By Katherine Salant
Friday, December 10, 2010; 9:23 AM
How can homeownership be a more sustainable proposition for middle- and low-income households? When I posed this question to former Housing and Urban Development secretary Henry G. Cisneros, his response was immediate and surprising.
In a marked departure from other housing experts, he did not discuss mortgages, foreclosures, adjustable-rate mortgages or any other financial factors. Instead, his focus was on construction quality.
"The number one thing for me is the quality of construction because I have seen so many things go south," said Cisneros, who has advocated for affordable housing for more than three decades. "When construction is poor and there are obvious signs of deterioration after 30 years or less, it is not just a problem for the individual homeowner, it impacts an entire neighborhood and an entire community. We are going to be building so much in the future, and we need to get it right."
Cisneros is now executive chairman of City View, an investment firm based in San Antonio and Los Angeles that focuses on urban real estate and metropolitan infrastructure.
"The quality issue has been a serious problem in the home-building industry in the mid- and low price range for a long time," he said. "It was exacerbated in the boom because we outstretched the capabilities of the workforce. During the boom, buyers of new houses showed me things like wall cavities filled with trash and the lunch leftovers of workers. It speaks volumes about the supervision of the workforce and the standards of workmanship."
He cited problems dating to his days as mayor of San Antonio during the 1980s. "We had to buy back houses because poor ventilation was making the owners sick from mold and bad foundations caused houses to crack down the middle," Cisneros said.New business model
When asked for solutions, Cisneros offered several suggestions. Enacting construction standards at the local level could bring some relief, but this will be a slow and arduous process that builders are not likely to embrace and might even actively oppose, he said. In his home state of Texas, for example, Cisneros said, "the home-building industry has planted itself in every regulatory agency that oversees home building."
Cisneros said that an effort spearheaded by the industry could have more wide-ranging impact and he called upon the industry, and its trade association, the National Association of Home Builders, to address the problem by developing national standards for construction quality.
Some problems could be avoided if buyers were more knowledgeable about the process, Cisneros added. He would put a spotlight on the home builders' business model with its emphasis on first-time costs, which affect a sale price, instead of the lifetime costs, which can be significantly higher if cheaper, less-durable materials were used when the home was built. When the replacement costs for lesser-quality windows and roofing, for example, are factored in, buyers will be paying much more for the house than the sale price and the monthly mortgage payments would indicate, Cisneros said.
Educating home buyers on these points is crucial, Cisneros said. If they understood the importance of higher quality for the items that affect the long-term costs of homeownership and demanded these things, builders would have to respond.
Another way to improve the quality of home building, Cisneros suggested, would be for mortgage lenders to raise their requirements. This would bring change, but at a snail's pace. A faster route would be through Fannie Mae and Freddie Mac. If the two quasi-government corporations that purchase home mortgages for the secondary market set quality standards that loan originators must meet, Cisneros said, that would have an immediate, nationwide effect.
Cisneros also emphasized the need for educating buyers about the purchase itself. "The sales contract can be so complex that even a lawyer with legal sophistication will not always catch things," he said.
Some clauses in a typical production-builder sales contract were things that Cisneros himself did not know. Although he was a board member of KB Homes for three years, he said that he had never seen a new-home sales contract and was not aware of the red flag that appears on the first line of most such documents: the name of the company building the house. It will not be the name that is plastered all over the building site and advertising materials. Instead, the builder will be listed as something like "Little Pine Tree LLC," a "corporate veil" employed by many corporations and manufacturers to protect their assets should a disgruntled buyer decide to sue. But, Cisneros said, "if the house is really as great as the company maintains, they should be willing to put their name on the contract."
It is understandable that a builder would want protection from endless nitpicky complaints about nail pops and barely visible hairline cracks in walls caused by routine ground settlement. But, Cisneros emphasized, the buyer also needs protection when major problems occur that render a house unsellable and cause its value to plummet to zero, even if the local health department says it is still safe to occupy. This situation can cause headaches for a builder, but it's catastrophic for the home owner. Each side has legitimate gripes, but the contract should be much more balanced, Cisneros said.
The sales contract clauses concerning the builder's preferred lender is another example of the need for "transparency and clear explanations" so that the buyer understands the consequences of the choices being offered, Cisneros said.
A builder typically offers a buyer numerous inducements to use his preferred lender. These can include "free" carpet upgrades, deck or granite countertops. It sounds good, but buyers who choose this option often end up paying for these goodies in the end. That's because the builder's lender is not obliged to give the buyer a competitive interest rate on the mortgage at the time of closing, often many months down the road when construction is complete. For the life of the loan, the buyers may find themselves saddled with higher monthly payments than they would have had if they had forgone the granite or the deck and shopped around for a mortgage with better terms.
Ever the optimist, Cisneros ended on an upbeat note. Although many decry the current state of the housing market, he said, "the current slowdown in the housing industry presents a great opportunity to address these issues and avoid the mistakes of the past."