Mary Owens: The way forward for Nevada County, continued
June 4, 2017
The Nevada County Economic Resource Council (ERC) recently held its annual summit. One of the guest speakers, Dr. Christopher Thornberg, a well-known national economist, stated the obvious about what is needed to create growth once again in rural American towns.
"You need to build houses. Build houses and your economy will grow."
But what he also acknowledged later in his presentation is the real core of the current housing problem here and elsewhere in rural America. It's the issue I mentioned in last month's article and indicated I would be further detailing in the next several months. The biggest constraint directly related to the moderate priced housing shortage is the lack of available developer financing caused by a federal regulatory bill that has gone way too far: Dodd Frank.
This law desperately needs to be amended. It was passed in 2010 and has been killing the ability of local housing developers to get the funds they need to build moderate priced housing in rural America. If you are a moderate-sized developer and want to develop a subdivision of a moderate size and price for a small town, the financial challenges are overwhelming. Just ask a banker if they are able to lend money to a local developer to build another housing neighborhood like Morgan Ranch. Their answer would be "highly unlikely" and that type of development is exactly what we need to get the moderate priced housing shortage solved in Nevada County.
Dr. Thornberg's theme is one the ERC has been shouting from the rooftops for quite some time. In order to address and understand our local need, a housing inventory study was performed by the ERC, including the ever so important future vacant lot availability. You can't build houses unless you have the land resources available to do so.
Nevada County is like a lot of rural communities; the availability of land with approved subdivisions already in place is adequate. Unfortunately, no matter how extreme the housing shortage has become; no one, so far, is able to start those projects unless they are an unusually large development company that does not need financing from local or regional banks. Small rural areas are not the first choice for large developers. Large or publicly traded housing developers are building in urban areas, where water and sewer infrastructures are cheaper to install and lots are usually flat.
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If you are to drive through Roseville and Rocklin, you will see the urbanization that has continued to occur while rural towns have come to almost a standstill in moderate home building. This shortage of moderate homes in rural areas is not limited to California. It is a national problem. All you have to do is see how few structures have been built in this decade starting in 2010.
To truly understand this building shortage, you also have to understand these low construction numbers are occurring when the younger population entering household formation is at an all-time high. The Baby Boomers created the last huge housing need when they started their household formation in the seventies. They were about 75 million in size. The Baby Boomers were buying their first homes or upgrading their houses until about 1998. The current generation that started household formation in 2010 is the Millennials. They are over 83 million in size. They are behind the normal trend of buying a house because of a moderate housing shortage and another financing problem also caused by Dodd Frank that I will talk about next month.
But the real slow down in all construction is best understood when we examine how much our population has grown. In 1970, the U.S. population was estimated to be about 203 million. Our estimated population now is 326 million.
Wonder why the median prices of houses are going up so quickly? Lack of housing construction is the answer.
The Dodd Frank bill dramatically limited how small and regional banks can lend money. This limitation hit local and regional real estate developers unusually hard. But that was not the only impact on real estate developers. Dodd Frank also dramatically increased the qualification standards for home loans. Without question, the lending standards that were allowed to exist for the five years prior to the housing bubble had to be improved. But Dodd Frank went too far.
There is a joke circulating about the current and past qualification rules. If you applied for a home loan between 2002 and 2009, you went to the local nurse to have your pulse and breathing checked. If you possessed both, the nurse wrote a note to your lender indicating you're qualified for a home loan. Starting in 2010, your lender had a newer, even shorter application process. He asked one simple question, "Do you need a home loan to buy a house?" Oh, I am sorry. If your answer is "yes" you no longer qualify.
If the loan qualification standards that were in place for decades prior to the housing crisis were in place today, millions of Millennials would be able to purchase a home that would not currently qualify for a home loan. Dodd Frank has handed moderate priced housing a double blow. Developers cannot get access to the funds they need and first time home buying are strapped to qualify in a housing market that continues to climb in both housing and rental prices. More home building is clearly the answer.
Next month I will continue this story as we explore the current loan qualification standards for home buyers. The next several months following, I will be exploring potential options local governments can pursue to assist in getting roofs up for our moderate priced home buyers in Nevada County.
Lack of moderate priced housing appears to have an easy answer on the surface. But as we have learned, nothing is as simple as it seems. Otherwise, the problem would not continue to exist.
Mary Owens, CPA, MS, Principal, President of Investments, Branch Manager RJFS with Owens Estate and Wealth Strategies Group, located at 426 Sutton Way Suite 110 Grass Valley, CA 95945 | (530) 272-7500. The information herein has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Mary Owens and not necessarily those of RJFS or Raymond James. Investment advisory services offered through Raymond James Financial Services Advisors, Inc. Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC. Owens Estate and Wealth Strategies Group is not a registered broker/dealer and is independent of Raymond James Financial Services.
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