Lessons for Helping Distressed Homeowners - and Avoiding Distress in the Future

by Jen Molinsky
Research Associate

In April of this year, the Joint Center convened a symposium entitled Homeownership Built to Last: Lessons from the Housing Crisis on Sustaining Homeownership for Low-Income and Minority Families. With the financial, psychological, and social costs of the recent housing crisis fresh in mind, the symposium gathered policymakers, industry leaders, housing advocates, and scholars to examine how the nation can move forward to ensure safer homeownership opportunities for low-income and minority families, many of whom suffered disproportionately in the foreclosure crisis. (In an earlier blog, Sarah Rosen Wartell, president of the Urban Institute, presented thoughts she delivered in a keynote address at the event.)

The symposium featured new research and analysis from 15 leading scholars and practitioners on the value of homeownership post-housing crisis; consumers’ tenure and housing choices; ways to balance affordability, access, and risk; the government’s role in the evolving mortgage market; and strategies to help homebuyers sustain ownership over the long term. We have begun posting these papers to the Joint Center for Housing Studies website, starting with three on the theme of sustaining homeownership. In their papers, Mark Cole and Patricia McCoy each explore lessons learned in the housing crisis about helping distressed owners, while Jeffrey Lubell examines shared equity homeownership as a potentially safer and more cost-effective form of homeownership, one that can help individuals sustain homeownership and help communities maintain affordability.

In her paper, Patricia McCoy (Connecticut Mutual Professor of Law and Director of the Insurance Law Center at the University of Connecticut School of Law) draws lessons from a thorough critique of servicer and government foreclosure prevention efforts in the recent crisis. Among her findings, loan modifications that do not lower monthly payments often failed: early in the crisis, the majority of loan workouts increased owners’ monthly payments, a serious difficulty for those whose distress stemmed from disruptions to income such as job loss. In contrast, decreasing monthly payments through interest rate reductions, lengthening of loan terms, or – most effectively – principal reductions, have been shown to lower the chances of redefault. Going forward, McCoy emphasizes the need to rethink servicer incentives; as she notes, “Today, servicers are overpaid for servicing current loans and underpaid for processing delinquent loans.” And loan modifications should not be delayed: McCoy notes that redefaults occur less frequently when homeowners receive loan modifications earlier.

In his paper, Mark Cole also emphasizes the importance of early intervention to help distressed homeowners, in his case through counseling. Cole (former Executive Vice President and COO of CredAbility and now President of Critical Mass Solutions) offers insights learned from CredAbility’s work engaging and counseling distressed homeowners in early intervention and post loan modification support programs. Data gathered from 1.6 million first counseling sessions reveals how the profile of distressed owners changed over the 2007 to 2012 period: by 2012, the average owner seeking counseling was older (51 instead of 44), more likely to be middle class, and less likely to be a minority. Drivers of distress evolved too: at the start of the subprime mortgage crisis, overspending and over-obligation were the top reasons for mortgage delinquency and default, but as the recession took hold, reduction in income became a more important factor. CredAbility is also observing that financial troubles are increasingly stemming from multiple issues rather than single problems. Emphasizing that homeowner distress often originates from more than housing debt, the average CredAbility client over 2007 to 2012 had a 32.5 percent monthly housing cost-to-income ratio but a 54.1 percent total monthly debt payments-to-income ratio. Cole argues that one-time financial transactions such as loan modifications are not likely to change habits by themselves; rather, long-term contact with owners through counseling that takes into account households’ comprehensive financial picture is needed.

Finally, in his paper, Jeffrey Lubell urges us to think beyond the binary “own/rent” decision by considering “shared equity” options that fall somewhere in the middle of the continuum, such as community land trusts, limited equity cooperatives, deed restrictions, and shared appreciation loans to limit owners’ likelihood of becoming distressed. Not only can shared equity approaches limit downside risk, their loans often perform better: Lubell (former Executive Director of the Center for Housing Policy and current Director of Housing Initiatives at Abt Associates) cites data finding that less than half a percent of large sample of Community Land Trust homes were in foreclosure in 2011, while the rate for the broader market was 4.63 percent. In addition, most shared equity approaches involve long-term affordability provisions that can help successive owners. While they require a subsidy and implementation challenges are significant, Lubell estimates that shared equity could assist from two to five times as many households with the same amount of money as current grant programs.

Taken together, the three papers make the case for active, early engagement with distressed owners, with solutions that address their entire financial picture and make sense given the circumstances that have led to delinquency or default. Counseling can play a critical role, as the intervention of a trusted third party who knows the system can go far toward helping owners confront and resolve delinquencies. In the future, shared equity forms of ownership that offer more support and help contain downside risk can offer new opportunities for more affordable and sustainable homeownership.

