The Cost of Housing

As the cost is the main reason why people move away from California and other high-tax states, are recent laws passed to streamline housing production having any impact? Additionally, what financing options are being explored to help address the current housing crisis?


Transcription:

Brady Guertin (00:14):

All right. Good morning everyone and welcome to the Cost of Housing panel today. Look forward to presenting to our all-star list of panels. My name is Brady Guertin. I'm the moderator for today and I am the Lobbyist for the League of California Cities in their housing portfolio. So I'm here to assist and guide the conversation, but I'm going to turn to the experts that we have on this esteemed panel. So looking forward to what we're going to discuss today. We're going to kind of give a background of the political dynamics of housing policy in California to start before moving into the funding opportunities at both the state and federal level, how the market is driving development for the repurposing of housing transit oriented development and what some of the trends are that way, as well as some of the long-term issues for the financial sector and the relevant research of that before we get into some Q&A. We look forward to all those conversations and we'll get started today with understanding the housing policy and political landscape in California and I'll turn it over to Libby, who is the former mayor of Oakland. So Libby, take it away.

Libby Schaaf (01:23):

Well, thank you so much. As he said. My name is Libby Schaaf. I like to say I'm the Recovering Mayor of Oakland, California. I also serve as HUD's appointee to the Metropolitan Transportation Commission and the relatively newly formed Bay Area Housing Finance Commission and Authority. This idea of regional bodies to finance housing is one of the trends I think that we're going to be seeing more of. We were recently joined by a similar entity in Los Angeles, LA Casa. I am also a candidate for state treasurer in 2026. I'm the first publicly declared democratic candidate, so please come give me all of your brilliant ideas when you see me by the coffee. I want to highlight two promising trends in policy and politics and then two upcoming opportunities that also could be threats that we should all be looking out for. I want to take you back to 2017.

(02:29):

I was about halfway through my first term as a mayor of Oakland and I was so excited to be invited to something that at the time seemed historic Governor Jerry Brown, possibly because of his guilt in eliminating redevelopment funding was having a giant ceremony with all of the politicians he could think of in bay view's. Hunter Point on a sunny September in 2017 to sign this historical package of 15 housing bills. He might as well had a mission accomplished banner behind him. The self-congratulatory remarks were amazing. You would think we had solved the housing crisis that day. Fast forward to this fall 2024, Gavin Newsom had a similar setup. The little desk, the politicians behind you, the pens, he signed 34 housing bills that passed out of the legislative session this year. Now, I think this is actually a promising trend and you might find that surprising for me as a recovering mayor to say that because this is part of what I think we are going to continue to see, and that is an arm wrestling match between local governments and their traditionally held local control of zoning and land use decisions and the state of California's legislature that is recognizing that in order to address the cost of housing, climate change, et cetera, the state has got to increasingly show its muscle put in guardrails and be more aggressive.

(04:19):

So you're seeing them do that in two ways that I believe are kind of the two pieces of what is driving the cost of housing. And by the way, if you are wondering what the cost of housing is in California, as we say in Oakland, it's hella expensive panel over. So the bills are primarily things to make it easier to start and finish building as well as to lower the costs that are otherwise piling on. I can give you lots of statistics about just how much more expensive California housing has become to both build and buy, but you don't need those statistics, particularly if you live here.

(05:09):

Now what else are we going to see in this arm wrestling? One other interesting trend that if you're not a political insider you might not have noticed is there is a little internal arm wrestling going on between the very influential building traits. There's a debate where the cost of things like project labor agreements, which used to be a very sacred cow, are now being called into question as being a barrier to actually delivering the affordable housing supply that California so desperately needs. So you're seeing a conflict between the carpenters and a set of unions they've put together the other building trades. I think that's going to be an interesting tension to continue to watch. It is very at play. The second promising trend that I hope people pay attention to. I'm going to coin a phrase. I have no idea if it's going to go over well.

