Affordable Housing Institute : US

[Previous Months In Review available here: Mar 09, Feb 09, Jan 09]

 

My blog isn’t the only source of periodic writing. 

 

So much prose, it surfaces in multiple outlets

 

A year into the LIHTC equity markets disruption, over at my for-profit consultancy we published an important piece, Policy Update 74, Rethinking and Re-engineering the LIHTC Value Chain (link in pdf)

 

In 2008, after more than two decades of uninterrupted and rising success, the LIHTC value chain – the sequence by which annual LIHTC awards turned into successful properties – broke.

 

In 2009, it needs fixing.

 

 

Evolving within and engineered for a benign and stable financial environment, the LIHTC value chain we knew was volatility-fragile. This was not an intrinsic condition, but an indulgence to which we succumbed over a period of a decade and a half. It is fixable, and it needs to be fixed – now.

 

If we fix it, we will have a delivery system robust enough to weather future ups and downs.  For demand to increase, whether stimulated by rising yields or program changes, investors will need to have confidence in the market mechanisms for delivering a pipeline of investments.

 

We recommend specific steps in §5.

 

Re-engineering value chains and capital stacks remains an ongoing theme of our global deleveraging, starting with Slicing through the capital stack:

 

What happens when a property’s capital stack is too high – when the debt substantially overtops its value?  The Law of Economic Gravity  dictates that such capitalization cannot be sustained for long, and as reported in the Boston Globe, in one of the least surprising developments of the global de-leveraging, on April Fool’s Eve, the overlevered John Hancock Building was foreclosed upon by its mezzanine lenders. 

 

Was that a personal guarantee John?

 

Just as a chain involves many links, a regulatory structure involves many planks, two of which have been hammered together, as profiled in Planks in the new regulatory platform: Part 1, the uptick rule and Part 2, putting the ‘fair’ in value:

 

Yesterday’s post highlighted the first of two new planks in a slowly emerging post-crunch global regulatory framework and platform, restoration of the uptick rule (as reported in the New York Times and as we recommended last December).  Today we look at another overdue change as part of the necessary improvements in regulatory structures after the financial catastrophe. 

 

Time to rethink the structure

 

2. Easing the mark-to-market rules

 

Over the last few years, the FASB had moved to require periodic revaluation of assets under a mark-to-market rule based on trading prices – a fine idea for securities that have a thick market with many similar items for sale and prices that rise and fall smoothly.  But, as I wrote in State of the Market 1 (September, 2007) and State of the Market 7: Banking on Value (April, 2008) that system collapses when the securities in question are thinly traded because they are unique, and when only some of the traders have to mark-to-market:

 

Enabling the revolution: FAS 157 and mark down, not up

Display or financial reporting only

 

Other good ideas were offered by Raghuram Rajan of the University of Chicago, as profiled in Capital markets regulation 2.0?:

 

Although catastrophe is a precondition to fundamental financial reform, one shouldn’t waste a good catastrophe, and now that we’ve had ours, let’s start on the reform.  A recent guest article in the Economist by Raghuram Rajan, former chief economist for the IMF, now a finance professor a U Chicago’s Booth school, “argues for a regulatory system that is immune to boom and bust,” with several ideas that have merit:

 

Rajan wants immunity

 

We can also examine the capital crunch from the micro to the macro:

 

The micro implies the macro, tovarisch

 

Starting with small complaints at the individual buyer level, as I skeptically reviewed in a post with which some commenters disagreed, I was dumb so give me my money back:

 

“I was dumb, so give me my money back.”

 

Okay, there’s more to these condo-buyers’ claims than simply that … but not much more. 

 

 

Insolvency being the mother of creative litigating, as shown in this New York Times article, numerous buyers’ attorneys (who, one presumes, are not being paid contingently) have been concocting interesting theories to justify not merely escaping from a purchase contract, but in fact having a collectible claim to recover the down payment:

 

Could the days of the iron-clad contract be numbered?