Remodeling Gains Expected to Continue Into 2014

by Abbe Will
Research Analyst

In our July 16 blog, Census Bureau Remodeling Data Revisions Out of Sync with Other Market Indicators, we indicated that there would not be a Leading Indicator of Remodeling Activity (LIRA) this quarter due to unusually volatile revisions to home improvement spending data collected by the U.S. Census Bureau.  On July 18, 2013, however, Census announced corrections to their annual revisions and today we are releasing our LIRA. 

General strengthening in the housing market over the past 18 months is translating into increased spending on home improvements. Remodeling contractors have been reporting improving market conditions for the past four quarters, and are seeing strength in future market indicators.  Spending trends have been on a solid upward slope, with the LIRA projecting continued strengthening of the market through the end of this year and into the first quarter of 2014.

Homeowners are more comfortable investing in their homes right now. Consumer confidence scores are back to pre-recession levels, and since recent homebuyers are traditionally the most active in the home improvement market, the growth in sales of existing homes is providing more opportunities for these improvement projects.

Yet, with housing starts leveling off in the second quarter and financing costs beginning to edge up, we may be seeing the beginning of more measured growth in the residential markets. Given normal timing patterns, this suggests that the pace of growth for home improvement spending should begin to moderate as we move into 2014.

(Click chart to enlarge)

For more information about the LIRA, including how it is calculated, visit the Joint Center website.

Climate Change and Indoor Air Quality: Lessons from the Energy Crisis of the 1970s

by Mariel Wolfson
Meyer Fellow

Current discussions of climate change do not often focus on housing. Unless large numbers of homes are destroyed or damaged by extreme weather events such as hurricanes, tornadoes, or wildfires, we rarely scrutinize the effects of our warming planet on our homes. However, environmental health experts argue that this must change. In 2010, the US Environmental Protection Agency asked the Institute of Medicine to study the relationship between climate change and indoor environmental health. The Institute convened an expert committee of professionals from a range of fields, including earth sciences, public health, medicine, architecture, and engineering. Ultimately, they produced a thorough report - nearly 300 pages - arguing that climate change “may worsen existing indoor environmental problems and introduce new ones.” For example, extreme weather events and flooding could increase dampness and humidity, leading to mold growth and chemical emissions from decaying building materials. Or, extreme heat and cold could increase power outages, exposing already-vulnerable populations to dangerous temperatures or to carbon monoxide emissions from portable generators. Finally, well-intentioned attempts at energy conservation, such as weatherization, retrofitting, or excessively tight new construction, could reduce ventilation to dangerously low levels, exposing occupants to indoor air pollutants (radon, VOCs, and more).

           

This final example - tight, energy-efficient building - has an instructive history. The Arab Oil Embargo of 1973-1974, memorable to many Americans because of the gasoline shortages it caused, was a turning point in residential construction. Everyone from Sierra Club President Theodore Snyder, to President Gerald Ford, to energy expert Daniel Yergin endorsed residential energy conservation as a promising, if partial solution to America’s energy crisis. From rural homesteaders to large developers, American builders eagerly pursued energy-efficient housing designs. This was a time of great enthusiasm for underground and earth-sheltered homes, alternative power sources such as solar and wind, and other housing experiments. While some now seem outlandish, other innovations from this era are now standard, such as continuous polyethylene vapor barriers. If you’ve ever seen a half-built house cloaked in Tyvek Homewrap, this is an innovation that dates to the energy crisis of 1973-1974. The ideal of the nearly-airtight, highly energy-efficient house became increasingly attractive to builders and buyers alike; the lower a house’s “air changes per hour” (ACH), the more it could promise in energy and cost savings.

Above: a “zero energy” Habitat for Humanity house produced in collaboration with the National Renewable Energy Laboratory. Denver, Colorado. The home is tightly constructed, super insulated, and uses solar energy for space and water heating. It also has a mechanical ventilation system to conserve energy while preserving indoor air quality. Photo credit: National Renewable Energy Laboratory Image Gallery

As residential energy conservation became a political and popular priority by the mid-1970s, the Department of Energy funded the Lawrence Berkeley National Laboratory in Berkeley, California, to establish an energy-efficient buildings research program. Scientists studying residential energy efficiency began to investigate concentrations of indoor pollutants in these impressively-sealed homes. Focusing on nitrogen dioxide (a product of combustion from cooking and heating), formaldehyde (a common organic compound in building materials and furnishings), and radon (dependent more on the geology of a house’s site than the house itself), they found alarmingly high levels of indoor air pollution in some energy-efficient homes.

