In 1987, I bought a house before a car.
That was nearly a decade before the phrase “smart growth” was invented and no one knew what a carbon footprint was. I understood simple economics, though. Lending policies were strict and my budget constraints clear. My husband was in graduate school and my income was so low I calculated our loan limits in my head. Since we couldn’t qualify for both a home and an auto loan we found a house on a major bus route within walking distance of food and general merchandise stores, restaurants, and medical and dental offices. I used mass transit or joined a carpool to commute each day.
Fast-forward to the 21st century.
The neighborhood characteristics we chose for practical reasons are now in high demand and, according to industry experts, could play an important role in stabilizing the home mortgage market.
A report recently released by the Natural Resources Defense Council (NRDC) identifies “location efficiency” as a key predictor of mortgage default risk. Researchers analyzed more than 40,000 mortgages from three distinctly different areas across the United States: Chicago, San Francisco, and Jacksonville, Florida.
“The sum of the counties we looked at incorporates a variety of neighborhood patterns,” explains Jennifer Henry, with NRDC’s Center for Market Innovation, “from center city and central suburbs to outer suburbs and more rural areas.”
The study’s results show the probability of mortgage foreclosure decreased in location-efficient communities. These compact developments offer a range of transportation options, and have businesses that provide essential services and products nearby.
Since people who live in location-efficient communities are able to drive less they can spend a smaller portion of their income on purchasing, insuring, operating and maintaining vehicles. The fact that they can use mass transit, or walk, or bike to meet their basic needs also gives them more flexibility for adjusting their transportation costs when gas prices and household incomes fluctuate.
“We think this is good news”, Henry concludes, “because it indicates that by [considering] transportation costs and location efficiency we can improve our understanding of mortgage performance, structure better loans, and reduce the nation’s overall rate of foreclosure.”
Lending practices currently take into account the average 9% of household income that is spent on auto loans, yet total transportation costs have grown to constitute roughly 17% of the average United States household’s expenditures.
In other words, the “drive ‘til you qualify” approach to housing development is a fallacy. It’s time for a new “affordability” index – one that takes into account all household transportation costs.
For more information you can view a copy of the report at: www.nrdc.org.
Have Clock, Will Travel
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6 comments:
Is there really any of this transit sensitive development going on? Most work seams to be on indefinate pause.
-Dave Thorp, A-AIA
Good question and comment. Since the NRDC's report has implications for the lending industry, real estate investment, and public policies (municipal through federal), I'm going to invite experts in these areas to comment.
Here's a hotlink to legislation by U.S. Representative Earl Blumenauer that proposes, among other things, developing location-efficient mortgages and providing tax credits for carpooling and telecommuting: http://blumenauer.house.gov/index.php?option=com_content&task=view&id=1339&Itemid=175.
Here is a comment that you could post from the authors:
Financial institutions benefit from lower risk of non repayment of mortgages among households that reside in areas that have greater location efficiency. Therefore, "location, location, location" is not merely a real-estate buzz-phrase signaling convenience for soccer-moms. Location efficiency represents a lifestyle that benefits a household's long term financial security, and benefits the long term bottom line of the creditor. However, in recent times, too many financial institutions have not considered risk of non-repayment much beyond the time horizon of bundling the mortgage into a complex instrument and passing the risk onwards. In the aftermath of the current mortgage debacle, lending institutions will not only need to pay more attention to the standard underwriting criteria they have traditionally used, but also should consider including measures of location efficiency in their underwriting models. Beyond mortgage underwriting, we expect that location efficiency may also have importance for underwriting construction loans and for commercial development as well – these are topics for future research.
While the economic situation has put a damper on development of any sort across much of the country, there are certainly many good, recent examples of location efficient development. One of us lives in Rhode Island; a local group there, GrowSmart RI, has put together some case studies of location-efficient development in Rhode Island at:
http://www.growsmartri.org/index.cfm?fuseaction=Page.viewPage&pageId=529
-Eric Hangen, AICP
I Squared Community Development Consulting, Inc.
So, we all need to buy homes in location-efficient communities? Unfortunately, some of us cannot afford to do this, which results in AHMSI complaints.
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