When it comes to new housing construction, it’s not just banks and private lenders that are shunning cash-hungry developers.
State housing officials, generally ready to dole out crucial dollars for various tough-to-finance residential projects, are also pulling back dramatically.
And the decision by MassHousing, the quasi-independent housing finance authority, and the Massachusetts Department of Housing and Community Development to close their vaults comes at a crucial time in the housing market.
After a long downturn and years of little new construction, the number of homes and condos for sale is falling fast across the Bay State, even as demand, albeit driven by the homebuyer tax credit, starts to rise. Rental construction has also lagged.
This cautious new approach by state housing lenders, in turn, could strand some worthy developers ready to take a chance on helping replenish our anemic housing stock in a still uncertain market.
“I can’t name any new projects that are getting underway right now,” notes Ted Tye, a top executive at Newton-based rental and condo development firm National Development. “It’s a difficult time in the market.”
A Basic Rule
Both MassHousing and DHCD have stopped lending altogether to builders of affordable condos and townhomes. Both are also taking a much tougher approach on loans for new apartment projects.
At MassHousing, the shift began two years ago, when the housing finance authority stopped lending to projects aimed at creating low-cost homeownership opportunities – a shift in policy that also included most rental projects.
While the agency is on track to pump more than $100 million into various housing initiatives during the fiscal year ending in June, most of the money will go toward preserving affordability at already-existing subsidized housing projects, according to spokesman Thomas Farmer.
For its part, the Department of Housing and Community Development has also stopped lending money to developers hoping to build affordable homes and condos, said Phil Hailer, a DHCD spokesman.
“The state has chosen not to fund new homeowner projects as a basic rule,” said Joseph Kriesberg, head of the Massachusetts Association of Community Development Corporations.
The retrenchment comes in part after state housing officials got a bitter taste of the housing downturn. A number of new housing projects featuring affordable condos and townhomes hit the market in 2007 and 2008, just as home prices began tanking – many of them developed by community nonprofit groups with state financing.
But the $200,000, three-bedroom units that looked like a sure sell when prices were spiraling upwards in the bubble years, lost their appeal to buyers suddenly confronted with more lower-cost choices, Kriesberg said.
A killer to potential deals was deed restrictions limiting the amount at which the homes could be resold in later years, a turnoff for many buyers, he said.
As a result, the local housing nonprofits often ended up taking the hit, with state housing officials absorbing some of the red ink as well.
“They couldn’t sell,” Kriesberg said. “They lost money, the state lost money.”
Stock Questions
But the new caution comes amid signs that inventory, or the number of homes on the market, has fallen to its lowest levels in a decade.
Even during the boom years, relatively little new housing was built in Greater Boston, a fact that surely contributed to spiraling home prices. And while it’s too soon to say we are headed for a repeat, the dearth of choices, combined now with a spike in demand driven by the homebuyer tax credit, is starting to bring back some scenes not seen since the bubble years.
The result has been packed open houses and an increasingly heated competition among tax-credit-armed buyers for a few, half-decent, moderately priced homes.
Ironically, even as it pulls back from new construction, MassHousing is playing a major role in helping further draw down the number of homes on the market. A major player in the mortgage market, the state housing finance authority pumped hundreds of millions of dollars this year into loans to first-time buyers.
Meanwhile, the shift away from financing new construction by the two big state housing players threatens to leave some developers in limbo.
In a welcome break from the pattern, developer John Rosenthal has at least a tentative deal with MassHousing to help finance his proposed air-rights project over the Massachusetts Turnpike near Fenway Park.
But National Development, which has made a name building transit-oriented housing developments across Greater Boston, may face a greater challenge winning over state housing officials.
The developer is now making the rounds of potential lenders, including MassHousing, in hopes of landing the financing it needs to push ahead with a major new apartment project.
Tye, the National Development exec, is hopeful, noting a banner in the MassHousing offices proclaiming the agency is “open for business.”
But he also acknowledges that state lenders, like their private sector counterparts, are much more cautious these days.
“It’s a time when all lenders, including the state, will be cautious, and appropriately so,” he said.
The solution, of course, is not for state housing officials to start throwing dollars at every developer looking to build new condos or apartments.
But to back out of the sector altogether, especially in what is still one of the nation’s priciest housing markets, is asking for trouble later.
