Fiduciary Landlords: Life Insurers and Large-Scale Housing in New York City

by Adam Tanaka

JCHS Meyer Fellow

For a brief window between the late 1930s and the late 1940s, life insurance companies built approximately 50,000 middle-income rental apartments across the United States. Most were racially-segregated, market-rate projects in semi-suburban locations. Others were central city redevelopment projects, built with the powers of eminent domain and offering below-market-rate rentals. Stuyvesant Town, an 8,755-unit apartment complex in New York City developed by Met Life, is perhaps the most famous of these projects (Figure 1) but there were many others, including Lake Meadows in Chicago (developed by New York Life), Hancock Village in Boston (developed by John Hancock Mutual Life), and the Chellis-Austin Homes in Newark (developed by Prudential).

As corporate entities with access to vast institutional funds, insurers achieved considerable economies of scale in construction, financing, and operation, and accepted longer, lower yields than conventional real estate developers. As such, policymakers hoped that life insurers and other fiduciary institutions, such as savings banks, would play a key role in building and operating large-scale, low-cost urban housing and in modernizing the postwar city more generally. By the early 1950s, however, a combination of disappointing financial returns and bruising controversies over discriminatory leasing drove insurers from the housing field.

The 789-unit Hancock Village, which straddles the Boston-Brookline border, was built in 1946 by the John Hancock Mutual Life Insurance Company. Source: “Greater Boston Housing Development Charted,” Christian Science Monitor, 01/05/1946.

While the volume of life insurance housing soon paled in the face of the postwar suburban boom — built for much the same demographic and often financed by life insurance dollars — insurers’ brief venture into multifamily development represents a significant and understudied episode in the history of affordable housing. With Stuyvesant Town currently enjoying an unexpected renaissance as both high-class investment and public policy touchstone, the time is ripe for a reevaluation of the substantial, if controversial, legacy of life insurance housing.

In a new Joint Center working paper, I provide an overview of the “rise and fall” of life insurance housing in the postwar period, with a focus on New York City, where the majority of insurance-sponsored apartments were located. The paper is part of my larger dissertation project, which examines the political and economic forces that drove various entities — including life insurance companies, labor unions, public authorities, and for-profit developers — to build some of the world’s largest middle-income housing projects in New York in the mid 20^th century, as well as the factors that abruptly terminated this “large-scale approach” in the mid-1970s.

In the paper, I argue that when it came to middle-income urban housing, the 1940s represented a moment of unusual convergence between corporate need and municipal interest. While incentives were aligned, thousands of relatively low-cost apartments were built in America’s most expensive housing markets. These apartments proved a panacea for white families who earned too much for public housing but not enough to purchase suburban homes. As soon as civic and corporate needs began to diverge, however, insurance capital moved beyond city limits to suburban jurisdictions offering higher returns with fewer political obstacles. In the context of today’s continued shortage of affordable housing — particularly for middle-income renters in high-cost cities like Boston and New York — the story can be read as both missed opportunity and cautionary tale.

Renovation Spending Continues to Grow, But More Slowly

by Abbe Will
Research Analyst

Strong gains in home remodeling and repair activity are expected to ease moving into next year, according to our latest Leading Indicator of Remodeling Activity (LIRA) released today. The LIRA projects that annual growth in home improvement and repair expenditure this year will remain above its long-term trend of 5 percent, but will decline steadily from 7.3 percent in the first quarter to 6.1 percent by the first quarter of 2018.

Homeowners are continuing to spend more on improvements as house prices strengthen in most parts of the country. Yet, recent slowdowns in home sales activity and remodeling permitting suggests improvement spending gains will lose some steam over the course of the year.

The remodeling market is approaching a cyclical slowdown after several years of steady recovery. While the rate of growth is starting to trend down, national remodeling expenditures by homeowners are projected to reach almost $320 billion by early next year.

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

What Impact Do Changing Interest Rates Have on Mortgage Demand?

by Stephanie Lo
JCHS Meyer Fellow

Could the post-Great Recession drop in housing demand have been driven in part by an increase in mortgage credit spreads across borrowers? In a new Joint Center working paper that uses proprietary data on the spread of mortgage rates across borrowers with different credit, I find that mortgage demand does react to mortgage interest rates in economically and statistically significant ways. 

