The contraction in homebuilding may have pushed the American Dream further out of reach for millions of potential buyers by choking off competition. Tougher credit policies following the savings and loan debacle have killed financing for many smaller builders, forcing them into bankruptcy. Whatever business exists is being handled by larger home builders, ultimately translating into less choice and higher prices for buyers. This poses profound implications not only for purchasers, but local economies inextricably linked to the ebb and flow of residential real estate.
One possible solution is about to be launched on the West Coast, where the California Public Employees Retirement System (Calpers) is providing $225 million in construction loans to home builders. The money will be used to finance subdivisions with anywhere from a few dozen to as many as 300 homes. Builders will pay market rates on the loans and Calpers gets a piece of the action once the development sells out.
This innovative concept is a long way from the typical, conservative pension-fund investment, and it is not without controversy. Critics say residential real estate is too risky for hard-earned retirement dollars. They also point out that opening the door to "social investing" could turn pension funds into financing sources for all sorts of "do-good" projects of dubious investment value.
Yet tapping cash-rich pensions to fill the gap left by the shell-shocked banking and S&L industries makes sense -- if it is handled prudently.
Could Calpers' innovative program work in Maryland? It's certainly worth exploring. Although past proposals to fund residential real estate have gone nowhere, the $12 billion Maryland State Retirement System has in recent years been increasingly open to putting money into non-traditional investments. It has committed $15 million to the nascent Maryland Venture Capital Fund and is now mulling over a proposal to guarantee lines of credit to small businesses.
This is the perfect time for a coalition of Maryland public and private housing officials to present an imaginative, yet prudent proposal to state pension trustees. Pension fund officials have expressed a willingness to consider the idea. The challenge will be to craft a plan that skirts undue risk while providing a meaningful pool of capital.
The Calpers idea is all the more attractive for its potential to boost the region's paltry supply of affordable housing. With demand tilting heavily in favor of moderately priced homes, developers have a powerful incentive to down-scale. The Bush administration's proposed tax incentives to first-time buyers should fuel additional demand.
Giving the local housing economy a strong boost is in everyone's best interest. And if the state's pension funds can reap a solid profit in the bargain, it would be a venture well worth pursuing.