(06:07):

Let me know. I'm going to call it Banish the Bagel. Banish the Bagel. I don't know if anybody else here is an Ezra Klein fan. He's a New York Times columnist and podcaster. When you're done being the mayor of Oakland, you get to discover things like podcasts. They're fantastic. He talks about everything bagel liberalism that in many ways Democrats, well-intentioned liberal, progressive Democrats are essentially being crushed under the weight of their own good intentions. In Oakland, we used to call it the Christmas tree. Every elected official needed to hang their own ornament. They had to add a provision or a regulation or a program requirement that served a particular purpose or a particular population. There is a growing movement, some call it the abundance movement that is calling into question whether this complexity is actually serving. In fact, they believe it is frustrating the goal of equity.

(07:17):

And so as you see this growing call to simplify regulations to not just streamline permitting but to streamline things like finance programs Spur Bay Area Think Tank put out a very influential report last year that really called on restructuring the complexity of state government, different planning requirements that are imposed on regional governments that actually conflict with each other and have no teeth and then a gazillion different funding programs that are not coordinated and are not aligned with the plans. I think you are going to see increasing calls to simplify the process, to not just streamline building permits but also to streamline financing programs. I for 1:00 AM on that team, go Banish the Bagel.

(08:16):

So two big opportunities that could also be threats coming up. I'm sure many of you know that in 2025, the 2017, the Trump tax cuts will be expiring. Congress is likely to be renegotiating the tax bill at that time. I think many of us are always mindful that we've got to continue to defend tax exemption for municipal bonds. That always feels like it's a little bit at threat, so do not lose your vigilance next year. Perhaps there's an opportunity to restore the advanced refunding that was taken away in that 2017 bill. And then there is always going to be a continued campaign to try and increase LiTech funds, especially for states like California that are constantly hitting against the cap.

(09:15):

I will close with what I believe is the single biggest opportunity in front of us and it is literally in front of us within the next two weeks and that is proposition five on your California ballot. I don't think people fully realize just how transformative the passage of Prop five will be. In fact, I'm probably speaking to a better room than most because most people don't even know what Prop five is. Prop five would take all infrastructure bonds issued by local or regional governments and that could be like the Bay Area Regional Housing Authority. It could be hospital financing districts, any special district, and it would allow those infrastructure bonds including affordable housing bonds to enjoy the same voter thresholds and accountability requirements. By the way that school bonds have been enjoying for the last several years, that's a 55% vote rather than the near impossible two thirds vote that they're subject to.

(10:25):

Now, the passage of Prop five would unlock billions upon billions of dollars to build affordable housing. Just this year, the authority I sit on the Bay Area Housing Finance authority was prepared. In fact, we voted to put on the ballot a 20 billion bond just for the nine counties here in the Bay area 20 billion. It would've been the largest bond in history at the last minute. We pulled it off because we didn't want to go until we knew the fate of Prop five. I can tell you that over the last decade, roughly half of the bond measures have gotten more than 55% but have lost because they have failed to clear that two thirds burden. We know that not only will more of these bond campaigns pass in California if Prop five actually does succeed, but there will be more put forward. And this is when we talk about the arm wrestle between the state trying to kind of manage local control, but local governments really being the closest to their communities, knowing their people, knowing the opportunities. This is actually a beautiful compromise because Prop five will empower local communities to plan and then invest in their own path for addressing the housing crisis and its increased cost as well as other challenges that we have in California infrastructure. So if anyone is interested in supporting Prop five within your legal limits, please come speak to me. It is imperative that we get Prop five passed. Thank you.

Brady Guertin (12:18):

Thank you Libby. And as Libby had mentioned, the complexity of government, state government. For example, the legislature passes around 6,000 bills or introduces 6,000 pieces of legislation every two years, which is really hard to keep track of. Keeps me employed as someone that works in government affairs, which I love. But one of the more important things is getting the funding to implement the laws and make sure that local governments as well as the nonprofits that are building affordable housing are getting money and resources to do that. So we're going to now turn over to Douglas Kincaid. He is the Financing Officer for the California Housing Finance Agency and he'll go over how the state is providing these funding opportunities for these different organizations to address California's extensive housing crisis. So Doug, I'll turn it over to you.

