The economist the late Edward Gramlich, who died in September, 2007 before the height of the subprime mortgage problems, penned the essay, "Boom and Busts: The Case of Subprime Mortgages" (PDF) for the "Economic Review" fourth quarter, 2007. This went along with his 2007 book, "Subprime Mortgages." In part, Gramlich supposes that policy making on the local level is a way of addressing the shortcomings of the subprime mortgage industry through supply side subsidy. Some people equate supply side economics with Ronald Reagan's trickle down approach. Gramlich puts forth devolving grants to the local level and leans on local policies that could mitigate impacts of national macro policies, or the lack thereof (51% of subprime loans were made by unsupervised mortgage companies according to Gramlich and I wonder if it is possible for local cities and towns to enact protective or proactive measures if federal and state governments do not change the climate.), by increasing local control and creating a housing glut in order to drive down prices, which aides those wishing to become low cost renters or homeowners. With this in mind I'm reminded of the 60 or so units now in progress at the former Northampton State Hospital as well as the two proposals by the Valley Community Development Corporation for Single Room Occupancy unit projects on North Maple Street in Florence and on King Street in Northampton proper.
On page 84 of his book Gramlich writes, "Apart from structure, a big question here is whether to expand the overall supply of rental housing. The answer would seem to be yes-many communities have intense affordability issues, and supply expansion would make sense."
He continues on the same page, "But another factor bears consideration. The foreclosure problem…may lead to a downward movement in home values, as suppliers place these foreclosed properties on an already glutted market. For present homeowners, this is the worst possible news, making it hard to refinance and build equity. But for renters and community based organizations just trying to get people in houses, it is the best possible news. In many communities, the downward adjustment in home values may do the work of an expansion in rental supplies."
Ouch. Some win, some lose essentially.
A problem I see with the local supply approach is that high transaction costs associated with public subsidy and assistance can substantially drive up the cost of creating or maintaining affordable housing in general. From federal housing grants a certain portion of the monies is skimmed off the top for salaries and administrative expenses. As well various and costly rules, regulations and inspections must be carried out further driving up the costs. Northampton city councilor Bob Reckman, who is also a building contractor, recently claimed during a city council meeting that all of the rules and regulations can essentially double the cost of construction. Reckman said his firm handled the previous $750 thousand renovation of the proposed SRO project on North Maple Street in Florence in the early 1990s.
This Thursday, December 18, the Valley CDC's applications for Northampton Community Preservation funds to renovate eleven single room occupancy units (SROs) on North Maple Street in Florence and for eight more on King Street in Northampton come before the city council. The plan in Florence is to leverage $250 thousand in CPA funds into about $2 million in grant money to renovate the units that are contained in one building. The renovation includes installing a bathroom and kitchenette area into each unit and making accommodations for persons with disabilities. Presently this SRO housing utilizes shared kitchen and bath spaces. The financing of the King Street SRO proposal is similar. Critics of the plan in Florence cite that there would be no net increase in housing units in the city and that the $2 million would be enough to construct about ten new affordable houses which would also create more jobs than renovation of the existing structure would, relatively speaking. It was also pointed out as I wrote above that the city expended $750 thousand to renovate the same building in 1992, calling into question the ongoing maintenance practices. Where did all that capital go? The Florence building is currently assessed for $350 thousand. If this plan goes through the cost per unit in Florence between the two renovations sixteen years apart would be $250 thousand each, which is a hard sell to the ordinary taxpayer.
Regarding the SRO proposal for King Street: Mike Kirby of "Kirby on the Loose" has written an article about it as excerpted below.
In the package of proposals that the Valley Community Development Corporation recently submitted for Community Preservation Awards (CPA) one, in particular, caught my attention. This proposal intends to create eight “enhanced” SROs in a building in my neighborhood, 98 King Street. Lu and I walk by 98 King almost every day, and have wondered why the building, which had been undergoing renovations, was now abandoned and left open to the elements. Porches have been stripped away, leaving improbable entrances 20 feet up. There are holes in the foundation and exterior walls, and the other day I noticed a cellar window was open. Only an unimpressive little padlock secures the front door of what has become a neighborhood eyesore.
Lily and Bennett Gaev bought the three-story building on lower King Street for $411,000 in April, 2007. Their plan was to convert the 1900-era building to commercial condominiums—a quick flip that would go sour. Husband and wife financed the sale with an adjustable-rate commercial $750,000 note from Florence Savings Bank. Under the former owner, rents were relatively modest, about $900 for a big 2-bedroom apartment. In March, 2007, all of the tenants were evicted, including Bob's Comics down in the cellar. I talked to a former tenant who said that it was a traumatic time for everyone. In August, 2007, the Gaevs’ contractor, Bourke Builders, pulled a building permit to demolish the porches and gut the building inside and out.
Time, I believe, stopped dead for this project on April 7, 2008. On that day the Architectural Access Board in Boston held a hearing that would put the kibosh on the 98 King project after the building had been gutted. The people in Boston told the Gaevs that they would have to have two means of egress for the third floor, and all public entrances would have to be accessible to people with disabilities. The Gaevs were hoping to handle accessibility issues on the cheap by making the first floor handicap accessible and putting a consultation room on the first floor, along with a handicapped bathroom. That was it for the project. The numbers didn’t work, interest in commercial condos in the $600,000 range was not there, and, at this point, I believe, the Gaevs had burned through the initial financing from the bank.
Enter the Valley Community Development Corporation with its plan to turn the building into an SRO. In its thick, well-researched proposal, the CDC requests $225,000 in CPA funds that it would then match with Smith College and other state funds. If all the ducks quack, the city will have a $2.1 million eight-unit SRO on King Street, with a commercial space on the first floor.
I guess it’s the downtown location that drew Valley CDC to this building, located near the corner of Trumbull and across from Sacred Heart Church. The possibility of getting a building that they never could have had a shot at a year ago must have been another attraction. The building still belongs to the Gaevs, but the CDC hopes to close before the new year, buying the building for $300,000 and committing $5,000 to “button the place up.” The building is attractive to the CDC because they can afford to let it sit around for a year or so while they get their financing in place. According to the proposal, they are borrowing the purchase money from an agency called CEDAC.
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