“The state’s secondary market for construction financing allows lenders such as state housing finance agencies and banks to provide the investment capital needed to build multifamily housing projects and put the keys in the hands of families.”
That’s the conclusion of a new report released by the agency Center for Public Enterprisea nonprofit organization that promotes the expansion of public sector programs.
The report states that these lenders can underwrite mezzanine construction loans, provided that the National Home Construction Fund has the ability to purchase these loans in the secondary market. This could make the already low overall cost of entry easier to digest.
“The investment required to get a typical multifamily project off the ground is small: a mezzanine loan accounting for less than 20% of the project cost could significantly lower the average cost of capital and allow shovels to get deeper into the ground,” the report states.
As housing supply faces well-documented problems across the U.S., coupled with high home prices and persistently high interest rates, multifamily housing starts have slowed despite low vacancy rates nationwide. But when demand picked up, “the new homes that should have been built were not built, thus starting another price cycle,” the report explains.
Establishing a national homebuilding fund has the potential to ease the burden on builders and lenders caused by rising interest rates. It could also create “an economic environment in which housing production is somewhat insulated from business cycle factors that do not reflect housing demand,” the report said. This could lead to housing production becoming “smoother and more stable over time.”
As policy recommendations targeting housing construction needs have yet to materialize to any meaningful extent, stakeholders are relying on monetary policy – a “machete, not a scalpel” when it comes to housing industry interests. Price pressures are primarily addressed by making business operations more difficult, rather than by solving fundamental problems unique to specific industries.
“If monetary policy succeeds in reducing demand—usually by triggering a recession—then eventually, interest rates normalize and, in theory, demand returns,” the report states. “Therein lies the problem: the housing stock, specifically Multifamily housing takes time to build—far longer than it takes to produce most other goods and services Americans use every day.
“When the economy recovers, the new units that should be available for the recovering consumer market are not available because construction was not taking place during the trough of the economic cycle.”
These actions also tell builders that if there are monetary policy tools to influence the economy, this could also work against them, leading to lower construction activity and preparing for policy changes. That will require federal tools to help more precisely reduce the burden of housing construction, the report suggests.
“National housing researchers, including Freddie Mac, it is estimated that the national housing supply gap is between 1 million and 5 million units. To achieve this goal, many policy levers must be mobilized.
“Financing leverage that can partially insulate housing investment from the swings of the business cycle has been a missing link in a range of tools and interventions so far. We hope that the housebuilding fund outlined here will fill this gap.