Douglas Kincaid (13:06):

Hi, I'm Doug Kincaid and I lead the capital markets at the California Housing Finance Agency. Cal HFA is a statewide affordable housing lender college HFA single family program. We provide down payment assistance and access to first brokerages for low and moderate income borrowers in California, opening up homeownership for low moderate income people and we are also a conduit issuer for their multifamily programs for the construction of new affordable housing projects in California. The state of California has dedicated a substantial amount of resources to development of affordable housing even within these challenging times. Currently, California for the 2025 year has budgeted $500 million of state tax credits for low-income housing projects. These tax credits are paired with federal tax credits to enhance the development of multifamily housing.

(14:11):

Cal HFA current has a mixed income program which combines federal and state tax credits with additional subsidy dollars from the state of California. Since its inception, our mixed income programs has allowed the construction of over 10,000 affordable units in the state of California. Cal HFA also runs a bond recycling program which allows for the preservation of multifamily volume cap. The issuance of recycled bonds allows for developers to save costs as without them projects will be issuing taxable bonds at a much higher interest rate. This results in an overall lower financing cost for the construction of new multifamily housing projects.

(15:02):

Cal HFA is actually partnered with the county and city of San Francisco and the city of San Diego to increase our availability of recycled volume cap and recently Cal HFA, we actually closed a $55 million bond for the construction of a fully affordable project in the ERO power station area in San Francisco 105 unit development. There's also some, we've actually seen an increase in the demand for recycled bonds with the increase of rates allowing for greater savings between taxable and taxes and bonds. And currently there's an industry push for Congress to reform the use of recycled volume cap, making it easier to use recycled volume cap including for allowing for the use of what was previously multifamily bonds to be used to issue for single family purposes, allowing for more people to purchase homes.

(16:15):

We also currently the state has what we call our dream for all program. This is an award-winning program that has that program that this program funds 20% down payment assistance through a shared depreciation program for low and moderate income buyers allowing more people to purchase housing in California. The second phase of this program targeted specifically first generation home buyers allowing first generation home buyers to purchase housing in California. With this program, we have allowed 4,000 homeowners to purchase housing. I want to talk briefly about the tax exempt bond market in California College FA just priced $107 million tax exempt affordable housing bond. The market has been very volatile since the feds have cut rates by 50 basis points in September and since the beginning of October, rates on MMD on the long end had risen about 30 basis points on the yield. There's also been a supply, there's also been a lot of supply with issuers trying to get into the market. Before the November 5th election, we were originally on a bond. We planned a two day pricing with optional to order period around 7:00 AM on Tuesday. And then because the market conditions were challenging later in the day, we decided to accelerate the bond and complete the pricing on Tuesday and we ended up being able to reduce our yield level by five basis points.

(17:57):

By the end of the day. Morgan Stanley with the senior underwriter for this project for this bond. I'll now turn over to Alex Zaman.

Alex Zaman (18:17):

Thanks Doug and nice to be with everyone today. Alex am head of Surface Transportation and Urban Development at Morgan Stanley and congrats to Doug and the entire Cal HFA team on a very successful pricing. This week. I'm going to spend some time just sharing some market perspectives, building off of Doug's points and then also talking about a few opportunities in the housing space to expand stock across all segments and an opportunity on the federal side as well. So just on the market side, I think in spite of the volatility and the huge supply surge that Doug referenced, I'd say that market conditions have been exceptional for many HFAs in the market this year. I think we've seen supply up about 25% year over year. Taxable supply is up about 50%, but in spite of a lot of that, we are seeing many of these deals get done with strong levels of subscription with some pretty substantial adjustments to yield and in some cases the acceleration of pricing to get ahead of volatility, which is exactly what happened with Cal HFA earlier this week.

