The housing mess, explained – CNNPolitics

Our conversation, conducted via email, is below.

A housing shortage, an affordability crisis

WHAT MATTERS: I have read both that there is a housing shortage and that there is a housing crisis. Is there a difference between these ideas: a shortage and a crisis? And the problem is that there are literally not enough houses for the number of people in the US?

BAHNEY: The “housing crisis” is actually an “affordability crisis.” Part of the reason housing has become so expensive for Americans is because there is a national housing shortage. Record-low interest rates during the pandemic, along with more than a decade of underconstruction, created a supply-demand mismatch that has driven home prices higher. The US has lagged behind by approx. 5.5 million homes over the past 20 years as builders failed to keep up with historical construction trends. If you add in property destruction due to demolition or natural disasters, among other things, the total shortfall could be $6.8 million during that time, according to the National Association of Realtors.

This is a gap so deep that it would take more than a decade to catch up. But even if more houses and apartments are built, it won’t matter unless people can afford them.

Mortgage rates are the highest they’ve been since 2008 and home prices remain near record highs, putting many potential homebuyers out of the market. These people then stay in the already tight rental market, driving rents even higher. As renters reach the limits of what they can afford to pay each month, home ownership becomes further out of reach as they struggle to save for a down payment. This widens the wealth gap and blocks inequalities between those who benefit financially from home ownership and those who do not. It also widens the racial gap in home ownership, with 72% of white Americans owning a home, while only 43% of black Americans own a home.

The cost of housing is driving inflation

WHAT MATTERS: The cost of housing has been cited as a cause of inflation. How true is this and what is the market force that could lower the cost of housing?

BAHNEY: The increase in the cost of housing has been a key factor in inflation. For most people, housing is their biggest expense. About a third of the consumer price index, a basket of goods and services the Bureau of Labor Statistics uses to track inflation, is the “haven” component.

Last month, the index showed inflation was worse than expected and the housing component had risen 6.2% from a year ago, the biggest increase since 1991. Stubbornly high inflation means the Federal Reserve will likely take aggressive action at its meeting next week with either a 75 basis point hike in interest rates, or potentially a 100 basis point hike. But there are some early signs of cooling in the housing market. Home sales have fallen for six straight months as the rising cost of buying and financing a home pushes more people out of the housing market. As demand dries up, prices will drop and mortgage rates will eventually settle.

Where is the housing shortage most serious?

WHAT MATTERS: Which parts of the country are most affected by this problem?

BAHNEY: Sun Belt cities like Phoenix and Austin saw some of the biggest increases in housing costs during the pandemic. In Miami on the price of a house increases by 33% a year ago, i rents increase by 26% from last year But the affordability crisis is happening nationally, in every region of the country.

The median-priced home now costs $749 more per month

WHAT MATTERS: The Fed’s medicine for inflation is to raise interest rates, which has pushed up mortgage rates. This might control sales prices, but won’t it make the cost of housing more expensive?

BAHNEY: The Federal Reserve has aggressively raised interest rates to curb inflation, which can reduce demand but also make the cost of buying a home even more expensive.

But the Fed doesn’t directly set the rate borrowers pay on mortgages. In contrast, mortgage rates tend to track the 10-year US Treasury yield. As investors anticipate Fed rate hikes, they often sell government bonds, which pushes up yields and, with it, mortgage rates.

The rate on a typical 30-year fixed mortgage has more than doubled from a year ago, putting the home purchase that was possible then out of reach for some today.

A year ago, a buyer who put 20% down on a home with a median price of $359,900 and financed the rest with a mortgage rate of 2.86%, which was the average at the time, had a monthly payment of $1,192.

Today, a homeowner buying the median home, which is now $403,800, with a mortgage at the current median of 6.02%, would pay $1,941 a month in principal and interest. That’s $749 more every month.

Americans now spend more than 35% of their median income on monthly principal and interest payments on this median-priced home. Historically, Americans spent more than 25% of their average income on payments.

To get back to that level, some combination of these things would have to happen, according to mortgage data firm Black Knight: A person’s income would have to grow by 40%, mortgage rates would have to be cut in half , or would have to assume a 30% drop in the average price of a house.

Neither is likely to happen anytime soon.

Home ownership is out of reach

WHAT MATTERS: If house prices fall, it will mean that millions of people will lose value in their main asset. If housing prices don’t come down, it means millions of Americans will never own a home. It seems like an impossible situation.

BAHNEY: Some housing economists have been saying lately that the housing sector is in recession, but homeowners don’t feel that way. Of course, there are many examples of cooling in the housing sector (mortgage company layoffs, home builders pulling back, falling home sales). But the owners still have a huge equity in their homes, which has increased by an average of $60,000 last year.

Even so, millions of people are being excluded from buying homes as affordability challenges prove insurmountable.

In April 2021, a household needed to make about $80,000 a year to make payments on a median-priced home with a modest 3.5% down payment. A year later, the income requirement was $108,000. This increase in costs means that about 4 million renter households who could have bought the home with an average price last year I couldn’t do it anymore 12 months later.

How can this problem be solved?

WHAT MATTERS: What are some ideas to fix this problem? Is there an effective way for government to act?

BAHNEY: Most housing policy experts say that building a steady supply of new, moderately priced housing is job number one. But because these homes are not as profitable for builders as larger, higher-priced homes, a concerted effort from both the public and private sectors will be required.

In May, the Biden administration announced a Housing Action Plan to close the affordability gap and ease housing costs. The plan aims to increase the supply of affordable housing by improving existing federal funding and incentivizing areas to reform zoning and land use policies to build more lower-cost housing. It also calls on homebuilders to adopt more efficient construction methods.

But none of this is a quick fix, and some of it requires congressional action.

Separately, the Federal Housing Finance Administration, which oversees mortgage giants Fannie Mae and Freddie Mac, announced plans this summer to expand home financing options for buyers, especially those of color, to close the racial ownership gap. These programs include down payment assistance, lower mortgage insurance premiums and a credit reporting system that takes rental payment history into account. Some of these ideas, such as new zero-down-payment loans with no closing costs for buyers in specific black or Hispanic neighborhoods, are already underway. place



Source link

Walter Rogers

Walter Rogers