okay to borrow as much as possible. Prudence was for suckers. Financing with little down and even nothing down was all the rage. Instead of requiring an equity cushion, lenders were mak- ing loans where the initial debt was equal to more than the underlying value of the property. A property worth $300,000 could secure a $330,000 mortgage – or more. And why not? The presumption was that home prices always rose so there was little downside risk. If loan payments became overwhelm- ing, you could just sell the property. No harm, no foreclosure. The whole system was like a legalized Ponzi scheme. It relied on rising prices, tolerable monthly payments, and the abandonment of traditional lending standards to be sustained. It could not continue. As I told the Association of Real Estate License Law Officials in a 2006 speech, “looming in the back- ground is the potential for financial disaster that will impact home values nationwide, spur foreclosure rates to new highs and devalue insurance funds, pension holdings, and investor accounts. The value of your home, no matter how you financed, is at stake.” And it was. Today equity is something to be hoarded, not exploited.
In California, proposed legis- lation SB. 50 would have allowed additional construction on land currently limited to single-fami- ly homes. While SB. 50 has been killed for this year, the bill has gotten a lot of support and will likely be re-introduced next year. Perhaps more importantly, it has opened up the idea of greater den- sity in California’s most desirable metro cores. “At SB 50’s core,” said Mother Jones, “is ‘upzoning,’ overriding local zoning laws that prohibit high- er-density housing construction in residential areas. Currently, zoning requirements in 80 percent of Cali- fornia forbid building anything other than single-family residences (with some allowances for in-law units). SB 50 would open up some of those areas – particularly those near major transit hubs, job clusters, and good schools – to higher-density residential construction. Develop- ers would be allowed to build taller buildings with more units, with a requirement that a certain number must be rented below market rate.” Meanwhile, in Florida, prop- erty owners are now allowed to have vegetable gardens on their front lawns, something previously prohibited by city and county rules. This marks in a big change to the status quo and a blow to the mow- ing industry. Households will now be able to get fresh food and lawn care costs can be reduced. Looking ahead, one can imagine that neigh- borhood co-ops will emerge. Picture 500 households with small gardens that provide food for community kitchens and local restaurants. Where’s the opportunity? It’s just starting to emerge. In the same way that Airbnb and other short-term rental companies have shown that residential real estate has income
EQUITY RICH PROPERTIES (LTV 50 OR BELOW)
15,000,000
14,401,555
11,250,000
9,097,325
7,500,000
3,750,000
0
Figures from ATTOM Data Solutions show that we had 9.1 million equity rich property owners at the end of 2013 – “equity rich” meaning that equity represented at least 50% of a home’s fair market value. By the first quarter of this year, the number of equity rich households totaled 14.4 million, a 58% increase.
Senior home equity reached a record $7.14 trillion in the first quarter according to the National Reverse Mortgage Lenders Association. Equity is growing because home values in most markets are increasing. What isn’t growing is the use of reverse mortgages. HUD figures show there were 112,154 FHA Home Equity Conversion Mortgages (HECMs) originated in FY2008. A decade later, originations fell to 48,359.
“Approximately 10 million consumers are expected to originate a home equity line of credit (HELOC) between 2018 and 2022,” said TransUnion in 2017. “This would more than double the 4.8 million HELOCs originated in the previous five-year period (2012-2016).” What actually has happened is that the number of HELOC accounts has been declining since 2008.
12 think realty housing news report
september 2019 13
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