With these troubling findings as motivation, the Berkeley Lab pioneered scientific study of the complex relationship between residential energy efficiency and indoor air quality, and sought to balance these two necessities in cost-effective ways. In my recent working paper, I examine a crucial period in this history: during the early 1980s residential indoor air quality went from an obscure academic subject to a source of national anxiety. The Federal government, the popular media, and the public became increasingly concerned that America’s houses - especially its newly-popular energy-efficient ones - were full of insidious poisons. The media often oversimplified the situation by portraying energy-conservation as the enemy of healthy indoor air, when in reality the relationship between the two was complicated.

Above: Sources of Indoor Air Quality (IAQ) problems, Lawrence Berkeley National Laboratory, Indoor Environment Department. Conventional and energy efficient houses alike can contain harmful indoor air pollutants if not properly ventilated. Climate change is likely to exacerbate existing IAQ problems and introduce new ones. Photo credit: National Renewable Energy Laboratory Image Gallery

Knowledge of energy-efficient building, indoor air quality, and their relationship has increased exponentially since the energy crisis of 1973-1974. However, the continual proliferation of new building materials and household chemicals makes it difficult, if not impossible, for even the most ambitious indoor air experts to keep up. As the Institute of Medicine’s committee concluded, climate change adds even more variables to an already complicated set of equations.

The experience of the 1970s offers valuable lessons as we face the defining environmental problem of our time with an increasing sense of urgency. First, energy conservation in housing and other buildings is imperative, but can affect indoor environmental quality both negatively and positively. It might seem counterintuitive, but drafty old houses do not necessarily have better indoor air quality than tighter new ones: for example, well-insulated houses have the potential to burn less fossil fuel to maintain comfortable temperatures, thus releasing fewer combustion products and maintaining better indoor (and outdoor) air quality. Second, our homes are not isolated from the environments in which they are built: local, regional, and, increasingly, global conditions affect the longevity of housing and the quality of the indoor environment it envelops, which in turn affects the physical, mental, and financial health of occupants. Third, during the “environmental decade” of the 1970s, energy independence appealed to diverse sectors of American society for environmental, political, and financial reasons. This was a time of remarkable ingenuity in the residential energy sector. For example, the Federal government funded the Solar Energy Research Institute, the Department of Energy asked its National Laboratories to design energy-saving houses, major developers created conventional-looking homes that used thermal mass and solar power, and motivated Americans experimented with a variety of energy-saving strategies. Americans have a tradition of ingenuity in the face of energy crises, we have four decades worth of knowledge about indoor air quality and energy-efficient building, and we have a rapidly expanding knowledge of climate change. We can surely combine these advantages to ensure healthy homes on a healthy planet.

Census Bureau Remodeling Data Revisions Out of Sync with Other Market Indicators

PLEASE NOTE: On July 31, 2013, we updated this blog with a new post, Remodeling Gains Expected to Continue Into 2014

by Abbe Will
Research Analyst

Since 2007, the Joint Center for Housing Studies has produced a quarterly Leading Indicator of Remodeling Activity (LIRA), which makes use of several economic indicators that historically have had strong correlations and leads over remodeling spending to anticipate near-term changes in the market. The Joint Center relies on the homeowner improvement expenditure data reported in the U.S. Census Bureau’s monthly Construction Spending Put in Place series (C-30) to estimate and benchmark its LIRA.

On July 1, the Census Bureau released its regularly scheduled annual revisions to the C-30, which adjusted the monthly improvement spending estimates back two calendar years to January 2011. As seen in Figure 1, these revisions increased estimates of home improvement spending by 6% for 2011 (from $114 billion to $121 billion) and decreased spending over 10% for 2012 (from $125 billion to $112 billion).

Source: US Census Bureau, Value of Private Construction Spending Put in Place (C-30).

Typically, these annual revisions are minimal and, in the past, changes were always in the same direction as the original estimates, often revising the whole series downward somewhat (Figure 2). This time, not only was the magnitude of the revisions significantly larger than in recent years, but the direction of the revisions was extremely divergent from what could have been expected based on previous annual revisions.

Source: US Census Bureau, Value of Private Construction Spending Put in Place (C-30).

Certainly, the extent of these revisions by itself calls for a thorough analysis and understanding of the reasons behind such dramatic changes, but the fact that the adjustments are at odds with other key industry data is even more worrisome. Figure 3 compares the annual rates of change in data series that historically correlate highly with home improvement spending (and are used as main inputs in the LIRA) with the pre- and post-revision C-30 data. As seen in the figure, key industry indicators including retail sales at building material and supply stores, remodeling contractor sentiment (RMI), pending home sales (PHSI) and single family housing starts all trended closely with the pre-revised C-30 estimates of homeowner improvement spending since January 2011.

Sources: US Census Bureau, Value of Private Construction Spending Put in Place (C-30), Monthly Retail Trade Report and New Privately Owned Housing Units Started; National Association of Home Builders Remodeling Market Index (RMI); and National Association of Realtors© Pending Home Sales Index (PHSI).

