Dick Lepre is senior loan adviser for RPM Mortgage of Alamo,
California. He has been in the mortgage business since 1992
and has been writing a weekly e-mail newsletter on macroeconomics, mortgages and housing since 1995. Lepre is from
New York City but has lived in the San Francisco Bay Area
since 1968. He has a degree in physics from Notre Dame.
Reach him at (415) 244-9383 or email@example.com.
Why Housing Prices Are Rising
Zoning changes could improve affordability in undersupplied markets
By Dick Lepre
Much has been written about the fact hat home prices in places like the San Francisco Bay Area have increas- ed to the point where few can afford
to buy. Prices have increased because demand has
increased much faster than supply. The effect of this is
considerable. “Housing is the chain on the dog that is
chasing a squirrel,” said Beacon Economics’ Christopher
Thornberg, in a recent article in The Mercury News
about the issue. “Once that chain runs out, it yanks the
Mortgage loan originators have certainly learned
over the past 10 years that although increasing home
prices makes life easy at first, the inevitable, eventual
decrease in values makes life much more difficult. in
the wake of the liquidity crisis that marked the Great
Recession, the mortgage industry saw loan-to-value
restrictions in counties with declining values, owners
walk away from upside-down homes and, in recent
years, a dramatic increase in government regulations
that originators must now deal with day to day.
The pre-2007 bubble was caused by increased demand generated by several factors, including the U.S.
Department of Housing and Urban Development’s
mandate to the government-sponsored enterprises to
loosen their loan standards, and Wall Street and the
debt-rating companies securitizing mortgage-backed
securities in a manner that made bad loans into
investment-grade securities. Eventually, too many
people got mortgages using stated income. You don’t
make payments with stated bank balances, so many
people had mortgage payments they could not afford.
Today’s stricter underwriting standards should help
avoid rekindling those issues going for ward. The cycle of
increased value we are in at present is not being driven
by unchecked demand. It is driven mostly by a lack
of supply. Values now are not being driven by stated-income buyers who cannot afford payments, but by an
increase in jobs, which is driving an increase in home-buying demand at a time when supply is scant.
It serves the interest of homeowners, borrowers and
mortgage professionals to find ways to stabilize values.
The best way to stabilize values is to build more housing. Unfortunately, land-use regulations, especially
zoning, often can restrain supply, driving prices up to
levels that are unaffordable for those borrowers who
could take the area’s available jobs. Land-use regulation and zoning are unnatural market forces that can
prevent property owners from building needed and
Of course, zoning ordinances were not intended to
make housing unaffordable, and they serve many
positive purposes. Zoning sets the overall plan of a
city. It sets building height, use — commercial, resi-
dential or mixed — setback, landscaping and even the
architecture of properties that get built.
Zoning may even reserve space where nothing
can be built and instead is left as urban parks or even
undeveloped raw land. Homeowners don’t want to
buy a house with a great view only to have some-
one build a taller building that blocks a view that has
aesthetic and financial value.
In addition, zoning gives residents peace and quiet
by separating residential from commercial activity and
controls traffic flow, thus making streets quieter and
safer. It also can prevent homeowners from having the
enjoyment of their property compromised by poten-
tial development by their neighbors.
Finally, zoning is about public safety. It can prevent
people from building homes where flooding is likely or
it can require structural modifications in areas prone
to earthquake damage. It is hard to see any fault with
What we see presently is an unintended consequence
of zoning. The problem is that some zoning rules
can cause prices to become unaffordable to many.
Although the physical characteristics of neighborhoods and cities have been preserved, what has been
affected is the population.
Cities are valued for their cultural diversity. Diver-
sity is severely mitigated if the annual family income
must be $200,000 to buy a median-priced home.
Zoning changes can allow clusters of high-rise multi-
family buildings to be built where they will have min-
imal effect on existing single-family housing. Done
sensibly a city can retain most of the benefits zoning
achieves while creating more housing and preserving
Land-use regulations need to be relaxed, however,
and before the problem of high values arises in an area.
Lack of housing that is affordable to the potential
workforce of an area can hold back economic growth.
Some would-be workers will choose not to relocate to
an area in the first place, and those who do get hired will
be deprived of giant chunks of discretionary spending
after paying for housing expenses. Zoning changes
need to be in place before this occurs so developers can
act when the demand for housing exceeds the supply.
The problem is regional and so are the solutions.
In the San Francisco Bay Area, for example, high-rise
residential condos and apartments need to be built
in large cities such as San Jose, San Francisco and
Oakland. In the suburbs, residential infill projects
should be allowed in places where commercial property no longer makes economic sense.
Originators who want to impact the issue of affordability in their local areas should get more involved in
community and professional organizations, as well as
their chamber of commerce.
The term “affordable housing” usually refers to governments forcing builders to build so many units in a
development designated to be sold at below-market
rates to people whose incomes are below a certain
level. In reality this often just makes other homes in
the development more expensive.
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86 Scotsman Guide Residential Edition |
ScotsmanGuide.com | February 2018
Continued on Page 88 >>
How many hours borrowers
must work to afford their
A recent map produced by Visual Capitalist, a
website that creates business and investment
infographics, shows how many hours Americans
must work each month to pay for the average
mortgage in various cities. The average person
living in New York, Los Angeles, Miami, and San
Francisco must work more than 100 hours each
month to afford a mortgage payment in those
cities. View the map at sctsm.in/vcmap.
At a Glance