Need a Mortgage? Banks Prefer Modern, Standardized Housing

It’s easy enough to put a value on a nice, 1,500 sq.-ft., two- or three-bedroom condo, Zhang says. It’s much harder to estimate the value of a really small house or a celebrity mansion. Quirky or historic properties and those with unusual features or dimensions may well find a buyer willing to pay top dollar, but that could take some time. A modern, standard three-bedroom condo is typically in more consistent demand. When a bank is weighing whether to provide financing, it considers what will happen if it needs to repossess and resell a property, making the issue of future value the central factor.

For lower-income families in the US who typically live in older or more run-down dwellings—precisely the kinds of nonstandard real estate that banks struggle to evaluate—securing a mortgage will be more difficult, the research suggests. Mortgage rejection rates were 10 percent higher in areas where housing values were hard to peg, the study finds.

Until now, policy makers mainly looked at affordability simply in terms of location: houses in San Francisco are more expensive than houses in Detroit, so the thinking goes. But the researchers point out that within a given area there can be significant differences in values assigned to collateral, depending on the quality and characteristics of the housing stock.

They find that in the neighborhoods they looked at with older, unusual buildings, the unpredictability of prices had a clear impact on homeownership. Fewer people bought in such areas, most likely because it was harder to get a mortgage, Jiang and Zhang suggest. Homeownership there was 1.4 percent lower than elsewhere, according to their study.

As price predictability makes it hard for private entities to lend to households with the greatest need for loans, policy makers should take into account the effects of housing policy on collateral values, the researchers argue.

“Maybe a better approach for local governments would be to rethink their housing policy in lower-income areas,” Zhang says. “If the goal is to boost affordability for struggling US families, one idea would be to incentivize developers to invest in modern, standardized, affordable housing schemes that retain a predictable value, such as you see in parts of Europe and Asia.”