(19:31):

Very prudent move to get in the market before rates continued to shoot up yesterday. From an investor perspective, I think we continue to see a tremendous amount of demand from accounts, especially in markets where there's strong fundamentals, strong market growth opportunities. We're really seeing this in particular in specialty tax states such as California, New York, others, and this is really driving some of the strong oversubscription that we're seeing on these deals. I think on the Cal HFA sale multiple times over led to some substantial adjustments. And on the retail side of the house, I think we saw most of the bonds spoken for through professional and individual retail. There was about 140 million of total retail and 32 million of California individual retail, which is pretty staggering. So a lot of that retail participation is driving the ability to push institutions and building off the institution's desire to add paper, especially in places like California.

(20:38):

I think in general the capital markets have done a very good job of providing latitude to finance housing segments across the board. The mature buyer base in the state HFA segment has obviously proven out this year. Low income and permanent supportive housing have benefited from a raft of different tools, whether it's continued use of 4% and 9% tax credits, private activity bonds, a robust securitization market that's developed in the affordable housing space. And of course the many geo bond measures that have been successfully passed over the course of the last couple of decades, both at the city and county level and of course at the state level as well for all segments of housing. Having said that, there's obviously still a massive housing shortage across all segments and I think the markets have only begun to scratch the surface of being able to crack a dent in that demand and that need for housing.

(21:41):

I do want to touch upon one segment in particular that's gone particularly underfunded and that is middle income housing. Generally when we talk about middle income housing, it's 80 to 120% of Aaron meeting income. It's particularly acute where wage growth has not caught up with the cost of housing and the supply of housing. And in California since 2020, since the beginning of the pandemic, we've seen obviously housing costs skyrocket. I think the monthly payments for what are called bottom and mid-tier mortgages and single family homes are up about 75% and rents are up 35%. And on the flip side, hourly wages are really only up 20%. So that's obviously a huge disconnect in terms of the supply and demand dynamics and given where incomes are trending versus housing costs, that shortage obviously is driving out a lot of our essential workers either out of the region or out of the state completely.

(22:43):

And that shortage is being exacerbated by the lack of subsidies that exist for things like affordable housing where we see a lot of tax credit programs as well as market rate housing where it's obviously very incentive driven given the returns over the past five years, a couple structures have developed in our market to help finance middle income housing, one of which entails the use of a property tax abatement that cities will provide in exchange for rents being subsidized at that 80 to 120% level. In that structure, a developer will source an asset, maintain rents for the life of the debt, and in exchange a joint powers authority or some other municipality will serve as the issuer and the owner of that debt. And of that asset, I'd say a pretty robust market developed in 2020 and 2021 for that structure. In California, I think we saw over 10 billion of issuance throughout the state, about 50 plus projects, all non-rated, all non-recourse, and the program certainly delivered a number of benefits, but I will say there have been limitations to that program.

(23:57):

I think the first of which is that those were all acquisitions of existing market rate properties and not new construction in California. We obviously want to try and stabilize and preserve all housing segments that we can and certainly that helps in that regard. But the addition to the net stock wasn't occurring through the structure and it was not allowing a lot of cities across the state to meet and contribute to their state mandated housing goals through the regional housing needs assessment, the ARENA program, which is a rolling requirement at the state level. Secondly, there continues to be, I think what's a pretty healthy dialogue around what the affordability benefits of the program should be vis-a-vis what the capital markets will accept. And then lastly, we saw a lot of those transactions do so well in 2020 and 2021 simply because rates were super low. Many of those deals were financed in the three to 4% range.

(24:59):

A lot of buyer activity, a lot of buyer base depth, and the runup in rates over the last two years coupled with a lot of saturation in the market led to that slow down. So a number of challenges, but I'd say that the program provides at least a proof of concept for the capital markets to at least finance some form of workforce housing. And I think it serves as a good guidepost to develop more sustainable ways to address the housing shortage and make sure we're maximizing affordability, especially at that middle income level. As Doug noted, I think we're looking a lot across the industry at other tools that can be used to enhance the facilitation of middle income. Obviously the state's middle income program is an important part of that. The use of the recycled bond cap and volume cap for middle income can help drive some of that.