 

No, but that won’t stop the Times from speculating!

 

It used to be that once a buyer went to contract on an apartment, the terms of the deal were all but set in stone. Sales prices never budged, and if the buyer balked, the down payment went bye-bye.

 

Legally, it does – unless you can find a loophole.

 

If in financial panic, press here

 

But double-digit price declines and the lending drought have started to threaten this once near-inviolable pillar of New York real estate.

 

Block that metaphor – how does a drought violate a pillar?

 

Violating a pillar?

 

Rising one level, we have two snapshots of the municipal-budgeting challenges and their impact on property owner choice from the allegedly sacred Discreet charm of the bourgeois school:

 

Another benefit of a permanent professional rental sector – households with economic and demography mobility also need tenure and consumption mobility.

 

Meanwhile, landlocked owners — unable or unwilling to sell in a down market or to spend around $33,000 a year to send their child to private school — are panicking.

 

Thirty-three kay a year?

 

How much extra is a place in the right New York City school district worth? 

 

Using $33,000 annually as the cost of sending a child to private school, let’s assume that the home or condo owners are in the 25% effective tax bracket, so that $44,000 in pre-tax mortgage interest costs them the same as $33,000 after tax.  (Actual New Yorkers are almost certainly in higher tax brackets than that, particularly when state and local taxes are factored in to the Federal rates.)  Now, at an 8.0% cap rate/ Weighted Average Cost of Capital (which is higher than typical cap rates, but probably realistic in today’s credit-constrained environment), that means as much as $550,000 in house price differential per school-age child.

 

To the allegedly profane in Bitten in the NIMBY ass:

 

Every now and then, the little guys win one, and when they do, as in this day-in-the-life farce reported in a recent Washington Post article, the resulting splutters reveal some folks’ unbalanced view of rules – namely that they’re things I write and you obey. 

 

To many in Old Town Alexandria, the sex shop that opened recently on King Street is nothing short of scandalous, a historical desecration just blocks from the boyhood home of Robert E. Lee.

But to Michael Zarlenga, it’s justice.

 

“I’m not just the owner of Le Tache, I’m also …”

 

Zarlenga spent $350,000 on plans to expand his hunting and fishing store, the Trophy Room.  

 

However laudable may be our historic preservation statutes, their procedures are archaic and arbitrary, prone to abuse, and opaque to judicial or legislative review – much less by an ordinary citizen.

 

What do you mean global liquidity is affecting me?

 

Rising still one more level, Cities mean traffic jams:

 

Unfortunately for those of us in a hurry, just as slums are economically rational, so too are traffic jams, in two ways:

 

1.  Municipal budgeting.  Private spaces are revenue producing, in demand, and readily created incrementally; public spaces are capital-consuming and to be done properly require a strong and courageous municipal government.  For an example of massive failure of nerve, see how the mayor and city utterly botched the reinvention and reinhabitation of New New Orleans.

 

2. People’s earning power and choice.  Give people secure tenure and a minimum acceptable structure (the embryo house) and they will improve it, bit by bit, incrementally.  By contrast, they don’t spend money on public infrastructure, partly because they can’t (what they can afford goes into their private spaces first), partly because infrastructure involves network hookups and formalization – which some informal homeowners would prefer to defer.  That’s why slums may be defined, in municipal terms, as places where private investment has outrun public infrastructure.

 

If there’s one image I have of peri-urban Africa, it’s of people walking.  In Los Angeles, no one walks; in Africa, many people walk, most of them black and poor.  (When Nancy and I were in Johannesburg some years back, she who likes exercise would often walk from our hotel or B&B to her destination, often the world-class zoo.  She used to comment that the only people she ever saw walking were black, and that many of them would warn her to be careful.)

Nairobi: four miles to work, four miles home: 90 minutes each way

 

Transportation and affordable housing are deeply interconnected.

 

Okay, maybe on-street parking

 

[Continued tomorrow in Part 2.]

 

Send post as PDF to