This finding is significant because little is known about the extent to which changes in interest rates affect the demand for mortgages. Measuring this effect is difficult because both interest rates and the demand for mortgages are driven by macroeconomic factors. For example, after the financial crisis in the late 2000s, interest rates fell as the Federal Reserve attempted to stimulate the economy, but the demand for mortgages also fell because individuals faced adverse macroeconomic conditions. A naive estimate would suggest that over this period, lower interest rates drove lower housing demand, which is clearly not correct.

My study uses Loan Level Price Adjustments (LLPAs) to address this issue.  Instituted by FHFA in November 2007, LLPAs are additional fees paid upfront by the lender to Fannie Mae or Freddie Mac. The fees are higher for loans with higher loan-to-value ratios and borrowers with lower credit scores, and feature discrete cutoffs at certain credit scores, as measured at mortgage origination. Put simply, a borrower with a 700 credit score will face the same LLPA as a borrower with a 701 credit score, but will benefit from a discretely lower LLPA than a borrower with a 699 credit score.

Using administrative mortgage rate data, I find that LLPAs are completely passed through to borrowers, so while lenders receive the same mortgage rate across credit scores, borrowers just below a credit-score cutoff pay a higher mortgage rate than those just above that cutoff point (Figure 1). I further show that borrowers across these credit scores are virtually identical, and for high credit scores, lenders do not differentially screen across these cutoffs. This allows me to apply a regression-discontinuity design to examine how mortgage demand changes for borrowers just above and below several credit score cutoff points—660, 680, 700, and 720—where the interest rates offered to borrowers change. 

Notes: Rates are for conforming 30-year FRM. The numbers shown reflect the mean across the entire baseline sample for the exact FICO score shown, on the weekly level, from October 2008 to December 2014. Higher FICO scores tend to benefit from lower mortgage rates due to lower upfront payments induced by LLPAs. Source: Optimal Blue and Fannie Mae; Author’s calculations.

The results show that borrowers respond to changes in interest rates in economically and statistically significant ways (Figure 2). I estimate that a 25 basis point cut in interest rates results in a 50 percent increase in the likelihood of a potential borrower to demand a loan. In a given month, this increases the number of mortgage originations from about 100 per 100,000 individuals to 140 per 100,000 individuals. I also find that a 25 percent basis point cut in interest rates results in an increase in loan size of approximately $15,000, or about 10 percent of the average origination volume.

Notes: The mortgage rate series comes from the Freddie Mac Primary Mortgage Rates survey. Mortgage originations data is calculated as the total recorded origination amount for purchase mortgages by year, using the proprietary McDash LLC data.

These estimates help to explain the post-crisis drop in mortgage demand from low-income and low-credit borrowers. A back-of-the-envelope calculation using my estimates suggests that, had 680-719 FICO borrowers been subject to the same LLPA as 720 FICO borrowers, this group would have generated $15 billion more in mortgage demand over six years, which would have been a 33 percent increase in mortgage lending to this group alone. More generally, my estimates suggest that borrowers were very sensitive to mortgage rates after the crisis, implying that the Federal Reserve’s efforts to lower interest rates, which in turn lowered mortgage rates, may have been very effective in bolstering the housing market.

Boston Mayor Gives Annual Dunlop Lecture

by David Luberoff
Senior Associate Director

In a more two-decade career that began in the construction trades and now brings him into a host of debates about federal policies, Boston Mayor Martin J. Walsh says he’s “learned a lot about housing: how it gets built, the role it plays in working people’s lives, and the role it plays in community development.”

Walsh, who gave the Joint Center’s 17th Annual John T. Dunlop Lecture on March 20th before more than 300 people at Harvard’s Graduate School of Design, hailed the fact that, in positions that included serving as dean of Harvard’s Faculty of Arts and Sciences and as U.S. Secretary of Labor, John Dunlop “spent his career bringing together academics, government officials, workers, and labor leaders to better understand our shared challenges.” Such collaboration, “is something we could use more of today,” noted Walsh, who added, “I’ve found that kind of dialogue and collaboration to be invaluable throughout my career,” particularly when it comes to housing.

Walsh, who emerged from a crowded field to win Boston’s mayoral race in 2013, said that upon taking office, “one of the first things I confronted was what more and more people were calling a housing crisis. Rents and home prices were rising beyond middle-class, working-class, and low-income people’s budgets.”  Addressing those challenges, he said, not only required setting and achieving ambitious goals, such as building more than 50,000 additional housing units by 2030, but also doing so in ways that go beyond “simply matching housing units to the population, or meeting market-driven demand.”