(25:54):

I think when we look at new construction in particular, it's important to consider creative structures either through developer driven subsidies or equity contributions or municipal contributions, which can include things like surplus land. And I think the ability to finance workforce housing is not just a joint powers authority construct. I know the model has received a lot of attention over the last couple of years, but it's really a sort of broad based application that can be financed at multiple jurisdictional levels, whether it's cities, counties, states, school districts, healthcare districts, and 501 c threes. I do want to just spend a quick moment on a new development at the federal level to really help drive the production of housing and it entails the facilitation of the Tian RIFF programs, which are two longstanding successful U-S-D-O-T loan programs that have been really the providence of the transportation industry for the last 30 years.

(27:01):

And so just for a quick primer, TIFIA was created to provide low cost loans to passenger rail highways and road projects. RIFF was accredited to really provide loans for short rail railroads as well as commuter rail projects. Both of those programs I think have provided an excess of a hundred loans, 50 billion of credit assistance across the country. A lot of agencies in California have taken advantage of this program, and while it initially started out as a gap filling program really for riskier assets like startup toll roads in the last 20 years or so, the eligibility of that program has broadened significantly to be able to finance transportation assets across the credit spectrum in the last two years in particular, thanks to the Infrastructure and Jobs Act, the eligibility of that program for both TIFIA and RIFF can now extend to transit-oriented development TOD as well as housing.

(27:59):

It's been a major push of the administration. It has been in the works for some time to get codified in statute, and when we look at the opportunities in the housing sector in particular, the federal government is allowing the use of that program to provide both permanent and construction financing for housing across the AMI spectrum. The benefits of the program are pretty substantial. The costs of these loans are tied to the 30 year US treasury rate, so today around a 4.5%, the loans themselves can go out in some cases 35 years and beyond. For TIFIA, the project cost eligibility can cover up to half of a project cost while RIFF can in some cases cover up to 75% or more depending on the project. There's a number of flexible amortization features. An agency or a sponsor doesn't have to begin principal amortization until five years beyond substantial completion.

(28:57):

The loans can be on a subordinate lien. So a lot of terms and conditions that many transportation agencies have taken advantage of that are now available for both the public and the private sector to deploy in the housing market. It is a program that is in its infancy and there are a couple challenges with that. There is a statutory requirement for ratings that is being worked through. There are a number of federal requirements NEPA by American Davis Bacon, but US DOT's credit, I think they're spending a lot of time right now working both with the rating agencies as well as with federal agencies like HUD and FHA to really streamline that underwriting criteria. So it's early days and I know we have an election coming up in two weeks, but I think the program really has a lot of promise to be another tool in the toolbox that can help really facilitate and drive housing across the board.

Brady Guertin (29:51):

Thank you, Alex. And as we talked about, as Alex hit on with the middle income housing and workforce development housing, one of the issues he had mentioned was transit-oriented development. So we'll turn over to Karen who has some background on that as well.

Karen Fitzgerald, CFA (30:04):

Yes, thank you everyone, and thanks for being here today. Yes, Alex covered a lot of the material I'm also going to cover, but to begin with, we've all seen the widening affordability gap, and that's from high housing prices, high mortgage rates, and that has really affected first time home buyers as well as rental households. And housing construction really has not been able to keep up with the demand and household growth, and that's led to a shortage particularly of affordable units due to rising costs and regulatory barriers. And this has left middle income earners in major metro areas with limited affordable housing options and has often forced them to either spend more time commuting or move to less expensive areas. There was a construction boom during the pandemic in the early part, but the new housing that was being built during the time was really geared more towards high-end, high-end multifamily and that made the problem of affordable housing even greater since 2022 with rising rates, the construction really has come to a standstill with new construction because of rising land costs, construction costs, obviously interest rates, labor shortages and restrictive covenants and local zoning restrictions.

