What are some of the key characteristics of a healthy housing system? And how can the success of these features be measured?
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Any nation’s housing delivery systems — homeownership, rental, or affordable rental — represent a complex and interconnected ecosystem. Within that ecosystem, individual elements (rules, capital flows, and participants) are like creatures, each operating for its own set of goals. None of them specifically creates the ecosystem; all of them collectively define it; and everything influences everything else.
Just as a rain forest is a complex ecosystem with several distinct ecological subsystems, the housing finance ecosystem can be thought of as four inter-related levels, each of which depends on the successful existence of the previous ones.
- Finance. Effective markets for capital flows on both supply (new homes or apartments) and demand (ability of consumers to afford to buy homes, or developers to create or acquire them), with reliable availability and smooth changes of prices and terms over time and over creditworthiness.
- Homeownership. Broad participation in occupant-owned homes, with emphasis on the ability of families to find, choose, buy, improve, and sell homes as their financial circumstances and household configurations change over time.
- Rental. Permanent professionally-managed quality rental housing with multiple configurations and price points. At some time in our lives, virtually everyone needs rental – often when young or old, and when mobile in pursuit of jobs or lifestyle. Rental needs to be co-located not only with homeownership tenures but also in proximity to healthy communities.
- Affordable housing, of good quality and location and reliable availability to lower income households. Sustainable quality affordable housing does not exist in economic nature, and must be created by the right combination of enabling laws and a suitable level of subsidy both capital and operating.
Each higher level within the ecosystem depends for its success on interacting symbiotically with creatures from the lower level (e.g. one cannot have effective urban homeownership without effective finance).
Housing ecosystems can be judged successful according to their:
- Scale, measured by volume of total homes, apartments, or households involved in the system.
- Longevity, particularly when it comes to continuity of common building blocks (e.g. long-term fixed-rate finance).
- Resilience and robustness, ability to respond quickly and effectively to changing circumstances.
- Coverage, measured by reach to all parts of the nation and all levels of society.
- Diversity of species, including types of actors and number of programs or options within each type. Diversity within an ecosystem is objectively good because greater diversity promotes greater choice and more rapid responsiveness.
- Complexity, expressed as interdependencies among participants. This too is objectively good because complex systems have a greater ‘wisdom of crowds’ intelligence.
- Deconcentration of risk, in terms of irreplaceable actors or value-chain links.
The United States has the world’s oldest, largest, most complex, and most sophisticated housing and affordable housing ecosystem. Before 2008, however, we were overly risk-concentrated with dependency on securitization and the unsustainable risk-arbitrage model being used by the GSEs, where profits were privatized and losses with indirectly socialized. The mortgage meltdown and the GSEs’ financial implosion showed the folly of overconcentration both by species (securitization) and entities (Fannie Mae and Freddie Mac), and as we recapitalize our mortgage liquidity functions, we must build in self-adjusting mechanisms to prevent any recurrence of that risk concentration.
David A. Smith is the founder and chairman of Recap Real Estate Advisors.
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