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Where Are My Discounted Urban Mortgages?

by Nic Darling on December 16, 2010 · 7 comments

in Philosophy,Urbanism

I believe that mortgages should be biased toward homes in urban areas. This is not simply because such a bias would offer a positive response to global warming or the growing crises sparked by our energy gluttony (though its effect in those areas couldn’t hurt). Nor is it driven solely by my own love for the vitality and creative energy present in cities. Rather, it is, I believe, a simple economic choice. It seems (from my admittedly limited understanding) that urban mortgages are simply a much better bet for banks.

Suburban bias in mortgages has long been a driver of sprawling development. The FHA in particular has been somewhat notorious over the years for its discouragement of multi-family construction or mortgages for rehabilitation of older buildings (particular urban needs). Less well known, but equally anti-urban, are it’s past directives to underwriters to note the property’s “protection from adverse influences”, “freedom from special hazards” and “appeal” when considering a mortgage. These were liberally interpreted to deny mortgages in urban areas where density itself was seen to “lessen desirability”. I do not doubt that there are several highly defensible factors at play in this situation. The baby boom certainly put a strain on the housing in many cities and made a move to suburban building a quick, attractive fix. There is also a very real argument that the conditions in an industrial city without modern sanitation techniques could have been a very real motivation to those developing an understanding of “appeal”. However, there is equally little doubt that racism, classism and numerous other unsavory “isms” played their own role in favoring suburban development.

Regardless of the history (interesting as it is), we are at a point now where that bias should be shifted. For the first time we have urban populations that exceed those of non-urban. People are moving back to our cleaner, safer cities and some of those people actually still want to own a house. I believe those people should have an easier time getting a mortgage and that their mortgage should be more favorable than the suburban equivalent. Here’s a few reasons why . . .

Reduced Car Ownership

City dwellers own fewer cars than those who live in the suburbs. This is a significant economic advantage. According to the Brookings Institute, “Households in drivable suburban neighborhoods devote on average 24 percent of their income to transportation; those in walkable neighborhoods spend about 12 percent.”  The same article goes on to say that “dropping one car out of the typical household budget can allow that family to afford a $100,000 larger mortgage.” And this is not even considering the heavy subsidy that car owners receive in terms of road maintenance, oil subsidies and free parking. Imagine if, one day in the future, individuals were expected to pay a higher percentage of the cost of owning and operating a car. That seems like a risk that needs considering.

No sidewalks will get you here.

Fewer Average Square Feet

While this feature of urban homes might be a bit painful during an appraisal, the smaller size is a significant advantage when considering the long-term cost of ownership. Smaller homes tend to have smaller expenses in terms of maintenance, energy use and furnishing. These lower costs translate to more cash with which to pay the mortgage.

So many roofs. So many potential leaks.

Lower Landscaping Costs

This may seem like a small item, but by turning yards and outdoor space into largely shared amenities (parks, rec centers, etc.), city dwellers save a significant amount of money over the average suburban dweller. Lawn mowing, pest control, tree maintenance and so on are significant expenses and risks. Eliminating, or at least greatly reducing those costs, can make personal cash flow higher and more predictable.

Tree attacks are less common in the city.

Housing Value Stability

This one is a bit tougher because it assumes an agreement on our basic sociological direction. There are currently more people living in cities than outside of them for the first time in history. I believe this is a trend unlikely to reverse itself as our economy, energy demands and improved city development point in the direction of urbanization. At the very least, we see a heavy bias in polls toward walkable neighborhoods, particularly among those soon to enter the housing market. From this I would argue that an urban home has a better chance of retaining it’s value (or increasing it) than it’s counterpart in a distant, inaccessible exurb.

This doesn't add much. I just liked the image. Click to see it bigger.

There are, of course, a number of arguments against my position. One could point out that education is often a significant expense among those who can afford to own homes in the city. This is true, but it effects less than half the households and is, I think, likely to be a less and less significant problem as demand improves urban public education. One could also point out that crime presents a higher risk in cities, but as our cities become denser and more affluent these problems begin to balance. Also, the risks presented by urban crime are minimal compared to those presented by car accidents (a much more suburban problem). Costs of food and other necessities can be higher in the city, but this is largely a reflection of individual neighborhoods and not the overall urban environment where bargains are still to be had. It is also likely a function of fewer WalMart style shopping opportunities, a situation which can be tough on the wallet but easy on the soul.