(31:40):

So in response to this, governments have been trying to address the various challenges through public private partnerships, issuing tax exempt bonds, land grants and donating land and buildings providing subsidies, and also low interest rate loans to develop essential housing for middle income earners. And state housing finance agencies in particular have also become increasingly involved in this sector by providing financing for the creation of essential housing by issuing tax exempt bonds, low interest loans and tax credits. Example, California HFA offers of low market interest rate loans to encourage the development of middle income housing and moderate income housing for Californians and Massachusetts. They have a workforce housing fund, which provides financing to developers to create workforce housing units. And also in the state of New York through the Homes and Community Renewal Agency, they have a middle income housing program, which is designed to develop and preserve housing for middle income households.

(32:53):

So as Alex mentioned, the passage of the Infrastructure Investment and Jobs Act or IJA in 2021 did provide substantial additional funding for infrastructure projects throughout the us. And as a result, the Transportation Infrastructure Finance and Innovation Act, a lot of acronyms and the railroad Rehabilitation and improvement financing RIFF program, which are both administered by the Build America Bureau and the Department of Transportation, they have significantly expanded their lending programs and are making over a hundred billion dollars available in low interest rate loans to finance transportation infrastructure, including transit oriented development or TOD projects. So the idea of TOD is to integrate housing with public transit with the goal of creating compact walkable communities and it seeks to foster growth along transit corridors by creating housing that are near public transportation systems such as light rail subways and busy bus routes. And these projects are aiming to create or provide affordable housing near economic centers and transit hubs.

(34:17):

And they are in many ways targeting essential workers who earn too much to qualify for subsidized housing but cannot afford market rate rents or to buy a home. And this approach has generated increasing attention from cities that are focused on increasing their housing stock and also by incorporating transit access into their development plans, developers can take advantage of the low cost financing available through TIFIA and the RIFF programs. As Alex said, the TIFIA loan proceeds can be used to finance almost half of eligible costs and they must be within a half mile of transit, inner city bus or passenger rail stations. And the RIFF program, which is for rural areas, I mean, sorry, not rural areas, but it's only for rail projects, commuter rail and inter city passenger rail, and that will finance up to 75% of costs. There's also a TIA Rural project initiative, which is for outside urban areas. And for those loans offer a rate of one half of the US treasury rate, so as low as 2% more or less.

(35:41):

And they offer repayment programs up to 35 years. And the debt has to be fully amortizing with no bullet maturities. And there is an investment grade rating requirement for the TFI loans and there is a rating requirement for RIFF loans, but it doesn't necessarily have to be investment grade. So the Department of Transportation through its Build America Bureau has identified a pipeline of about a $12 billion in projects OD projects as of October. And in May the DOT granted its first TIFIA loan for A TOD, which was for a project in Washington state, but that was secured a geo pledge by the city I believe, and was not revenue supported. So as Alex was saying, the progress has been a bit slow and that's in part because of the lack of guidance for TODs. This is a brand new program and many of the issuers, it's mostly been used for transportation, toll roads and transportation infrastructure in the past.

(36:52):

So it hasn't really, it's been underused, but we're expecting perhaps after they iron out some of the details and HUD has got involved and is sort of acting as a liaison between the DOT and housing issuers and developers that next year it will open up and there'll be a lot more issuance and approval of these loans. So turning to our criteria and how we rate these kinds of transactions at Fitch, we use our affordable housing criteria, which is for standalone and single borrower essential housing projects. And we have a rating cap, which is a plus, although lower ratings are more typical. And that is due to the lack of pricing flexibility and the exposure to the local real estate market. As part of our analysis, we look at occupancy, the quality of the property, the local rental market characteristics. We evaluate operating risks such as including the control of expenses, the strength of property management and oversight.

(38:09):

If there's new construction involved, we will assess the construction phase under fitch's completion risk rating criteria. And although most of these projects will probably most likely be new construction there, if it's a conversion and there's existing performance data available on the property, we are definitely interested in seeing that. And our looking for an actual breakdown of units by the AMI level, so 80%, 100% to one 20% AMI, the rent increases are often necessary for affordable housing and essential housing. However, rent increases are subject often to local rental rent control ordinances, which can put a limit on the amount by which rent can be increased. And in addition, what we look at is the differential between local market rents and what's being charged at the project. So if that cushion or that gap is small, it may cause problems in trying to raise rents in the future.

