A secondary market for construction financing could spur multifamily development
“A national secondary market for construction financing could enable lenders, such as government housing finance agencies and banks, to provide the investment capital needed to build multifamily housing and get the keys into the hands of families.”
This is the conclusion of a new report published by the Center for Public Entrepreneurshipa non-profit organization that promotes the expansion of public sector projects.
Such lenders, the report said, could make mezzanine construction loans on the assumption that a national housing fund would have the ability to purchase these loans on the secondary market. This could make the overall cost of entry – which is already low – more palatable.
“The scale of investments needed to get typical multifamily housing moving is small: mezzanine loans covering less than 20% of project costs could significantly reduce average capital costs, allowing shovels to break ground,” it said report.
Due to the well-documented challenges facing the U.S. housing supply, coupled with high home prices and persistently high interest rates, multifamily housing starts have slowed despite low vacancy rates across the country. But when demand returns, no new homes that “should have been built” have been built, setting off a new price cycle,” the report said.
Establishing a national housing fund has the potential to reduce the burden on builders and lenders from higher rates. It could also potentially “create an economic environment in which housing production achieves a degree of insulation from cyclical factors that are not indicative of housing demand,” the report said. This could lead to a situation where housing production “becomes smoother and more stable over time.”
Because policy proposals tailored to the needs of the housing industry have not yet been realized to any meaningful extent, stakeholders are relying on monetary policy – a “broadsword, not a scalpel” when it comes to the interests of the housing industry. Price pressures are primarily addressed by making it more difficult to conduct business activities, as opposed to addressing the underlying problems specific to a particular sector.
“If monetary policy succeeds in reducing demand – often by causing a recession – then interest rates eventually normalize and demand theoretically returns,” the report said. “And herein lies the problem: Building housing, especially multi-family housing, takes time – much more time than it takes to produce most of the other goods and services that Americans use every day.
“When the economy returns, the new units that should have been available to a revived consumer market will not be available because construction did not occur during the trough of the cycle.”
These actions also serve to teach builders that if any monetary policy tool is used to influence the economy, it will likely be bad for them as well, leading to a downturn in construction activity in preparation for a policy change. This requires federal tools that can help more accurately alleviate these burdens on housing, the report suggests.
“National housing researchers, including Freddie Macestimate that the housing supply shortage nationwide is between 1 and 5 million homes. There are many policy instruments that need to be deployed to achieve this goal,” the report said.
“A financing instrument with the ability to partially insulate housing investment from the volatility of the business cycle has so far been a missing part of the range of instruments and interventions. We hope that a housing fund, as outlined here, can fill this gap.”