Subcommittee on Housing and Transportation

Hearing to Examine Proposals to Promote Affordable Housing



June 20, 2000

My name is Frank Thompson. Thank you, Chairman Allard, for the opportunity to testify this morning before the Senate Subcommittee on Housing and Transportation on S. 1333, "Promoting Housing Affordability for Working Families Act of 1999." Senators Robert Bennett (R-UT) and Ron Wyden (D- OR) introduced this bill on July 29, 1999. NAHB has made passage of a bill to remove barriers to housing affordability one of it's top priorities for 2000. This bill goes a long way towards addressing the subcommittee's concerns about homeownership rates among segments of our population.

On behalf of the 200,000 members of the National Association of Home Builders (NAHB), I am pleased to participate in the exchange of ideas on the important issue of homeownership for Americans. Homeownership plays a critical role in a family's success and financial well being and we applaud the Chairman's effort to enhance the federal government's commitment to increasing the access to homeownership for more Americans.

The "Promoting Housing Affordability for Working Families Act of 1999," S. 1333, provides an opportunity for a broad local dialogue among interested parties about the tradeoffs between housing costs and other valued priorities that can be a significant factor in adding to the cost of housing. NAHB supports developing a common sense approach to relief from excessive, oftentimes duplicative, regulatory burdens.

Homeownership and Barriers to Housing Affordability

Home building is a highly regulated activity. Perhaps in no other industry must the producer obtain a permit or undergo inspection for each individual unit of the entire production. For example, builders must comply with site-development standards, while applying for building permits and undergoing building code inspections. The effect of regulation on the affordability of housing is undoubtedly negative. Layers of excessive and unnecessary regulation imposed by all levels of government - federal, state, and local - can add 20 to 35 percent to the cost of a home, which translates into thousands of dollars, making it difficult, or even impossible, for families to own their own home.

When American families are denied the opportunity to purchase a home, the whole nation suffers. Homeownership is the cornerstone of family security, stability, and prosperity. It strengthens the nation by encouraging civic participation and involvement in schools and communities. It provides a firm foundation from which Americans can work to provide for their families and enhance their communities.

It is important to understand why NAHB has placed such a strong emphasis on homeownership and removing the unnecessary barriers that prevent some families from becoming homeowners. The national homeownership rate, the percentage of households who own their own home, reached an all-time peak of 67.1 percent in the first quarter of 2000, and an all-time annual peak of 66.8 percent in 1999. That means that nearly 71 million households own their home, one-third more than the 53 million who owned homes in 1980 when the homeownership rate was last at a peak. All of the growth in the rate of homeownership and much of the growth in the number of homeowners has occurred since 1994.

Certainly low interest rates and a thriving economy have contributed to the growth in homeownership. The Congress deserves credit for doing its part in raising homeownership by holding the line on spending, delivering a balanced budget, and maintaining and enhancing the tax treatment of owner-occupied homes.

However, the recent growth in homeownership still leaves many age groups below their peak homeownership rates of the late 1970s and early 1980s. For instance, households headed by an individual between ages 30 and 34 had a homeownership rate of 62.6 percent in 1978, which was only 2.6 percentage points below the rate for all households. In 1999, this same age group had a homeownership rate of 53.8, almost 9 percentage points below the rate in 1978 and 13 percentage points below the overall rate in 1999. Both their absolute and relative positions are much worse than they were in 1978. Other examples are shown in Appendix I.

Much of the gain in homeownership is due solely to the aging baby boomers whose sheer numbers and age have pushed the average homeownership rate to new highs while the homeownership rates for individual age groups have not returned to their former peaks. In 1999, the only age groups to establish new records for homeownership were the ones headed by individuals aged 55 and above.

However, even with all the gains in homeownership, affordability has diminished over the last 25 years. Some of the deterioration must be laid at the feet of burdensome regulations and their unnecessary costs, which end up being paid by home buyers. Young families trying to purchase their first home are confronted with unnecessarily high home prices brought about by government-imposed regulations and restrictions.

In 1972, the median new home price was $27,600. Mortgage interest rates were similar to today's rates. With a 10 percent downpayment, nearly two-thirds of the young households could afford to purchase a new home. Twenty-seven years later, in 1999, the median new home price is $157,000 and with a 10 percent downpayment, less than 40 percent of young households can afford to purchase a new home. The salient figures for this comparison are contained in Appendix II.

Excessive regulation of the residential development process and of home building has contributed to the fall in affordability for young people and raised a barrier that many cannot surmount. In a 1994 survey, NAHB found that development costs and fees added an average of $21,000 to the cost of a $200,000 home in highly-regulated markets. Even in markets where regulation is deemed only moderate, the costs amounted to over $10,000 per home. These added costs push many potential home buyers out of the market or force home buyers to purchase homes farther from their jobs and commute longer distances. NAHB estimates that one-half million households fail to qualify for a mortgage on a typical new home for every $1,000 increase in sales price. Clearly, regulatory barriers have been a leading cause for young families' slow return to their peak homeownership days of the late 1970s.

