Jonathan Fox is a real estate agent with Coldwell Banker Residential Brokerage Dupont/Logan.
Recently, I’ve had some extended discussions on the troubling issue of scarce affordable housing and how that has hurt a generation of would-be first-time home buyers (specifically millennials) in the Washington area.
One session of clicking around online and you know that housing in this area will cost you more than you feel comfortable spending — unless you have a trust fund, equity from a previous property (meaning you are not a first-time home buyer) or somehow find a way to get ahead of crushing debt and cost of living in time to save for a down payment before age 39.
Regardless, the housing here is pricey, and with a generation of potential first-time buyers struggling to decide where to live and how much to spend on housing, the elusive goal of fiscal responsibility can seem unfairly difficult to obtain.
Here are a few suggestions on how to make housing more affordable in this area:
• Developers should build more rent-to-own communities where rents paid will be applied toward future down payments. You don’t really see rent-to-own (RTO) projects anymore, and for good reason. Honestly, under the current RTO model, really no one wins, and what I am proposing could work fundamentally different than it has in the past.
The current RTO model exists to bail out overpriced developers at people’s expense.
RTO projects are often overpriced properties that developers bought high and the market went down (or their cost went up), and could no longer afford to sell their units at current market prices. Rather than taking a loss or risking a complete community failure and bankruptcy, they lure a demographic of hopeful home buyers with the promise of home ownership by allowing them to save for a down payment through rent. The problem is that once you sign the “rental” portion of the agreement, you are also locked in at the artificially higher sales price. If you get cold feet at the end of your lease term and decide the unit is no longer worth the contracted price, you walk away with nothing.
Under my proposed RTO concept, people would enter into contracts on an apartment as renters for a period of, let’s say, two years, or some preestablished period of time (probably calculated by the amount of time it would take to save for a 5 to 10 percent conventional loan from the rent). The tenants will either purchase their place at the end of the two years or be forced to move and allow someone else the opportunity to enter into the program, and the two years of collected rent would be given back to the government as an “interest” payment for their investment.
The developers and the project as a whole would be 100 percent financed by the city, state, county or whatever jurisdiction the community falls under. The catch here is that the first two years of capital would be interest-free to the developers, meaning the money they were forced to borrow to construct and run the community would be supplied by the local government interest free. So the developers would use and lose nothing during the two-year rental period.
At the end of the two years, the renters would get to make a purchase with the down payment they now have (courtesy of the rent they paid), the developers would get to finally make their money through a normal sale, and the government would be made whole by the developer who has just bought them out of the project. Everyone would win.
• States, counties and cities should commit underused land for affordable housing. They all own land, and not the kind that makes Washington such a beautiful town. I’m talking cesspools of wasted space and garbage-filled parking lots, unavailable to developers or people. This land is basically sitting there and costing cities and counties millions of dollars to maintain, not including the lost revenue from property taxes they could be collecting if someone lived there.
It’s a classic case of uncalculated opportunity costs, and it’s costing taxpayers. Let’s use some of that land and build affordable apartments and single-family homes designated for people who earn under a certain amount and would otherwise qualify for a mortgage if they had a reasonable down payment.
Give them a maximum three-year lease so that they have an opportunity to save while paying the reduced rent. Also attach a few strings to ensure everyone is on the same page. If you are able to reduce people’s total housing costs, allowing them to save for a down payment and to work toward qualifying for a mortgage, the result would be many more first–time home buyers in Washington. And thanks to the city’s unlocking plots of unused land, we now have new space to accommodate such a program.
Some of you may be thinking that I am referring to housing projects, or perhaps something potentially discriminatory. I am not, nor is this idea discriminatory. Rather, it is there to help people get ahead and responsibly inject first-time home buyers back into the markets. There are many programs like this on a small scale in Fairfax and Montgomery counties that help people save housing costs while luring more first-time buyers to the market place.
• We should set aside housing for public servants. We all have a vested interest in taking better care of the people who work in positions of public service. I am talking teachers, fire fighters, police officers, hospital workers and the many other public servants we have living in the area. There should be a housing program courtesy of the state, which subsidizes their housing payments somewhat.
By governments investing in this, you will get more people living closer to work, spending less time commuting and more time living, and subsequently investing in their communities. This supplies a lot of auxiliary benefits (such as less commuting traffic) but mainly would allow those who earn a modest salary, because of their public service, to thrive in the area and afford to buy property.
I know a lot of police officers and teachers who do not even live in the county or city they work in because compensation plans cannot keep up with the growing costs of living (mainly housing), or really even come close. Bring them back into the fold, and you’ve just given the entire area an upgrade in many ways and supplied a huge wave of buyers living and working in the same place.
• Give first-time home buyers moving to areas where the median home prices are above a certain amount (we’ll say $400,000) the ability to secure a traditional 30-year loan, but at a reduced interest rate for the first five years. Two possible stipulations to mitigate the risk of individuals taking advantage of this benefit would be to deed the property with a no-sale clause for the first 10 years (preventing home flippers) and keeping the property owner-occupied (otherwise the loan would adjust to normal market rates).
The majority of a mortgage payment during the first 15 years of a traditional 30-year loan is interest, which is great because it allows our banking and borrowing system to function properly. But that said, we can do a lot to help first-time buyers if the government helps on the interest portion of the payment for the first few years.
This will help younger people enter the housing market sooner, allowing them to begin sharing the wonderful aspects of home ownership, such as building equity.
Before you start feeling terrible for the government, realize that it gets a huge chunk of cash called “transfer and recordation taxes” at settlement (the day someone transfers a title to the new buyer), plus an average of $3,000 to $8,000 per year in property taxes, and a lot of other tax opportunities each day because someone is now living, earning and investing in their new spot.
It is advantageous for a municipality to have more people living in the jurisdiction, so an approach like this helps.
I also realize there are a few arguments against the government being involved in this transaction on any level. To that, I would say the government is already very much involved in housing on many levels. Also, subsidizing is happening on a much larger scale across a broad range of industries, so the government’s helping an affordable housing crisis is not without tremendous precedent.
We all have tremendous stake in home ownership on many economic and social levels.
Catch up with Fox’s previous column:
Jonathan Fox can be reached at Jonathan.Fox@cbmove.com.