The New Housing Market and its Effect on Infrastructure Financing Capacity

Transcription

1 The New Housing Market and its Effect on Infrastructure Financing Capacity Economic & Planning Systems, Inc. NIFR 2009 November 6,

2 Presentation Overview Housing Market Trends New Home Pricing Trends A New Paradigm Back to Fundamentals Measures of Development Feasibility Potential Solutions Discussion/Questions 2

3 Presentation Goals Discuss how economic and market trends influence infrastructure financing. Describe new market paradigm and issues faced by local agencies. Identify and discuss potential solutions for development impact fees and infrastructure financing. 3

4 Housing Market Trends 4

5 National Historical Home Price, Building Costs, Population and Interest Rates Index or Interest Rate Building Costs Home Prices Population Population in Millions Interest Rates Year Source: Gregory Group and Robert J. Shiller.

6 Annual Housing Starts (US) 2,500,000 2,000,000 Total Permits Increased 32.4% From 1996 Through 2004 A -59.2% Decrease 1,500,000 1,000, , Source: NAHB

7 E.00 California Building Permits Total Permits Increased 125.3% From 1996 Through 2004 A -69.5% Decrease Source: Gregory Group and US Census Bureau.

8 California Building Permit Change ( Est) South Bay Los Angeles South Central Valley Orange County East Bay San Diego Mid Central Valley North Bay Average Change: -66.8% Sacramento Inland Empire North Central Valley -110% -100% -90% -80% -70% -60% -50% -40% -30% -20% -10% 0% 10% 20% 8 30% Source: Gregory Group and US Census Bureau.

9 The Recovery Will be Slow Overall economic issues Fewer jobs Slower income growth State and local government budget shortfalls limiting regional economic and employmentrelated growth. Issues specific to the real estate industry Restructuring of home financing industry Overly restrictive credit standards 9

10 What's Happening in the Building Industry? Short-Term Transition/Transformation Financial Feasibility Issues Long-Term and Beyond? Consolidation of large builders Increase in small/independent builders Financing Issues Inability to Advance-Fund Infrastructure Slower absorption Requirements of private/debt equity Highly regulated public debt market 10

11 New Home Pricing Trends 11

12 Key Findings Magnitude of home price appreciation ( ) was not sustainable in the long run. Future appreciation at the same scale is not likely to occur. Feasibility analysis should be based on historical relationships between housing prices and income levels and traditional mortgage financing. For most entry-level and mid-range housing products, current infrastructure costs and fees exceed feasible ranges. 12

13 Home Price Indices ( ) 13

14 Case-Shiller Housing Price Index (1989 to 2009) 14

15 Housing price appreciation was driven primarily by factors other than income including: Housing prices have been driven by loose credit standards and misguided lender/ borrower expectations that home prices would continue to rise Bank of America (January 2009) Aggressive Financing Practices: Increased use of ARMs and Hybrid ARMs Increased subprime lending Lower underwriting standards Zero down payment loans Increased Availability of Capital: Securitization of mortgages Institutional real estate investment Foreign real estate investment Private investment movement from stock to real estate capital markets These factors are not likely to reappear in the near future. 15

16 Ratio of Average New Home Price to Median Income: California Source: The Gregory Group, EPS, US Census, Census 2000, American Community Survey, Estimates by The Gregory Group (Income 1999, 2001 and 2008) Bubble Historical Range E 2009 Proj 16

17 Ratio of Average New Home Price to Median Income: Sacramento County Average Ratio: Average Ratio: Average Ratio: Source: The Gregory Group, US Census, RELU, SRRI, and EPS. Prepared by EPS 17

18 Ratio of Average New Home Price to Median Income: Placer County Q/1999 4Q/2003 Average Ratio: 5.7 2Q/2004 4Q/2008 Average Ratio: th/1999 2nd/2000 4th/2000 2nd/2001 4th/2001 2nd/2002 4th/2002 2nd/2003 4th/2003 2nd/2004 4th/2004 2nd/2005 4th/2005 2nd/2006 4th/2006 2nd/2007 4th/2007 2nd/2008 4th/2008 Source: The Gregory Group, US Census, Census 2000, American Community Survey, Estimates by The Gregory Group (Income 1999, 2001 and 2008). Prepared by The Gregory Group 18

19 Ratio of Average New Home Price to Median Income: Solano County Q/2004 4Q/2008 Average Ratio: Q/1999 4Q/2003 Average Ratio: th/1999 2nd/2000 4th/2000 2nd/2001 4th/2001 2nd/2002 4th/2002 2nd/2003 4th/2003 2nd/2004 4th/2004 2nd/2005 4th/2005 2nd/2006 4th/2006 2nd/2007 4th/2007 2nd/2008 4th/2008Est Source: The Gregory Group, US Census, Census 2000, American Community Survey, Estimates by The Gregory Group (Income 1999, 2001 and 2008). Prepared by The Gregory Group 19

