Housing: Its Not Just For an Investment Anymore

Today the FDIC has apparently drawn up a list of banks that it believes are moving into dangerous territory towards a potential failure. Yesterday, in fact, The Columbian Bank & Trust Company of Topeka, Kansas was shut down. The remaining assets will go into a receivership arrangement. It is the ninth bank this year that has failed. The largest, of course, is IndyMac.

It has been a tough year. We have seen the end of Bear Stearns. We may see the end of Freddie and Fannie, as we currently know them. There may be more to come.

We know why it is happening. Mortgage loans are going bad. Lots of them.

This is why I think manufactured housing has a chance to break through, right now, in redefining its image among housing policy advocates.  That involves examining the underlying motive for our interventions in housing.

But lo, I do not want to dedicate this post to asserting who is at fault for this situation. That is a good question, but for another day. No, instead, I want to suggest that all of this is should provoke a reckoning about one of the assumptions that has lately been in vogue among housing policy practitioners. That assumption is that manufactured housing does not have a place for housing advocates, because it does not appreciate in value.

I have to go into some background first.

The background on how housing policy has changed over the years (very broadly)

For years, housing policy focused on improving minimum housing standards, especially for the poor. This goes back a long ways. In the United States, people like Jacob Riis exposed the dumbbell tenements for the unsafe living conditions that they imposed upon families in the early years of American industrialization. You could go back even further, of course…across the lake in the mid-19th century, Charles Dickens made the same conclusions about how unsafe housing posed a threat to sanitary living conditions.

“Rows of small houses, which may have cost for their construction eighty pounds a-piece, are built designedly and systematically with their backs to the marsh ditches; which, with one exception, are all stopped up at their outlet; and, in many parts of their course also, if there were an outlet, or if it could be said that they had any course at all. Two or three yards of clay pipe “drain” each house into the open cesspool under its back windows, when it does not happen that the house is so built as to overhang it.

In winter time every block becomes now and then an island, and you may hear a sick man, in an upper room, complain of water trickling down over his bed. Then the flood cleans the ditches, lifting all their filth into itself, and spreading it over the land. No wonder that the stench of the marsh in Hallsville and Canning Town of nights is horrible.” — Charles Dickens, 1857

Our nation’s priorities gradually shifted.

After World War II, housing policy shifted to focus on scale. We wanted to build enough homes for a generation of soldiers who came home from the War. Congress passed the Housing Act of 1948. Highways were built that connected suburbs, often built in the spirit of Levittown, to cities. Housing quality came to be associated with housing location — which more often than not, was co-incident with outside of the City.

In the 60s, the Great Society provoked an examination and re-emphasis on equity in access to housing. Urban areas and the federal government became builders of housing for low-income residents. The high rises of the Chicago Housing Authority are a symbolic example of this kind of building, but it is hardly unique.

This had some challenges that were perhaps, or perhaps not, unexpected. Warehousing poor people and clearing out sections of cities with eminent domain have created some long-standing resentments. Many American cities (Washington, Detroit, Los Angeles, Pittsburgh, Durham, and more) still carry a profound sense of injustice over decisions made during this era.

In the 80s and 90s, the government continued to be a funder of housing for LMI families, but it shifted to an emphasis on a decentralized approach through things like low-income housing tax credits. It was building upon some of the momentum generated by Section 8 (started in 1974). LIHTC’s have motivated private corporations to provide capital for housing through tax incentives. Some say its brilliant, others question the cost-efficiency.

The same focus on decentralization prompted calls for the use of vouchers. Some felt that our nation’s housing challenge was less about meeting adequate supply, and more about finding a way to make up for the lack of income among the poor to pay for housing.

A new focus on equity

What if the problem is not the supply of housing, but instead rooted in the ability of workers to get good jobs with enough wage power?  Is it logical to focus as much on savings for down payments, as it is to think about how to stimulate building?

In the last decade, studies about housing needs keep on telling us that the problem is really less about supply than it is about affordability. Or, to put it differently, its not just that there isn’t enough supply, although that may be true, but it is also that wages are too low for low-income people to afford the cost of paying for the cost of construction for new homes.

This assumption rings true if you think about how attractive innovations in financing proved to be.  The feature in common among interest only, 40 year, or adjustable rate mortgages is that they all gave people a way to get a lower monthly payment on their mortgage, at least in the initial period of home ownership.

So, In recent years, a set of strategies known as “asset policy” have focused on how to get low-income people into the practice of saving and investing.  Housing fits in with that goal.  Homeownership and its attendant equity became a criterion for housing policy. The poor need equity, it goes, in order to keep in step with the gains experienced by wealthier portions of society. Housing policy thus became appended to investment policy.

Most of the efforts by this group of thinkers focuses on savings. Its insightful and important.

Re-examining the situation after the mortgage crisis

It might be time to have a conversation about housing appreciation. Right now, that is not a given in many parts of the country.  Are we setting people up to buy too much house, in the name of potential gains that may never materialize?

Don’t get me started on how these expensive site built homes are going to do as investments when baby boomers try to sell them in 10 years.

When people talk about housing an investment for LMI people, I think they risk putting the cart before the horse. Housing is important because it is the locus of so many basic functions of human development. It is critical to health, to family stability, and to social interaction. These are often called the non-financial values of shelter. But, its the non-financial values that matter.

How does this relate to Manufactured Housing?

One of big criticisms of manufactured housing is that its residents have missed out on a chance to build equity.  “It doesn’t appreciate,” or, alternatively, XYZ state does not want to put its resources into depreciating assets,” are common statements that often kill efforts at introducing manufactured housing to the toolbox of affordable housing development.

The observation about the lack of gain in equity is largely true.  Manufactured housing has not conferred these kind of gains. In most places, the value of a manufactured home steadily depreciates. Now, if a person happens to own the land underneath the home, then the story is different. Then they experience a gain, all things being equal.

Did I mention that the same analysis is often made when people attempt to disaggregate the gains in site built homes between home value and land value? The homes lose value! The land goes up. Oh, and you have to replace stuff on homes.

Either way, people are seeing losses on their site built home investments. Which isn’t to say that they shouldn’t be in a home.

But the affordability of a manufactured home remains compelling. The problem of low wage earners needed shelter is easily answered by an industry that can produce a 1,200 square foot home for $30,000. Such a home can be transported to an area with low land prices. Even better, places with low land prices are unfortunately often in areas where there is little or no home construction workforce (rural areas), so manufactured housing producers are able to bring supply to a region that is otherwise lacking in it.

That goes back to the original goal of our industry, which is to bring more people into housing arrangements that sustain a higher quality of life.  The low cost of this housing is the key appeal. We  can help more people, all things being equal, and we can do it without putting so many of their assets at risk in an era of unstable housing values.