Two new reports focus on the emerging problems in the multifamily housing market and the dire impact such issues could have on low income residents. The first report, Closing the Door 2009: Risks of Boom and Bust, was released by Community Service Society (CSS) and focuses on New York City’s market, while HUD’s U.S. Housing Market Conditions for the 3rd quarter of 2009 analyzes national trends.
All forms of affordable housing in New York City are currently threatened as a result of a wave of mortgage defaults facing predatory investors, the CSS report found. The defaults appear to be due to the influx of a new group of investors who entered the market between 2003 and 2007, buying multifamily properties at highly speculative prices and causing a dramatic increase in sales prices during that time. These investors were willing to pay very high prices for apartment buildings where low to moderate-income renters lived, the report found, because they were under the assumption that building values would increase and incomes of tenants would rise to cover their debt payments.
CSS further found that not only were properties bought at very high prices relative to annual rental income, but that these prices did not come down, even after the economic downturn, as they did in the single-family housing market. The current sales prices of multifamily properties are still above the pre-boom levels, suggesting that these buildings have not been sold for less than the amount of outstanding debt. This trend suggests that lenders are contributing to the problem by refusing to accept losses on the unsustainable loans they made.
As this trend continues, tenants and neighborhoods will likely see buildings deteriorate rapidly, the report warns, since the majority of an investor’s income will go to debt service rather than to maintenance of the property. The report estimates that this type of predatory equity is now affecting more than 4,000 units in New York City, and that a large share of apartment buildings could ultimately end up being affected if no action is taken to regulate the market.
The issues discussed in the CSS report are not unique to New York City, as evidenced by the most recent version of HUD’s quarterly U.S. Housing Market Conditions. A section of the report called “Eye on Multifamily Housing Finance,” echoes many of the concerns regarding overleveraged multifamily properties. HUD notes that policymakers should pay close attention to these issues since a disproportionate share of people living in multifamily properties are households living below the poverty line, minorities, people with disabilities, and the elderly, and that if this stock deteriorates, these populations will suffer disproportionately. The HUD report also shows that the multifamily credit market is tightening while property values are declining, vacancy rates are increasing and rents are falling, adding to the troubles of already overleveraged property owners.
The CSS report offers some policy recommendations to address these issues, including establishing a “right to purchase” policy for tenants, and making federal resources available to support the restructuring of debt on overleveraged buildings. A full list of recommendations is included in the report, at: http://www.cssny.org/userimages/downloads/Closing%20the%20Door%202009%20%20Risks%20of%20Boom%20and%20Bust%20-%20final%20report.pdf