Presentation at the Orange County 5/20/10 Housing Summit

1. OC Housing Summit IV May 20, 2010
Orange County Housing Summit IV
Irvine, May 20, 2010
Rethinking Home Ownership
observations & commentary
without conclusions
ith t l i
Professor Kerry Vandell / UCI
Ehud Mouchly / READI, LLC & USC
Who Is Here Today?
Homeowners
Why own?
o Financial
o Other
Would you prefer renting?
Renters
By choice?
Would you prefer owning?
o Hurdles?
Down payment
Monthly cost
Rethinking Home Ownership 1

2. OC Housing Summit IV May 20, 2010
Home Ownership Rates by Country – 2002
Source: The Economist, March ‘02
Source: US Census
Rethinking Home Ownership 2

3. OC Housing Summit IV May 20, 2010
Family Homeownership by Income
Percentile
Source: Federal Reserve Board, 2009
Rethinking Home Ownership 3

4. OC Housing Summit IV May 20, 2010
Home Ownership – 1945-2010
1945-
– Shelter vs. Financial Asset
Post World War II Experience
Living the American Dream
o Rent > Own > Upgrade > Downsize / Rent
Income-driven housing solutions
o Low and moderate income household – need-driven
o Middle income (~100% AMI) – struggling between
“need vs. want vs. afford
need vs vs afford”
o High income – discretionary
Non-financial / semi financial considerations
o Public policy
o Social / psychological value setting
o Mobility
Home Ownership – 2010 and Beyond
A new paradigm or continuing pattern?
Changing employment patterns
Technology and communication
Transportation and commuting
Evolving planning, design & architecture
Higher density development
Smaller units
Changing patterns of residential uses
o e.g., multi-generational housing
Accommodating California / So. Cal population
growth
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5. OC Housing Summit IV May 20, 2010
Rethinking Home Ownership 5

6. OC Housing Summit IV May 20, 2010
Buy vs. Rent Tradeoffs:
The NY Times Buy vs. Rent Calculator
http://www.nytimes.com/interactive/business/buy-rent-calculator.html
Biases
Generational social / political / public policy
bias towards ownership
Political stability / personal safety / perceived
economic security / “Community building” /
Managing expectations with taxation preferences
Changing the bias – if desired
Subsidizing ownership housing instead of just rental
housing (LIHTC / NMTC)
Regulatory production incentives
Rethinking Home Ownership 6

7. OC Housing Summit IV May 20, 2010
Affordability, Workforce & Employer-
Employer-
Assisted Housing Issues
Shortage of affordable near-employment housing:
g p y g
roadblock to employee attraction, retention,
economic development and community building
Middle-income housing to be priced at “4X Income”
“New normal” will make the shortage acute again
For many employers the emphasis is on JOD not
just TOD
Commuting costs are combined with PITIH for
qualifying ratios in mortgage underwriting
“Smart Commuting” mortgage financing – ~$1K income
increase per 1 mile reduction in commuting distance
Rethinking Home Ownership 7

8. OC Housing Summit IV May 20, 2010
Balancing Acts and Tradeoffs for Affordable
Workforce and Employer-Assisted Housing
Employer-
(+) (–)
End of “drive to qualify” Higher densities
Reduced time-distance Smaller opportunity
to jobs parcels /higher land cost
Increased discretionary Lower value of suburban
income and exurban homes
More time with family Need for investment in
and community attractive / efficient
More efficient municipal mass transit
services
Indicated Housing Solutions
Rental – for:
Shelter
Sh lt
Short tenure
Alternative investment of surplus funds for higher returns
Ownership – for:
Shelter
Longer tenure
Forced savings / investment
Alternatives / hybrids:
Rent-to-own
Ownership on ground leases (community land trust)
o Shared equity model – continuing affordability
o (ref. University hills / ICHA)
Rethinking Home Ownership 8

9. OC Housing Summit IV May 20, 2010
Thank you
Prof. Kerry Vandell, UC Irvine, Merage School of Business
949.824.1985 / kvandell@uci.edu
Ehud Mouchly, READI, LLC
310.289.1855 / emouchly@readi.com / www.readi.com
Rethinking Home Ownership 9