I am aware that I am only barely qualified to act as a catalyst for conversation on this topic, but I felt the potential for discussion outweighed the risk of embarrassment if someone calls me out on my poor arguments. So let’s get to it. Where am I wrong? Where am I right? Where could I have been even more right if I actually knew what I was talking about? Are the ongoing costs of homeownership actually lower in the city or am I imagining things? If so, do these lower expenses beyond the mortgage payments make urban buyers a better risk? Do banks take ownership expenses into account? Should they?

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{ 7 comments… read them below or add one }

1 Lloyd Alter December 16, 2010 at 2:14 pm

I have never understood the American mortgage system, the way it has been used as a political, planning and financial tool. From mortgage interest deductibility to suburban bias to the whole subprime crisis, the American mortgage has been the source of so much trouble.

Where I live in Canada, the banks hold the mortgages, they do not get sliced up and sold to third parties. So the banks are careful about who they lend to. There is no mortgage interest deductibility, which keeps purchasers a little more conservative. Result: no financial meltdown, and you all have TD banks now, which stands for Toronto Dominion.

2 David Ross December 16, 2010 at 5:54 pm

Unfortunately there’s few benchmarks on HOW trends change based on density. It would be great if Mint or a similar app could crunch the numbers on consumer spending based on density and location. This would provide a barometer for how much of an urban discount could be applied. For example, your urban consumer may have 10% more income available even after increased dining and social activities are subtracted. Heard of any comprehensive studies like this?

3 Fred December 17, 2010 at 5:24 pm

Is this an idea that is actually gaining some traction in the US? I’ve never heard of anything like it in Canada but it would be an excellent concept for study. Sprawl isn’t just wrecking our rural areas, it’s also ruining our cities with congested commuter traffic and all that entails.

4 Greenbuildingindenver December 18, 2010 at 12:26 pm

For those of us interested in building small, efficient, urban homes, zoning laws must evolve as well. Urban-biased mortgage policy is worthless with suburban-biased land use policy.

Granny Flats have recently been re-legalized in Vancouver, Seattle, and Denver, cities that always had carriage houses before the bad zoning of the 1950s. A family that has income from a carriage house won’t default on their mortgage as readily.

In Denver it began as a grass-roots effort, with the lesson being that a small group of concerned citizens can sow the seeds for increased livability, affordability, walkability and urbanity.
http://greenbuildingindenver.blogspot.com/2009/07/denvers-new-zoning-code-is-dropping.html

5 lavardera December 18, 2010 at 2:49 pm

I agree with you Nick. Not only bias towards urban housing, but also energy efficient housing no matter where it is. Right now, as stated before, high performance registers no more value and hence positions a project as greater risk for lenders. Completely upside-down. At this point I think I’d settle for no bias and a level playing field.

I am a community activist where I live also. Its a tough slog. Our community has people who opposed connecting to a regional bike network. Because they were afraid it would bring crime to our neighborhood. Crime. On bicycles. (forehead slap)

6 Fred December 18, 2010 at 6:17 pm

lavardera, luckily you don’t live in Toronto where our new mayor thinks that when a cyclist gets killed on the road by a motor vehicle, “it’s their own fault at the end of the day.” http://www.theglobeandmail.com/news/national/toronto/rob-ford-and-a-decade-of-controversy/article1678543/page2/

7 bruteforcecollaborative December 19, 2010 at 3:13 pm

obviously you’ve never been to seattle… our houses are regularly attacked by trees – a combination of torrential downpours and winter winds.

of course, if seattle was significantly denser, it wouldn’t be an issue – this only happens in the semi-urban, overpriced and outlying neighborhoods of seattle.

i recently was looking at a study that said incidence of crimes are higher in cities, but property crimes affect rural areas at higher rates.

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