20 A New Paradigm Back to Fundamentals 20

21 Relationship of Housing Prices Relative to Income In a sustainable and stable market, home prices must be linked to household income levels. 21

22 Est. Housing Prices & Affordability based on Area Incomes By calculating the estimated mortgage payment of area residents, a range of home prices by household income can be determined. Household Income Range Home Price Range Income to Home Price Ratio Range % of the Market $0 - $50,000 Assumed Renting NA $50,000 - $75,000 $250,000 - $380, $75,000 - $100,000 $380,000 - $510, $100,000 - $150,000 $510,000 - $740, $150,000 + $740, Depends on the Market Source: Census 2007, EPS. 22

23 Est. Housing Prices & Affordability Based on Income Assumes Household is Renter Sales Price Median CA Home Sales = $278K (2/09) HH = HH = HH = HH = HH = $50K $75K $100K $125K $150K Household Income 23

24 Analytical Methodology Economic Forecast Estimated housing price points and product distribution Estimated absorption Infrastructure Cost Burden Analysis Compile infrastructure costs and fee burdens Comparison of burdens with nearby/completing jurisdictions Development Feasibility Analysis Evaluate development feasibility based on market data Identify range and magnitude of issues Identify and Implement Targeted Solutions 24

25 Measures of Development Feasibility Residual Land Value Infrastructure Cost Burden as a Percentage of Finished Home Sales Price 25

26 Residual Land Value Final Sales Price Market Derived Minus Development Costs Equals Residual Land Value Estimated Development Costs Impact Fees Backbone Infrastructure (Onsite & Offsite) Environmental Mitigation Subdivision Infrastructure Building Construction Costs Marketing and Financing Costs Contingencies Builder s Profit (Enhanced Value) 26

27 Land Development Cost Land Acquisition Entitlement Costs Environmental Impact Report Residual Land Value (Enhanced Value) Planning Documents Infrastructure Master Plan Environmental Mitigation Developer Overhead Land Developer Profit 27

28 Typical Components of New Single- Family Home Construction Components of New Single Family Home Construction 100% 90% 80% 70% Site Development and Home Construction Costs (Includes Profit) 65-75% 60% 50% 40% 30% 20% Infrastructure Cost Burden 15-20% 10% 0% Residual Land Value 10-15% 28

29 Residual Land Value Calculation: Pro Forma Examples Feasibility Targets Feasible Range Traditional 50 X DU/AC Avg 2,520 sf Total Percent of Selling Price Traditional 60 X DU/AC Avg 2,800 sf Total Percent of Selling Price Average Home Price w/o Premium (Rounded) $440,000 $470,000 Infrastructure Burden Building Permit and Impact Fees [1] $43,000 10% $45,000 10% Project-wide Backbone Infrastructure $48,000 11% $48,000 10% Total Infrastructure Burden 15-20% $91,000 21% $93,000 20% Unit Development Cost of Unit Construction [2] $ 151,000 34% $ 166,000 35% Subdivision In-Tract & Frontage Improvements [3] $ 39,000 9% $ 44,000 9% Soft Costs [4] $ 88,000 20% $ 94,000 20% Builder Profit $ 44,000 10% $ 47,000 10% Subtotal Unit Development $322,000 73% $351,000 75% Total Cost of Unit $413,000 94% $444,000 94% Residual Land Value (Enhanced Value) [5] 10-15% $27,000 6% $26,000 6% Feasibility Tests Infrastructure Burden FAIL Marginal Residual Land Value FAIL FAIL [1] Includes building permits, City/County fees, plan area fees and school fees. Amounts are net of assumed impact fee credits for sewer, water, parks, and roadways. [2] Includes direct costs, landscaping, final grading, and fencing. [3] Includes in-tract infrastructure and local infrastructure. [4] Includes sales, marketing, and model home costs. [5] Residual land value must fund land acquisition, entitlement costs, environmental and planning documents, infrastructure master plan, environmental mitigation, developer overhead, and land developer profit. 29 Source: EPS.