At this time, there is no obvious explanation for why the revisions to the C-30 improvements data were so extreme this year. As part of the Joint Center’s investigation of this issue, we will be in contact with the federal agencies involved in collecting the survey data and developing these estimates to assess whether changes in survey methodology or weighting procedures, for example, might explain these large shifts. As the Joint Center reviews the underlying source data for home improvement spending and the procedures that generate these estimates, we have decided to forgo publication of the LIRA this quarter. The next LIRA is scheduled to be released on October 17, 2013.

Housing Recovery Unlikely to Ease Renter Cost Burdens

by Chris Herbert
Research Director

The headlines continue to trumpet good news about the housing market, including falling vacancy rates and increased construction in rental housing markets across the country. But the flip side of this good news for the rental market is that the share of renters who face severe cost burdens, paying more than half their income for housing, has surged in recent years. As documented in our most recent State of the Nation’s Housing report, the number of renter households facing severe cost burdens reached a new record of 11.2 million in 2011, an increase of 2.5 million households since just before the recession in 2007 (see Figure 1). To make matters worse, this rise comes on the heels of what had already been a decade of worsening rental affordability; the number of renters facing severe housing cost burdens increased by 1.4 million between 2001 and 2007.  In all, the decade from 2001 to 2011 saw an increase of more than 50 percent in the incidence of severe rental cost burdens.

Notes: Severely cost-burdened households spend more than 50 percent of pre-tax income on housing costs. Source: JCHS tabulations of US Census Bureau, American Community Surveys.

To a substantial degree, the sharp rise in renter cost burdens reflects the significant growth in the number of low-income renters who are most likely to struggle to afford housing.  Between 2007 and 2011 the Great Recession pushed the number of renters earning less than $15,000 up by 1.8 million, while those earning between $15,000 and $30,000 rose by 1.1 million. ($15,000 roughly corresponds to what is earned by those working year round at the federal minimum wage.) But over the same time frame, rising rents made it even more likely that households within these income bands would face severe burdens.  Over this four year period, the share severely burdened households among those earning less than $15,000 rose from 67 to 71 percent, while among those earning between $15,000 and $30,000 the share rose from 29 to 33 percent.

But while the number of low-income renters has risen sharply, the supply of housing they can afford has at best remained stagnant (see Figure 2).  In 2011 there were 12.1 million extremely low-income renters who earned 30 percent or less of median incomes in the areas where they lived.  (This is a common income cutoff for eligibility for housing vouchers and is roughly equivalent to our $15,000 threshold but is adjusted for differences in area incomes and family size.)  Meanwhile, there were only 6.8 million rental units affordable at this income cutoff, representing a gap of 5.3 million housing units.  The shortage of affordable housing is made worse by the fact that many of these affordable units are occupied by higher income households. When the number of units affordable for extremely low-income households and available to them is considered, the supply gap in 2011 was even larger – 7.9 million units.  The magnitude of this supply gap testifies to the fact that it is nearly impossible to produce new housing at such low rents, and almost as difficult to maintain existing housing. In fact, 650,000 housing units renting for less than $400 a month in 2001 were permanently lost from the housing stock by 2011.

Note: Extremely low-income households earn less than 30% of area median income.

Source: JCHS tabulations of US Census Bureau, American Housing Surveys.

With the market unable to supply housing affordable for the nation’s lowest-income households, addressing the problem of rising rent burdens may largely come down to efforts to increase household incomes. But there will always be some households facing temporary financial struggles and others facing long-term challenges who will need more assistance to afford decent housing. Currently, only one in four of those eligible for federal assistance are able to obtain subsidized housing. Those who do are among the nation’s most vulnerable families and individuals – 35 percent are disabled, 31 percent are age 62 or older, and 38 percent are single parents with children. With the population of households struggling to afford housing at record levels and continuing to expand, there is a compelling need to assess whether existing resources for assisted housing are both sufficient to meet the need and being used effectively through current programs. 

But while options for reforming the housing finance system have been subject to a vigorous debate, to date the issue of how to address the significant problem of rental housing affordability has received relatively little attention.  The Bipartisan Policy Center’s (BPC) Housing Commission report this past year was a notable exception as it both framed the importance of this issue and advanced specific policy options that should be considered. 

The next snapshot of renter cost burdens will come this fall when the 2012 American Community Survey is released.  But as we showed in this year’s State of the Nation’s Housing report, rents are continuing to increase in markets across the country, against a backdrop of continued stagnation in household incomes. As a result, it is likely that this more up-to-date data will once again find that rental housing affordability has only gotten worse. Hopefully, the BPC report will start a dialogue on what should be done to address this urgent problem.