Enactment of any regulation carries a cost. The housing industry supports laws that clearly safeguard the health and safety of the homebuyer and general public, and allow a reasonable use of natural resources. However, reform is needed to remove barriers that add to the cost of residential development without providing any related benefit.

Recent newspaper articles in USA Today and the Washington Post highlight the growing affordability problem in areas of the country experiencing continued economic prosperity, especially in the technology sector, such as Silicon Valley in California and Fairfax County in Virginia. A recent report by the Center for Housing Policy says that because wages are not keeping up with skyrocketing housing prices, and there is a lack of affordable housing units, there are a growing number of moderate-income families facing a housing crisis. This is especially true of two-wage earner, entry-level municipal employees, teachers, and service employees. The government and the private sector need to do more to help the working class.

It is for these reasons, that NAHB is delighted to work with Senators Wyden and Bennett on legislation addressing these barriers to housing affordability. NAHB is very pleased that S. 1333, the "Promoting Housing Affordability for Working Families Act," contains many of the provisions on removal of barriers to housing affordability that were included in a housing bill from the 105th Congress, S.1877, the "Affordable Housing Barrier Removal Act." Similar provisions are included in H.R. 1776, the "American Homeownership and Economic Opportunity Act," which passed the House on April 6, 2000 by an overwhelming vote of 417 to 8.

The "Promoting Housing Affordability for Working Families Act of 1999," S. 1333, addresses housing affordability on a multitude of fronts. First, it would require all federal agencies to include a housing impact analysis, when a new rule has a significant impact on the cost of housing. The housing impact statement is intended to focus the attention of federal agencies on the question, "how does this policy affect home prices" every time it tries to solve a problem by instituting a new rule or regulation.

Each housing impact analysis would include the following:

  1. a description of the reasons why action by the agency is being considered;

  2. a succinct statement of the objectives of, and legal basis for the rule or regulation;

  3. a description of , and where feasible, an estimate of the extent to which the rule or regulation would impact the cost or supply of housing or land; and,

  4. an identification, to the extent possible, of all relevant federal rules, which may duplicate, overlap, or conflict with the proposed rule or regulation.

This provision would raise the awareness of proposed actions by the federal government by demonstrating that oftentimes well-intentioned regulations have unintended, yet negative consequences for consumers, private industry, and housing. S. 1333 establishes is a procedure whereby the federal government must disclose any possible impact on housing affordability and may consider less costly alternatives.

S. 1333 also provides incentives to states and localities for evaluating their own regulations. It would reauthorize grants, originally included in the Housing and Community Development Act of 1992. These grants were developed to serve as incentives for states and localities to plan for and to develop barrier removal strategies. Reauthorization is important as it serves as a means for the federal government to encourage states and localities to identify ways to eliminate barriers to homeownership at the local level.

The bill would require communities to demonstrate a "good faith effort" in removing barriers when they submit their Consolidated Plan to the Department of Housing and Urban Development (HUD) for HOME and Community Development Block Grant (CDBG) funding. This would allow states and localities to examine more comprehensive efforts to remove barriers to affordable housing. The purpose of the barrier removal grants, coupled with the requirement that states and localities demonstrate a "good faith effort" in removing barriers when they submit their Consolidated Plan to HUD are intended to bring together all the parties involved in the production of housing and those who regulate them to discuss the barriers and how to remove them. The demonstration of a "good faith effort" at barrier removal in the Consolidated Plan can be bolstered by the assistance provided in the grant and can be part of a long-term strategy to cut unnecessary regulations and make housing more affordable.

S. 1333 would encourage the creation of a Barriers to Homeownership and Housing Affordability Council at the state or local level. The purpose of the Council is to require all participants with an interest in the production of affordable housing, to "come to the table" to identify the barriers to housing affordability and to devise barrier removal strategies. Each Council would be comprised of representatives of the for-profit housing industry, the non-profit housing industry, and related interests, such as, city planners, environmentalists, or transportation officials. The local government would appoint members of the Council and control would reside at the local level.

Each Council would determine it's own meeting schedule and develop a barrier removal strategy, based on input from the members and any other interested party, for it's own jurisdiction.

The practical effect of the establishment of the Councils, and the actual distribution of the barrier removal grants, would be to promote barrier removal by increasing general awareness that certain regulations have an impact on the ultimate cost of housing. The ability to bring all participants together through the Councils - those who produce housing and those who regulate land use and services -- would facilitate removal of some burdensome regulations.

It is important to note that affordability barriers assume many shapes and sizes. What is considered a barrier in one city may not adversely impact affordability in another city. For example, in City X, housing providers may decide safety and health requirements are a primary local problem, but do not consider the associated costs. In that case, local safety and health officials could be included in the Barriers Council to discuss how some of these regulations could be removed. However, in City Y, health and safety officials would not be included because the problem there may be restrictive and exclusionary zoning. In that case, then planning and land use officials would address the zoning burden.