10. READI, LLC Housing Alternatives: Market Rate Unit vs. Rental Unit vs. Ground-Leased Unit May 20, 2010
Illustration: Market Rate Unit vs. Rental Unit vs. Ground-Leased Unit
Assumptions
Orange County Metro - comparing median housing unit to Ground-
a middle-income ground-leased workforce housing unit Ground- For-Sale leased
for a family earning $86,100 - the OC Metro AMI Generic Market leased Market Unit Rental Unit Owned Unit
Home Purchase
Initial Purchase Price $435,000 23% (discount) $435,000 $336,065
First Mortgage 90% 100% 391,500 336,065
Down Payment 10% 0% $43,500 $0
Mortgage Loan Fees 1.00% 3,915 3,361
Other Closing Costs 2.00% 8,700 6,721
Rental Unit Security (2 X monthly rent (1/20 of house price)) $1,800 3,600
Cash at closing $56,115 $3,600 $10,082
Annual Housing Costs & Required Income
Mortgage Interest Rate (ground-leased rate after buy-down) 6.50% 5.75%
Mortgage Term (years) 30
Annual Mortgage Payments $29,695 $0 $23,534
Annual PMI Premiums (no PMI on Ground-leased unit) 0.52% 2,036 -
Annual Rental Payments 21,600
Property Tax (rate - excl. special districts / other assessments) 1.00% 4,350 3,361
Property Tax Annual Increase 2.00% - -
Homeowners / Renters Insurance 0.25% 1,088 840 840
HOA Fees per month $250 $200 3,000 2,400
Housing Assistance Loan (HAL) 1st Year Disbursement per mo. $0 - -
Annual Housing Costs $40,168 $22,440 $30,135
Required Annual Income by 35% Qualifying Ratio 35% $114,765 $64,115 $86,100
Price/income Multiplier 3.8 - 3.9
Home Resale in Yr. 7
Time in Home (years) 7
Sale Price in Yr. 7
by Market Appreciation Rate for Market Unit / CPI for Ground-leased
unit 4.0% 3.0% $572,430 $413,317
Home Price Appreciation $137,430 $77,252
Appreciation Multiplier of Cash at Closing 2:1 8:1
Resale Price in Yr. 7 (mkt unit by appreciation / GL unit by CPI) $572,430 $413,317
Pay-off Mortgage Balance (353,980) (299,882)
Repayment of Housing Assistance Loan (HAL) $0 0 0
Brokers Commission / Transfer Fee 5.0% 1.0% (28,622) (4,133)
Share of Appreciation to Landowner / Ground Lessor (a Special Purpose Entity (SPE)) 10.0% 0 (7,725)
Return of Rental Security 0 3,600 0
Pre-tax Cash Proceeds to Homeowner From Home Sale $189,829 $3,600 $101,576
Equity Multiplier of Cash at Closing 3:1 1:1 10 : 1
Compounded Annual Growth Rate of Cash at Closing 19% 0% 39%
After-tax Benefits During Time in Home
Total Mortgage Interest $170,341 $128,557
Total PMI Premiums 14,251 0
Total Property Taxes 32,339 23,525
Tax-deductible Housing Costs $216,931 $0 $152,082
Federal Income Tax Savings During Time in House 25.0% $54,233 $0 $38,020
Cash Proceeds From Home Sale / Deposit Return 189,829 3,600 101,576
After-tax Cash Gain Including Homeownership Benefits $244,062 $3,600 $139,597
After Tax Equity Multiplier of Cash at Closing 4:1 1:1 14 : 1
Compounded Annual Growth Rate of Cash at Closing 23% 0% 46%
OC Housing Summit IV page 1 of 2

11. READI, LLC Housing Alternatives: Market Rate Unit vs. Rental Unit vs. Ground-Leased Unit May 20, 2010
Assumptions
Orange County Metro - comparing median housing unit to Ground-
a middle-income ground-leased workforce housing unit Ground- For-Sale leased
for a family earning $86,100 - the OC Metro AMI Generic Market leased Market Unit Rental Unit Owned Unit
Nominal total housing benefits / (costs) after 7 years.
Appreciation: 4.0% / Inflation: 3.0% / Reinvestment: 4.0%
Cash at home purchase / rental start ($56,115) ($3,600) ($10,082)
Annual housing costs
Mortgage payments (207,862) 0 (164,739)
PMI premiums (14,251) 0 0
Property taxes (32,339) 0 (23,525)
Homeowners insurance (8,589) (6,438) (6,438)
HOA fees (23,695) 0 (18,390)
Housing Assistance Loan (HAL) 0 0 0
Total [CPI-escalated] $1,800 / month rent (HUD FY2009 Fair Market Rent) over 7 years. (165,509)
Annual Housing Costs (286,736) (171,947) (213,091)
Total Cash Outlays ($342,851) ($175,547) ($223,173)
Offsets
Cash from sale / Deposit return 189,829 3,600 101,576
Tax savings 54,233 0 38,020
($98,789) ($171,947) ($83,577)
Nominal after-tax compounded savings - from differences in cash at closing plus annual housing costs
among a market rate unit, rental unit and a ground-leased unit. This assumes that the renter or buyer
of the ground-leased unit has sufficient income to qualify for a market-rate unit but opts (if eligible) for a
rental unit or a ground-leased unit and invests the equivalent amount at 4.0%. Furthermore, that
ground-leased unit buyer's qualifying ratio is then reduced from 35% to 26%. n/a 190,204 134,972
Nominal combined after-tax benefits / (costs) of cash at closing, annual housing expenditures and final
sale outcome or alternative investment of cash-at-closing funds ($98,789) $18,257 $51,395
Rental Unit Comparison
Annual Rent $1,800 per month $21,600
Total [CPI-escalated] $1,800 / month rent (HUD FY2009 Fair Market Rent) over 7 years. No gain at end of tenure ($165,509)
OC Housing Summit IV page 2 of 2