(39:21):

And so typically what we do is we look at a model, a base case pro forma, which represents the expected scenario. And then based on that, we will establish our stress case assumptions for occupancy operating expense growth and revenue growth, and use that to derive a debt service coverage and compare that to our stress debt service coverage ratios and our criteria. There are also certain asymmetric risk factors that we consider, and these are factors that generally could weaken the rating but not necessarily lead to a positive rating adjustment. And these include deferred amortization instruments, the use of bullet maturities or debt that's not fully amortized at maturity. And the reason for this is because the uncertainty that these structures create for both market access and the cost of debt in the future. And for structures that do include debt that's not fully amortizing, we will typically calculate service coverage ratio assuming that the debt is fully amortizing and level pay over the life of the debt. However, with the TIFIA and RIFF programs, the debt is required to be fully amortizing after an initial interest only period. So we don't expect to have that issue with the new program. But that was all my all I had to say.

Brady Guertin (40:53):

Thank you Karen. And we will wrap up today with the long-term issues for the financial sector as well as some relevant research. Nora, take it over.

Nora Wittstruck (41:00):

Thanks. Hi, I am Nora Wittstruck. I'm the Chief Analytical Officer for governments at S&P Global. I recently changed roles, so my title is wrong on the slide, but that's okay. So I think our panelists have really demonstrated that the cost of housing is a nationwide and also an all hands on deck situation. We have all entities trying to solve the Rubik's cube on this particular issue. And I'll say that our perspective at s and p is that there's a fundamental imbalance between the home buyer and the housing market, and that's unlikely to change anytime in the near term. Some of that is a result of what Alex mentioned, and that's the imbalance between incomes and home prices. So in August of this year, we published an article that was called No Quick Fix for the US Affordable Housing Shortage. And in that we pointed out that since 1992, median incomes have risen, 43% sounds like a lot home prices for a medium priced home, that middle income buyer has risen 252%.

(42:18):

So that home price situation is not going to change in the near term, and although interest rates are coming down and mortgage rates are coming down, and that's a great thing, that's not going to be the way that we solve this issue. The other things that underpin the structural imbalance is climate hazards. For one, if you heard my colleague Ali Ani speak on the electric grid panel yesterday, the cost for infrastructure related to climate hazards will also weigh on home buyers and home purchasers. So if you are an entity, a city, the city of Oakland or LA County or San Francisco or even San Francisco International Airport sell bonds to make their infrastructure more resilient and adaptive to climate hazards, the end user is going to pay the cost for that either in property taxes or in user fees for utilities and things like that.

(43:19):

So that also weighs on people's ability to buy a home. The other thing is supply. Libby mentioned this supply I believe is we have a million units under for supply when compared to, excuse me, when compared to demand for homes, either multifamily or single family and HFAs are doing a great job to get people in those homes through lower interest cost loans or down payment assistance, but the supply is not there. In fact, Tennessee HFA indicated that they think their loan production is going to be down in 2025 because they have no homes to put middle income or affordable people into, which is an issue. I think what has weighed on the supply is the labor concerns in the market. Construction labor was very tight through the pandemic. It hasn't really eased up that much inflation really affect the building material costs. Those have come down a bit over time, but those are still a big issue.

(44:33):

And then you have a potential strike of the East coast ports and then you have another issue with supply chain and building supplies being available. And so wages, wages are a big concern in New York, and it sounds like in California as well, which I'm not as familiar with, have prevailing wage statutory provisions. So the cost to employ construction workers are very high. So until we get supply back up to a level where middle income people or even people that are not so much middle income, maybe they're even on the higher spectrum of middle income, have a home to get into that HFAs can help them finance the mortgage or give them down payment assistance to be able to get into that home supply is going to be a fundamental issue that keeps the cost of housing high. And then I'll just say that from a credit perspective, this is a demographic issue.

