Madison Needs More Homeownership Opportunities in Multifamily Housing

I authored and am sponsoring a resolution calling on federal policymakers and agencies to lower their barriers to condominium development and mortgage financing and improve the transparency in their rulemaking process that governs condo financing rules. This blog post explains why I think this topic is important for Madison. 

Those who read my weekly blog updates may remember my blog post in July about the release of the City’s 2023 Housing Snapshot Report, an annual report that provides interesting and valuable data on the state of Madison’s housing market, factors influencing supply and demand, impacts on housing affordability, and the unequal burden of Madison’s worsening housing costs in both the housing rental and ownership market. In the owner-occupied housing market, key factors for price increases include relatively high incomes among homeowners and the slow growth of owner-occupied housing. This rapid increase in prices of ownable housing creates additional barriers to entry for renting households who want to own a home. Homeownership allows households to make a stable long-term investment that provides housing for their families and remains a key strategy for financial security in our market economy.

The 2023 Housing Snapshot Report includes a finding that, from 2011 to 2021, as the population of Madison increased by 14.5%, housing-owning households grew by 9.3% while renting households grew by 27%, nearly three times faster. A big driver of this trend is the relatively few condo buildings, compared to apartment buildings, added to the housing market in recent years compared to before the Great Recession. This is happening in Madison and nationwide. Here’s what changed after the recession: federal housing policymakers and agencies now require a higher percentage than before (80%) of units in multifamily buildings with 20+ condos to *already* be owned by occupants before lenders can issue federally-backed mortgages for the purchase of units in that building. That 80% threshold is a significant increase from the 51% requirement before the Great Recession. As a result, most new multifamily buildings proposed for development in the City have rental apartment units instead of condos. When developers respond to pushback from neighborhoods or alders on this trend, they cite the increased financing risks and costs resulting from federal condo financing policy changes (among other state-level factors, too). 

Madison needs more rental housing, too, as more people continue to move here and as demonstratedy by the "unhealthy" low vacancy rate of units in the City. However I'm concerned about the long-term impact of this imbalance of most new housing being available for rent and not for families to own. Note that increasing ownership opportunities is a key goal of the affordable housing study that Common Council just directed the Housing Strategy Committee (one of my committees) to investigate and make recommendations over the next eight months.

See this WI State Journal article from July for more background: Why aren’t developers building condos in Madison? 

Here’s the text of the resolution that I authored (with help from a policy memo by Council’s Office Legislative Analyst Isaac Matthias) and am sponsoring at Common Council on Tuesday with a handful of other Alders:

WHEREAS, condominium development lags nationwide, currently amounting to just 2.3% of multifamily construction, and there have been just two condo projects in recent history within the City of Madison; and,

WHEREAS, condos are a crucial part of the housing market, particularly for those who are looking for a more affordable entrance into the homeownership market and earn equity; and, 

WHEREAS, in Madison, the average median sale price for single-family homes was $400,000 between July 2022 and June 2023, while the average median sale price for a condo was $275,000 in that same time period; and,

WHEREAS, this affordable entry to homeownership is particularly important for young adults, as well as empty nesters looking to downsize, which then opens up the homes they are moving from; and,

WHEREAS, condominiums support the City’s density and sustainability goals, often as more energy efficient alternatives than single-family homes that can be built around transit hubs, which can ease the burden of traffic and create walkable neighborhoods; and,

WHEREAS, the latest available data about Madison’s homeownership rates as measured by Madison’s 2023 Housing Strategy Report reveal stark racial inequities as evidenced by the fact that the 2021 homeownership rate for white households was 53%, the rate for Hispanic/Latino households was 35%, the rate for Asian households was 32%, and the rate for Black households was 18%; and,

WHEREAS, not having this affordable entry point can lead to greater inequities in the housing market that disproportionately harm low-income households and households of color, exacerbating existing patterns of wealth inequality and limiting opportunities for social mobility; and,

WHEREAS, there has been increased demand for condominiums in recent years, as indicated by key findings in Madison’s 2023 Housing Strategy Report, and housing market data indicates that monthly owner-occupied housing inventory has dropped steadily over the last nine years, while these owner-occupied units spend significantly less time on the market before selling; and,

WHEREAS, this high demand has not led to a greater supply due to factors that cause condominium development to be both riskier and more expensive than other multifamily development, such as construction defect litigation, a lack of bank financing, and rising construction costs; and,

WHEREAS, mortgages of potential condominium buyers are backed by the Federal Housing Administration and contain owner-occupancy requirements, which outline the proportion of units that must be already owned by individuals set to live in the unit versus a single entity, such as the developer trying to sell new units, in order to be eligible for an FHA-backed mortgage; and,

WHEREAS, while this owner-occupancy rate was 51% prior to the Great Recession and resulting requirement beginning changes in 2009, today it stands at 80% for buildings with 20 or more units; and,

WHEREAS, that in order for a whole development or for single-unit approval within a development to be eligible for mortgages backed by the Federal Housing Administration (FHA), a project must have 80% of units already sold, and only 10% of units may be held by a single entity, such as a developer trying to sell new units, in buildings with more than 20 units; and,

WHEREAS, developers often indicate that they cannot secure financing from banks or investors for construction loans to build condominiums because lenders are worried about the marketability of units once completed because of worries about the ability of purchasers to obtain mortgages, specifically FHA products; and,

WHEREAS, the U.S. Department of Housing and Urban Development (HUD), under the leadership of the Biden-Harris Administration, has taken a number of steps to make homeownership more accessible to all Americans, understanding that homeownership is a foundation for security and a primary source of wealth;

NOW, THEREFORE, BE IT RESOLVED that the Madison Common Council calls on the Federal Housing Authority as well as Government-Sponsored Enterprises like Fannie Mae and Freddie Mac to provide increased transparency to the public in the process of developing requirements and guidelines for condominium and housing cooperative lending requirements.

BE IT FURTHER RESOLVED that the Madison Common Council asks Federal Housing Authority and its supervisory policy bodies to reduce owner-occupancy threshold requirements to the extent that their abilities within the Executive Branch allow them to do so, in order to reduce barriers to FHA-backed mortgage lending for condominium buyers and to provide condominium developers less uncertainty in securing construction financing.

BE IT FINALLY RESOLVED that a copy of this resolution will be sent to the Chief Executive Officers of Fannie Mae and Freddie Mac;  the Director of the Federal Housing Finance Agency; the Director of the Federal Housing Authority; The Senate Committee on Banking, Housing, and Urban Affairs and its Subcommittee on Housing, Transportation, and Community Development; The Senate Committee on Appropriations (oversees HUD program funding); The House Committee on Financial Services and its Subcommittee on Housing and Insurance; The House Appropriations Committees and its Subcommittee on Transportation, Housing, and Urban Development; the office of Representative Mark Pocan; and the offices of Senators Tammy Baldwin and Ron Johnson.