30 Rapidly Declining Land Values - Construction Costs and Building Fees Much Less Elastic $500 $550 Sales Price / Costs (per unit) (in $1,000) $480 $460 $440 $420 $400 $380 $360 $340 $500 $450 $400 $350 $300 $250 $200 $150 $100 $50 $0 Land Residual Value (per acre) (in $1,000) $320 -$50 $300 $475K $460K $445K $430K $410K $400K $380K $370K $360K Median Sales Price -$100 Home Sale Price Costs (Construction + Fees + Profit) Land Residual Value 30

31 Impact on Funding Infrastructure Industry standard assumptions: Infrastructure cost burden feasibility range typically between 15%-20% of home price. Resulting feasible infrastructure burdens, when applied to peak & current market price points: Assumptions Peak Current Average Home Price $600,000 $400,000 Feasibility Range for 15% $90,000 $60,000 Backbone Infrastructure & Public Facilities to 20% to $120,000 to $80,000 Decrease of approximately $30,000 - $40,000 per unit. 31

32 Impact on Mello-Roos Financing Target: Special Taxes & Assessments for infrastructure should be less than or equal to 0.4% of home price. Results in following feasible tax rates & estimated construction proceeds when applied to peak & current market price points: Average Home Price Assumptions Peak $600,000 Current $400,000 Tax Rate for Infrastructure 0.4% of Home Price $2,400 $1,600 Total Bonds $26,400 $17,600 Estimated Construction Proceeds 75% of Bonds $19,800 $13,200 Decrease of approximately $6,500 per unit. 32

33 Sacramento County Estimated Housing Prices and Affordability based on Area Incomes By calculating the estimated mortgage payment of area residents, a range of home prices by income can be determined. Household Income to Income Home Price Home Price Ratio Range Range Range % of % of Potential the Market Homebuyers $0 - $50,000 Assumed Renting NA 46% - $50,000 - $75,000 $250,000 - $380, % 36% $75,000 - $100,000 $380,000 - $510, % 25% $100,000 - $150,000 $510,000 - $740, % 26% $150,000 + $740, % 13% 100% 100% 33

34 Housing Feasibility Current cost structure for housing makes products below $500,000 infeasible. Current infrastructure burdens and site improvement costs contribute to the infeasibility of products for a large segment of potential homebuyers. 34

35 Potential Solutions 35

36 The Public/Private Partnership A new paradigm for public finance is required. Builders and public agencies need to work together to reset expectations and responsibilities. Builders and public agencies need to recognize that home prices have fallen to a range that matches available income. Builders will need to adjust products and land plans. Public agencies will need to adjust expectations as to how much new housing can contribute to infrastructure. 36

37 Immediate Actions Potential Solutions Short- to Mid-Term Actions Long-Term Actions 37

38 Immediate Actions Fee Deferrals Fee Financing Phased Implementation Interim Reductions Fee Waivers 38

39 Short- to Mid-Term Actions Review facility master plans Review cost estimates Review land use and cost allocation assumptions Establish alternative development-based financing methods to fund obligations Apply available federal or State funding to high priority projects Participate in development impact fee financing programs (e.g., California Statewide Community Infrastructure Program) Fees scaled to unit size Total fees based on percent of valuation Land secured financing options 39

40 Long-Term Actions Revise General Plan or specific plan service standards and facility requirements. Amend existing ordinances that impose costs on development Develop broad-based funding sources for infrastructure priorities (e.g., local sales tax measure or real estate transfer tax) Identify economic development opportunities that strengthen the economic base and viability of local economy. 40

41 Comparison of Actual Versus Target Infrastructure Burdens Sacramento Region SFR Product Types Distribution of Potential Homebuyers (Sacramento Region): Backbone Infrastructure Costs $100,000 $80,000 $60,000 $40,000 Infeasible Difference: ($35K) 61% 26% 13% Infeasible Difference: ($20K) Infeasible Difference: ($15K) Target Burden Actual Burden Feasible Difference: $2K $20,000 RD-10 RD-7 RD-5 RD-4 $240K $360K $400K $530K Housing Value 41

42 Solution 1: Reduce Infrastructure Cost Burdens Distribution of Potential Homebuyers (Sacramento Region): $100,000 61% 26% 13% Target Burden Actual Burden Infrastructure Costs $80,000 $60,000 $40,000 Proposed Burden $20,000 RD-10 RD-7 RD-5 RD-4 $240K $360K $400K $530K Housing Value 42

43 Solution 2: Fees Scaled to Unit Size $100,000 Distribution of Potential Homebuyers (Sacramento Region): 61% 26% 13% Target Burden Actual Burden Infrastructure Costs $80,000 $60,000 $40,000 Proposed Burden: Scaled to Size $20,000 RD-10 RD-7 RD-5 RD-4 $240K $360K $400K $530K Housing Value 43

44 Land Secured Financing Alternative Structure Annual Maximum Special Tax Revenue Series 3 Debt Service Series 2 Debt Service Series 1 Debt Service Additional Bonding Capacity Years/Bond Term 44

45 Discussion 45

46 Presented by Jamie Gomes Principal Economic & Planning Systems, Inc. The Economics of Land Use Berkeley, CA Sacramento, CA Denver, CO 46