(45:34):

In 2023, we published an article on the cost of insurance premiums. California probably leads the way for this particular issue. Wildfire is a huge risk in California and unfortunately that's playing out in insurance premiums. And we noted that California is the state in the US that has the highest level of domestic out migration. Some of that is the fact that people can't afford a home here. Some of that is the layering on of insurance premiums and other costs to own a home that you have to pay property taxes, user fees for utilities, all of that and demographic issues are ultimately going to be a credit concern, maybe not over our two year outlook period, but potentially over the longer term. And the way that states and local governments and everyone solves this housing affordability issue together is going to be helpful in the long run to credit quality for entities being able to sustain their economic basis as people are still able to move there as companies are still able to relocate to certain areas. So this is a really long-term issue and the cost of housing is definitely the headline, but there's a number of structural issues that underpin that, that even good people like Doug here at Cal HFA are trying to help solve. It's really going to require a number of different issues to really stabilize credit quality for some of these communities across the US where they're struggling with this.

Brady Guertin (47:14):

Perfect. Thank you Nora. And it looks like we're about to the end of session. We might be able to take one question, we'll take a couple questions. Is there any questions in the audience before I ask the panel? A couple of the pre-approved ones we had.

Audience Member 1 (47:32):

Hi, I have a question. It's obvious that the cost of housing in California across the nation has skyrocketed. The New York Times actually earlier this week released a piece on trends of building or where people are migrating to and building. And the piece basically was focused on climate hazards, natural hazards, and that's where most people can afford to move to. So I'm kind of curious, this isn't for anyone particular on the panel, but what are your thoughts on those trends? The fact that people are moving to more hazard prone areas?

Libby Schaaf (48:15):

You are correct.

Nora Wittstruck (48:17):

Well, the New York Times is correct.

Libby Schaaf (48:20):

And when you look at, I mean there is a little bit of a myth about who is leaving California and why, but the statistics are very clear that it is low wage and to a lesser extent, middle wage workers, not our wealthiest workers. And I will say the good news for probably the people in this room is at least politically, there is a growing realization that both our homelessness problem, our out migration problem is actually driven by a supply problem. So lots of people like to blame lots of different things on homelessness on the housing crisis, but there is really now a kind of consensus that when you play musical chairs as a kid and there's one less chair than people, somebody falls on the floor. And that is literally what is happening with our housing supply. I also do worry about this issue of the missing middle in Oakland. We were really successful at adaptive reuse of older housing stock, converting that into regulated, affordable, and then building a crap ton of market rate housing. We built 20,000 units during my eight years as mayor, but that was luxury product. And then the regulated affordable, actually protected our lowest income. And the missing middle is an apt term because it's not just that that housing product is missing, but we are missing our ability to serve that particular income population. Nora,

Nora Wittstruck (50:01):

I was just going to say that it's great to live on the coast of Florida. I mean, I lived close to the coast of Florida at one point in my life, and I have lots of friends and family that have second homes there or first homes there the same way in California. California is beautiful. Who doesn't want to live in California. But I think there will come a point when, and this is nor with drug's opinion I should say, there will come a point in time I think where individuals or families may tire of having to rebuild their home or put a new roof on or actually carry the costs associated with having a home in climate exposed areas. And I think while the initial purchase price may be lower, your long-term costs associated with owning that particular property is probably going to escalate. And unfortunately, part of the issue is not just in the coast.

(51:09):

My family lives in Iowa and wind events, convective events, if you're an insurance person, have also played a huge role in the cost of insurance. And actually in Iowa in 2020, there was a derecho. Does anyone know what a derecho is? I didn't know either. It was very scary. It was like a hurricane on land. Anyway, long story long when the housing stock that was ruined in that particular event was old housing stock. So some of what insurers are having to go back and replace becomes much more expensive. You have to bring the house up to code, you have all of the costs associated with inflation. You have people maybe wanting a bigger home than what they had before. So unfortunately, there's really nowhere safe from climate hazards in the US and I would say that is an S&P opinion. So I think that all of that is part of this problem why we're having the panel today.

Brady Guertin (52:14):

Perfect. Thank you. And it looks like we are at our time today. Thank you all for joining. Thank you to our panelists for their great expertise on this one. And thank you all for joining.