Tuesday, February 23, 2010

Driving can be hazardous to your homeownership

Man survives 30 chick flicks in 30 days
The probability of mortgage foreclosure increases in neighborhoods with characteristics that force greater reliance upon cars.

by Broderick Perkins
© 2010 DeadlineNews.Com

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Deadline Newsroom - Homeowners who live in areas that force them to drive everywhere, not only face a home value hit, they are also at greater risk of foreclosure, according to a new report from the Natural Resources Defense Council (NRDC).

"Location Efficiency and Mortgage Default" used data culled from 40,000 Chicago, San Francisco and Jacksonville, FL mortgages which showed that the probability of mortgage foreclosure decreased in neighborhoods with characteristics that enable less reliance on cars, after accounting for important factors like income.

"In all three cities, the results were the same -- if your only choice is to drive, you have much less economic flexibility -- flexibility that can protect you from foreclosure in tough times," said Jennifer Henry, real estate sector manager in the Center for Market Innovation at NRDC.

(Also see: Cities that 'Walk the Walk')

The report is also an eye-opener for policy makers. It reveals how the connection between driving and foreclosure risk could provide policy makers and the lending industry with new tools to address the continuing mortgage default problem.

"Add urban sprawl to the list of sources for our current financial mess," said David Goldstein, co-director of the Energy Program at NRDC.

"It’s not just predatory lending or lax standards. The connection between transportation costs and mortgage default cannot be ignored. The sooner we address it in our lending and development practices, the sooner we will start to see a more stable real estate sector," he added.

Ironically, another report "Walking the Walk: How Walkability Raises Housing Values in U.S. Cities" says when you are able to drive less, not only do you reduce the risk of foreclosure, you are likely to see a boost in your home's value.

When the organization CEOs for Cities analyzed ZipRealty data from 94,000 real estate transactions in 15 major markets, it found that in 13 of the 15 markets, higher levels of "walkability" boosted home values by $4,000 to $34,000 compared with homes with just average levels of "walkability."

Driven to foreclosure

The greater prospect of foreclosures in areas with a lot of drive time is largely due to the financial cost of driving. Transportation costs account for roughly 17 percent of the average American household's income and these costs are exacerbated by fluctuating gas prices.

Even before gas prices surpassed the $3- to $4- a gallon mark National Housing Conferences' Center for Housing Policy found in "A Heavy Load: The Combined Housing and Transportation Burdens of Working Families" that in 17 of the 28 metropolitan areas studied, the average transportation expenses for working families with annual incomes from $20,000 to $50,000 were actually higher than their housing costs.

"Driven to Spend." by the Surface Transportation Policy Project likewise chronicled how housing dollars are drained by driving.

The NRDC report focuses on the impact of "location efficiency" on mortgage performance, a concept pioneered by NRDC and other groups in the 1990's. It shows that rates of vehicle ownership -- largely determined by neighborhood compactness, walkability, and access to public transit -- is key to predicting mortgage performance and should be taken into account by mortgage underwriters, policymakers, and real estate developers.

"Knowing that now, aggressive investment in public transportation and walkable communities make even more sense. And investing in transit will not just improve our economy by avoiding future foreclosures -- but create jobs to get things humming right now," said Henry.

That's inline with the Obama Administration's new Office of Sustainable Housing and Communities in the U.S. Department of Housing and Urban Development.

An outgrowth of the federal interagency Partnership for Sustainable Communities, the new HUD office works with the Environmental Protection Agency's existing Smart Growth efforts and the Department of Transportation's also new Office of Livable Communities to develop more transit in low-income neighborhoods, to build more sustainable neighborhoods and to otherwise promote smart growth.

"Our Partnership really is a new way of doing business in Washington, to help our nation meet 21st century challenges," said Transportation Secretary Ray LaHood.

"Working together, we're creating jobs to revitalize our economy, while helping state and local transportation agencies to build the capacity they need to promote livable, walkable, sustainable communities," LaHood said in a prepared statement.

Location Efficient Mortgages (LEMs)

NRDC says the study points to the need for:

• Public policies that encourage location efficient land use; infrastructure and transportation that support location efficient communities to help reduce foreclosures. This includes a "Fix-It-First" focus on existing transportation systems, something the Obama Administration has encouraged.

• More research and analysis to develop and refine tools to assess the impact of location efficiency.

Mortgage underwriting practices that provide access to proportionally better qualifying terms for purchasers of location efficient homes.

Those underwriting practices do exist, to a small degree.

Much as "Energy Efficient Mortgages (EEMs)" allow a home owner with a more energy efficient home to spend more money on housing instead of energy, "Location Efficient Mortgages (LEMs)" allow home owners to spend a greater percentage of their income on housing when they spend less on petrol power transportation.

LEMs are offered by the Institute for Location Efficiency, a California not-for-profit agency sponsored by Fannie Mae. The institute only offers LEMs in Seattle, San Francisco, Los Angeles and Chicago.

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Broderick Perkins, an award-winning consumer journalist, parlayed 30 years of old-school journalism into a digital real estate news service, the San Jose, CA-based DeadlineNews Group, including DeadlineNews.Com, a real estate news and consulting service and Web site, and the Deadline Newsroom, DeadlineNews.Com's news back shop.

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