The bill would also establish a clearinghouse within HUD to collect and disseminate information on regulatory barriers and the effects on the availability of affordable housing. This is important as it provides an additional tool for states and localities to use to evaluate successful barrier removal strategies from all parts of the country and in communities of similar population and economy for their own planning and development.

Building Better Places to Live, Work, and Play

Home builders have always worked hard to make the communities they build the very best places for America's citizens to start their lives, raise their children, and fulfill their dreams. NAHB supports meeting the housing demand in smarter ways by planning for and building to higher densities, revitalizing our nation's cities and older suburbs, and preserving meaningful open space and protecting environmentally sensitive areas.

Understanding where people want to live and the homes they want to live in is the first step in mapping the patterns of growth for America in the decade ahead. The federal government's role should be to encourage local communities to adopt long-term comprehensive plans that will meet the demand for new housing, public infrastructure, and other services.

The people who live in them will shape the fate of cities - large and small. The federal government can help by making strategic investments in people and communities and by creating incentives for others to do the same. Municipal employees and teachers contribute to the health, safety, and vitality of the communities they serve. However, as we have stated earlier, many of these teachers, fire fighters, and police officers cannot afford to purchase homes in the communities in which they work.

S. 1333, the "Promoting Housing Affordability for Working Families Act" contains several programs to assist hard-working, dedicated public servants, especially young entry-level workers, purchase a home. NAHB strongly supports provisions in the bill to allow communities the option under the Community Development Block Grant (CDBG) and the HOME Investment Partnerships Program to provide downpayment assistance, closing cost assistance, reduced mortgage rates, or homeownership counseling for uniformed municipal employees and teachers. NAHB is pleased the homeownership option extends to uniformed municipal employees and teachers whose family incomes do not exceed 115 percent of the area median. However, NAHB would like to see the option extended to those employees whose family incomes do not exceed 150 percent of area median in high cost areas. This would assure that even two-wage earner families could participate in this important program and make a greater investment in their community.

Making the FHA Program more efficient

The Federal Housing Administration's (FHA) single family mortgage insurance program is a very important tool to enhance homeownership. The FHA was established in 1934 as a result of the unfavorable lending conditions created by the Great Depression. Over the past six decades, FHA has enabled 25 million families to realize the dream of homeownership.

Even programs as successful as FHA can be improved, however, made more efficient and effective. One important FHA reform contained in S. 1333 redefines the term "area" for the purpose of establishing local FHA loan limits. NAHB believes that HUD should be given flexibility in determining how areas are defined to best serve home buyers.

NAHB believes that the Secretary of HUD should have the discretion to define "area" in a manner that best fits the mission of the FHA to provide a vital source of housing finance, regardless of how metropolitan statistical areas (MSAs) are determined by the Office of Management and Budget. Areas bordering on MSAs, for example, often experience significant demand for housing due to changes in population and/or commuting trends long before these areas are officially recognized as part of an MSA.

NAHB supports other FHA provisions that are included in H.R. 1776, the "American Homeownership and Economic Opportunity Act," but not part of S. 1333. One of these is the permanent authorization of the downpayment simplification program. The VA/HUD/Independent Agencies Appropriations Act of 1999 included a two-year authorization of a program to simplify the method by which the maximum FHA-insured mortgage (or minimum downpayment) is determined. The downpayment simplification program has allowed a maximum mortgage calculation in a far simpler process than that which is required in past years, an efficiency that helps consumers.

Also part of H.R. 1776, NAHB wholeheartedly supports the authorization of a new hybrid adjustable rate mortgage (ARM) for FHA loans. By having the authority to insure hybrid ARMs, the FHA will gain the ability to offer prospective home buyers an additional financing option during times of rising interest rates, when fixed-rate loans carry high rates, and 1-year ARMs fail to offer home buyers the stability afforded by hybrid ARMs. Hybrid ARMs have been available in the conventional mortgage market for some time, but these loans have been beyond the reach of traditional FHA borrowers who are unable to meet the more stringent credit criteria required to qualify for conventional loans.

NAHB supports provisions in H.R. 1776 permitting teachers, firefighters, and police officers to obtain FHA-insured mortgages with a reduced downpayment and a deferral of the upfront mortgage insurance premium. As stated above, it is important to make homeownership more affordable for those who serve their communities.

Mr. Chairman, we are anxious to work with you to make housing a national

priority. We believe it is important to strongly support legislation designed to help eliminate many of the regulatory barriers currently preventing individuals of all income levels from becoming homeowners by recognizing the implementation of sound housing policy. By acknowledging the existence of these barriers and developing a specific legislative plan of action to alleviate them, more families will be able to achieve the American dream of home ownership. NAHB stands ready to be your partner in developing a common sense approach to relief from excessive regulatory burdens.

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