Rather, he said, “the challenge is to embrace our success as a city while retaining the core values that got us here. Those values center on inclusiveness, on opportunity, on social and economic diversity. We are a community that welcomes all and leaves no one behind. These aren’t just ideals. They are pragmatic needs.” The mayor, who also spoke about city initiatives to provide more housing, reduce homelessness, and address evictions, added that those efforts further highlight “the role of housing not just in community development but also in human development.”

Turning to current debates about the federal budget and other federal policies, Walsh said the Trump administration’s recent budget proposals and other federal initiatives are “an effort to end the system of federal partnerships that date to the New Deal and Great Society commitments of the 1930s [and] the 1960s.”  Left unchecked, he said, such policies would exacerbate the already significant problem of economic inequality in Boston.  Therefore, he added, he and other mayors are actively trying “to educate people on the impacts of inequality, and advocate for solutions” such as “health care; paid family leave and affordable daycare; strong labor laws and fair tax laws; financial regulation; [and] infrastructure investments.”

While these are daunting challenges, the mayor said, “I’m still counseling confidence” because the work the city has done and continues to do puts Boston “in a good position to respond to this moment. Even if the funding arrangements we’ve built seem threatened, the relationships we’ve built are strong. They will produce new solutions and new ideas. They will bring new partners to the table.”  Those partners, he concluded, hopefully will include the many graduate and undergraduate students who attended the lecture. “We are going to need you in the years ahead,” said the mayor.

Watch Mayor Marty Walsh deliver the 2017 Dunlop Lecture.

Remodeling Activity Projected to Grow in Most Metropolitan Areas

by Elizabeth La Jeunesse
Research Analyst

Spending on home improvements is expected to increase this year in 43 of the nation’s 50 largest metropolitan areas, according to our latest report about the home improvement industry, Demographic Change and the Remodeling Outlook. The report projects that, on average, home improvement spending in 2017 in these metro areas will be 6.8 percent higher than it was in 2016, slightly more than the projected 6.1 increase nationwide. 

However, as an interactive map released in conjunction with the report shows, the growth rates will vary widely. About a third of major metro areas are expected to see strong growth of 10 percent or more, while a similar number should see declines or slow growth of under 3 percent.

Some of the largest increases, in percentage terms, are expected to occur in several Midwestern metropolitan areas such as Cincinnati, Cleveland, Columbus, Kansas City, Minneapolis, and Milwaukee, where there is a consistent demand for housing and prices are not as high as in other parts of the country.

Double-digit gains in home improvement expenditures are also expected in New England’s three largest metro areas—Boston, Hartford, and Providence—where home sales have been strong. While average per-owner spending in other metropolitan areas on the East Coast has been relatively high in recent years, total spending in several of those areas is expected to increase slowly in the next year. The report projects that spending will grow by less than one percent in New York, the nation’s largest metro area, and by less than four percent in the Washington, DC area.

Home improvement spending is also expected to pick up significantly in several fast-growing, Southern metropolitan areas where homebuilding activity has revived and more households are forming, such as Atlanta, Charlotte, Jacksonville, and Orlando. In contrast, spending will grow modestly or may even decline in Southern metro areas with oil-dependent economies such as Dallas, Houston, and Oklahoma City.

On the West Coast, the report projects a significant increase in spending on home improvements in the Sacramento metro area, where house prices recovered more slowly from the Great Recession than in other parts of the state. In contrast, spending is expected to increase only modestly or decline slightly in the Los Angeles, San Diego, San Francisco, and San Jose, where leading indicators suggest housing markets may be approaching their cyclical peaks. In metro areas across the Mountain and Pacific Northwest regions, growth rates are also expected to vary widely, from a low of just under 2 percent in the Las Vegas metro to a high of nearly 10 percent in the Salt Lake City area.

These projections are based on two measures of housing demand—single-family starts and growth in existing home sales—that are strong leading indicators of national remodeling activity. The results broadly support our expectation that home improvement expenditures in certain high-cost markets may soon reach a cyclical peak, while spending will increase in markets where house prices are lower but are increasing steadily.

The report also finds that the national market for home improvements is somewhat more concentrated in the nation’s 15 largest metropolitan areas, which account for about 29 percent of the nation’s homeowners. Illustratively, according to estimates from the 2015 American Housing Survey, average per-owner improvement spending in the same 15 metro areas was $3,500, or more than 30 percent greater than average spending by homeowners outside of these areas. As a result, aggregate spending by homeowners in the same 15 areas totaled over $80 billion, or nearly 37 percent of the total spending by all owners on home improvements nationally.