We buy and sell hopes and dreams all the time, particularly the American Dream. We store these hopes and dreams in the financial markets and over the past 70 plus years, our financial or capital markets have fueled growth, innovation and development, and spurred us into becoming an ownership society. Unfortunately, just as the financial markets rise based upon confidence, hopes and dreams, they also fall based upon a lack of confidence, hopelessness and dashed dreams. That's just the way it is. But real estate is an actual investment that you can see, touch, and care for. In real estate, whether you're building, selling, buying, investing, or looking to live there, the fundamentals still remain, and the market will cycle back. That too, is just the way it is.
Granted, banks have tightened their lending standards, they are holding onto their cash and finally settling for the spread between what they borrow for and what the money market pays, instead of the returns they sought in the speculative and risky collateralized debt market. That's restricting capital flow right now, but there are still markets that are poised to expand, particularly with the passing of some exciting new legislation. On July 30, 2008, President Bush signed into law the Housing and Economic Recovery Act of 2008 (the "Stimulus Act"), which provides incentives intended to create greater capital flow into both the affordable and market rate areas of the real estate marketplace. Clearly, other than with government intervention, the capital markets need to work through the shock of the so-called "subprime bust" and ascertain the true monetary cost of the failure of the collateralized instruments that greased the capital markets, but this is a forward-looking article.
On the commercial side
These are not ordinary times, so there's a need to expand one's range of thinking. For those with investment properties, mixed use properties, two family homes or small buildings with subsidized tenants, or even for estates, trusts or other investors in real estate assets that desire tax advantaged income, the population of potential financing sources and investment opportunities may now include some that traditionally attracted a different clientele. In the past decade, or more, most new housing production has been spurred by M.G.L. c.40B, §§20-23, the statute more commonly known as Chapter 40B, which allows an override of municipal zoning authority to promote affordable housing. 40B creates an expedited permitting procedure whereby an applicant approved by a State or Federal Housing Program, such as the Department of Housing and Community Development ("DHCD") may make a single application to a local Zoning Board ("ZBA") for a comprehensive permit instead of navigating through multiple applications within the Town over a staggered period of time. The ZBA is subjected to a streamlined procedure, and a denial (or imposition of uneconomic conditions) by the ZBA can be appealed to the Housing Appeals Committee ("HAC"), a unit of DHCD . To be permitted under 40B, 25% of the housing units in a proposed development must be affordable.
There are various provisions in the Stimulus Act that have the potential to create additional funds to be available for investment, commercial or development real estate than were available previously:
• The Stimulus Act may allow tax credits to be available to many commercial borrowers that turned to FHA funding sources during the current credit crunch;
• For investors previously adverse to tax credit investing, the repeal of certain AMT limitations may be a positive factor;
• Additional loan funding may be available as a result of the increase in bond volume issuance authority that the Stimulus Act allows, as well as the Multifamily Housing Bond "recycling" provision, which allows bond issuers, under certain circumstances, to re-use bonds that have been repaid to back new loans. These provisions provide entities, such as MassHousing, with additional funding capability; and
• The temporary increase in housing credits allocated to the states, as well as the fixed 9% tax credit rate may allow more equity to be available to projects that may previously have been financially infeasible due to pricing declines in the equity market during this credit crunch.
For Residential Buyers and Sellers
It is more difficult to receive funding, and certainly the down-payment requirements and verification of income procedures have been thoroughly overhauled by the underwriting departments of most banks. Notwithstanding the current restrictive financing environment, there are many programs catered to the various strata of borrowers and property types that are available; interest rates are still historically low; and home values are more in line with reality than we have seen in the past decade. Additionally, the federal government has also made FHA funding available to a wider range of the borrowing population, and has temporarily increased conforming loan amounts in high cost areas, such as ours. These factors, when coupled with the Stimulus Act's $7,500 break for first-time homebuyers, and the creation of a program that will allow some borrowers to cancel their existing mortgages and replace them with new fixed-rate loans lasting at least 30 years (for 90% of the property's current value) may create the stimulation effect in the residential market we have been hoping for, or dreaming of.
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