Housing SummitIsland Housing Solutions

Research Performed

and

Initial Ideas Put Forward

A Report by the Orcas Research Grouphttp://orcasresearch.org/

June 4, 2005

The Underlying Problem

Expected increases in house price and mortgage rates producean increasing gap between salaries and affordability.

At current rates of appreciation, that house will cost $486,000 in 2011!

Who will qualify for today's $275,000 home in the future?

$50,000

$70,000

$90,000

$110,000

$130,000

$150,000

2005 2006 2007 2008 2009 2010 2011

Year

Expected Income

Qualifying Income

What do we seek?

• Solutions that assure that our working families can live in our communities.

• Solutions that are perpetually affordable.• Solutions that are consistent with our values

and culture: – our sense of self-sufficiency, – our respect for the environment, – our sense of community and – the self-actualizing power of home ownership.

Financing

Financing Affordable Housing for a Family of FourResearch Methodology -- Income Levels and Target Markets

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

$100,000 $200,000 $300,000 $400,000

House Value

Middle Income

Moderate Income

Low Income

Affordability Gap

Financing: Conventional Mortgages

Conventional Mortgages are now and will continue to be the primary form of financing.

Homeowner

Bank Seller

Financing only 6 years ago:

Mortgage rates were higher and income limits were lower, BUT houses cost a lot less than what they do today!

Financing Affordable Housing for a Family of Four1999 HUD Income Levels, Mortgage Rates and Target Home Prices

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

House Value

$62,202

$41,468

$49,243

$25,918

6%

7%

$100,000 $200,000 $300,000 $400,000

Financing: Baseline Figures

At today’s mortgage rates and house prices, few families can afford a home using only conventional mortgages.

Financing Affordable Housing for a Family of FourConventional Mortgages

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

House Value

6% 5%

$72,120

$48,080

$57,095

$30,050

Middle

Moderate

Low

$100,000 $200,000 $300,000 $400,000

Financing: Local Decisions

Recommendation #1: Form a local mortgage company.

Financing Affordable Housing for a Family of FourConventional Mortgage Qualification Decisions Made Locally

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

House Value

6%

$72,120

$48,080

$57,095

$30,050

Middle

Moderate

Low

$100,000 $200,000 $300,000 $400,000

Financing: Adding a Co-owner.Homeowner

Bank Seller

3rd PartyInvestor

•Secure Investment•Modest Return•Inflation Protection•Tax Deferred Gain•Homeowner Buyback

Recommendation #2: Encourage conservative 3rd party investments

Finance: Land Rich, Tax Poor

Recommendation #3: Make use of tax breaks

•Land as Investment•Avoid Property Tax•Tax-free Transfer•Modest Income•Inflation Protection•Depreciation Allowance•Tax Deferred Gain

Homeowner

Bank Builder

3rd PartyLand Owner

Financing: Joint OwnershipFinancing Affordable Housing for a Family of Four

Conventional Mortgages compared to Perpetual Shared Equity

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

House Value

$72,120

$57,095

Middle

Moderate

Low

$30,050

$48,080

6%

PSE 6%

PSE 5%

$100,000 $200,000 $300,000 $400,000

Financing: Land TrustsHomeowner

Bank Builder

Land Donor

Financing: Land Trusts

Recommendation #4: Take the cost of the land out of the equation.

Financing Affordable Housing for a Family of FourConventional Mortgages compared to Community Land Trust

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

House Value

6%

CLT 5%

CLT 6%

$72,120

$57,095

Middle

Moderate

Low

$30,050

$48,080

$100,000 $200,000 $300,000 $400,000

Financing: Bring solutions together

Recommendation #5: Combine financing approaches when they make sense.

Financing Affordable Housing for a Family of FourCombining Several Approaches to Financing

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

House Value

$72,120

$57,095

Middle

Moderate

Low

$30,050

$48,080

6%

$100,000 $200,000 $300,000 $400,000

How are we doing so far?

Life Cycle Costs: Energy Efficient Mortgages

Recommendation #6: Use sound conservation policy to reduce cost.

Fiberglass Batts

Soffit Vent

Baffles

Ridge Vent

Vapor Barrior

Structurally Insulated Panels

•1992 Model Energy Code•DoE Building America Projects

Note especially:

Life Cycle Costs: Maintenance

Recommendation #7: Build housing that will outlast the investment cycle.

Asphalt Shingles Metal Roofing

Life Cycle Costs: Financial ImpactFinancing Affordable Housing for a Family of Four

Considering Life Cycle Costs

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

$100,000 $200,000 $300,000 $400,000

House Value

$72,120

$57,095

Middle

Moderate

Low

$30,050

$48,080

6%

Reduce Risk that: 1) The homeowner can service the debt2) The value of the home is retained

Life Cycle Costs: Planning

http://www.bowenisland.info/

Aerial View Land Use Forest Resources

Water Resources Geology

•Time is money.•Reduce risk throughpublic awareness.

Changing How We Do Business: Time is money

• Modular Design• Focus on Quality• Get Subs Involved• Control Schedule• Control Costs• Eliminate Callbacks• Make a profit so that

you can do it again!

Changing How We Do Business

Recommendation #8: Remove risk from the entire process.

Financing Affordable Housing for a Family of FourImproving How We Do Business Buys Back at Least 5% in Cost

House Value

$72,120

$57,095

Middle

Moderate

Low

$30,050

$48,080

6%

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

$100,000 $200,000 $300,000 $400,000

Are you still with me?

The Housing Bank: Bringing it Together.

Recommendation #9: Pull organizations together around use of tools.

Projects Implemented by Community Teams

Mortgage Company

ContractorsCommunity Land Trusts

3rd Party Investors

Trades

Housing BankProvides "Capstone" Funding

Tool Box of Financial Products

Potential Sources of Funding

Private Public

Purchase

of Existing

Land & Homes

New

Construction

Education &

Facilitation

Project

Proposals $Policy Solicitations

Permanent Pool of Affordable Homes

Funding: Alternatives

Recommendation #10: There is no practical alternative except a transfer tax to fund moderate income homes.

• Federal, State, and Local Programs• Fee-Based Approaches

– Mitigation Fees – Aspen req. 60% - 70% affordable– Permitting Fees – Limit growth at the top– Planning Fees – Key West limit on transient rentals

• Tax-Based Approaches– Exemptions and Incentives – 3rd party investments– Real Estate Transfer Tax – Taxes demand side– Property Tax – Not likely except as last resort– Sales Tax – Aspen 0.045% sales tax, also not likely

• Other Approaches

What happens if we delay?

Financing Affordable Housing for a Family of FourTwo years from now...

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

$100,000 $200,000 $300,000 $400,000 $500,000

House Value

7%

$51,008

$76,512

$60,572

$76,512

$60,5726%

$31,880

Middle

Moderate

Low

Many households again out of luck!

Our 10 Recommendations:

1. Form a local mortgage company

2. Encourage conservative 3rd party investments

3. Make use of tax breaks for land rich, cash poor investors

4. Take the cost of land out of the equation

5. Combine financing approaches when they make sense

6. Use sound conservation policy to reduce life cycle cost.

7. Build housing that will outlast the investment cycle

8. Remove risk from the entire process

9. Pull organizations together around the use of tools

10. There is no practical alternative except a transfer tax to fund moderate income homes

Summary

• Identified the problem.

• Attributes of a solution.

• 10 Recommendations.

• Small window of opportunity.

• Now, we need to engage in a public dialog about these and hopefully other ways that we can work together.