posted November 10, 2009

Book Views Importance of Affordable Housing Finance

With housing finance having played a major role in triggering the global recession, economist Dr. Kim Hawtrey of the Hope College faculty believes that major changes are needed to avoid similar crises in the future, with affordable financing for home-buyers a crucial part of the mix.

Hawtrey, who is a professor of economics at Hope, is the author of "Affordable Housing Finance," published this fall by Palgrave Macmillan of New York City and Hampshire, England.  The book, written for a wide audience, outlines the nature of "housing stress" and explains why capital markets need to be an essential part of the housing solution.  Considering the issue in the U.S., United Kingdom and Australia, it examines the shape of the challenge, explores new banking ideas and concludes with directions for future policy.

Describing the sub-prime mortgage crisis that prompted the recession as "the largest economic upheaval of a generation," Hawtrey believes that indications that the current crisis is abating - as reflected by stabilized housing prices and growing sales--shouldn't be mistaken for a sign that all is well.

"The short-term cyclical downturn has been arrested, but the real issues are long-term and structural," he said.  "It's clear that if we don't find more sustainable ways of supplying housing and financing housing, we could have a repeat of the crisis," he said.

Hawtrey notes that residential housing is a major component of the global economy, accounting for nearly half of all tangible capital assets in the developed countries of the world.  "The housing sector is well in excess of US $40 trillion; housing is the most valuable asset category on earth," he said.

The value, Hawtrey says, reflects shelter's role as one of three basic human needs, along with food and clothing.  As crucial and enduring as the need is, however, he feels that the current models for making housing affordable are inadequate, with harmful results for individuals, society and ultimately the economy overall.

In the U.S., for example, some 30 percent of households are defined as experiencing "housing stress" - meaning that they are spending more than 30 percent of their income on housing.  Some 17.7 million of U.S. households are defined as "severely burdened," meaning that they are paying more than half of their income for housing.

"Lack of housing access, adequacy, affordability and finance in turn produces negative externalities - unpriced, unintended costs - that are borne by the economy and community," he said.  "The direct costs of poor housing include bottlenecks in attracting workers to growing industries, and adverse impacts on the health and educational opportunities of household members.  Impacts on the community include declining social cohesion and erosion of social capital.  A common scenario would be the social exclusion of a significant section of the population from the normal avenues of participation in society."

Hawtrey notes that the widely used, traditional mortgage model is just one option for making adequate housing available to a large segment of the population.  With many prospective home-buyers failing even to qualify for such mortgages, he believes that a vastly expanded menu of pathways to home-ownership needs to be looked at.  Hawtrey encourages further development of alternatives, including affordability-based lending, shared equity, equity release and pooled investor vehicles.

Hawtrey also believes that new practices in both the capital market and by government can help not only with financing but with avoiding the sort of collapse that took place in 2008.

For example, Wall Street, he notes, didn't anticipate the crisis - but could have.  He believes that greater transparency - such as a clearer system for understanding various grades of housing-backed securities - can help avert such crashes in the future.

"We need better processing of information," he said.  "Remarkably, credit rating agencies judging the worth of securities simply didn't see the crisis coming."

He also believes that it's time for a re-assessment of government's involvement, perhaps with an eye toward spreading some of the risks currently related to such securities.  "We have a suite of policies already," he said.  "This is a good time in the cycle to revisit those policies."

Hawtrey has been a member of the Hope faculty since 2007, and he was previously chief economist of a commercial bank and economic advisor with a Central Bank.

He has authored five other books and more than 30 scholarly papers, including in "North America Journal of Economics and Finance," "Applied Financial Economics," "Reformed Theological Review" and the "International Writings in Economics" series.  He serves on the editorial board of the "Finsia Journal of Applied Finance," and chaired the Affordable Housing National Research Consortium, a peak policy committee of CEOs from leading housing industry bodies.