Falling home prices and the contraction of the housing industry are most often attributed to subprime lending — that is the loosening of lending standards and an intentional disregard for income documentation. These practices, combined with variable rate lending, led to a dramatic burst of the housing bubble.
While the subprime/variable rate caper kept the party going and is responsible for most of the agony associated with the price downturn, it is not the underlying cause of the fall of prices. And the end of subprime lending will not fix what is wrong with housing locally.
The deeper problem is the worsening ratio of housing prices in relation to income. It’s worth looking at some history here.
The ratio of median home prices to median incomes nationwide in the 1980-2000 period tended to be around 3.5 to 1, up from less than 3 to 1 in preceding decades. By 2005, it had increased to 4.75 to 1. Sonoma County’s 2006 prices were over 8 to 1 and current prices are still around 7 to 1.
By the 2003-2005 period, prices in many areas, including our region, had reached a level where there were too few first-time homebuyers with the financial resources to purchase a home.
The continued home price inflation was fueled by this new “subprime lending product” even though everyone, including state and federal government, had to ignore any serious consideration of its eventual outcome.
It would be easy if prices could simply fall and the housing business could just start up again but, unfortunately, the costs of housing development actually have caught up with the prices.
All the costs of producing homes have increased dramatically, including land, construction, public fees, environmental mitigation, design and permit processing.
Some costs are more elastic and can fall a bit easier than others, but a return to a ratio of 3.5 to 1 — which would require prices to be roughly half of the current level — seems unlikely.
Public policy could make a difference, but all policy options have painful effects:
* If we tried to reduce land costs by eliminating growth boundaries or by restricting land prices or dramatically increasing development densities, we’d meet with powerful and righteous opposition.
* An elimination or substantial reduction of impact fees would need to be replaced with new taxes somewhere.
* New public subsidies to assist first time homebuyers would need to be paid by taxes as well.
* A roll back of building regulations involving such things as earthquake safety, fire safety, storm water runoff, water quality, air quality, energy consumption, growth allocation, or rare species and habitat protection would all meet with compelling disagreements.
* Increased incomes would help, but in the near term, they would be associated with inflation, and if the inflation also affected home prices, the benefit of the higher incomes would be diminished.
Despite the difficulties of making changes in these areas, it is essential that we act. It’s time we think of housing not as a problem, but as a critical component of a healthy community.
After all, what’s the alternative? Seeing greater numbers of people confined to rental housing even though they have reliable incomes and the life skills which would make them successful homeowners? Further acceleration of the flight of young people from the region because opportunities are closed to them? Acceptance that we are no longer a society with widespread opportunities, and we’ll settle for a more rigid class structure?
It’s time to rethink housing opportunity. It’s time to bring down the cost of housing development and put more real financial resources in the hands of first-time buyers.
It’s time to see housing opportunity as the positive good that it is.
John Lowry is a Graton resident and the executive director of Burbank Housing. These comments are his own and do not represent any official positions taken by Burbank Housing.