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 those 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?
The “housing crisis” is actually a “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, coupled with more than a decade of underconstruction, created a mismatch between supply and demand that has pushed home prices higher.
The United States has lagged behind by about 5.5 million homes
for the past 20 years as builders failed to keep up with historical building trends. If you add property destruction due to demolitions 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 recover it. But even if more houses and apartments are built, it won’t matter unless people can afford them.
mortgage rates are the highest since 2008
and house prices remain close to all-time highs
, leaving many potential homebuyers out of the market. Those people then remain in the already tight rental market
, pushing rents
As renters reach the limits of what they can afford 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 expands the racial gap in home ownership
in which 72% of white Americans own 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. To what extent is that true and what is the market force that could reduce the cost of housing?
BAHNEY: The high 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 that the Bureau of Labor Statistics uses to track inflation, is the “haven” component.
Last month, the index showed that inflation was worse than expected
and the housing component had risen 6.2% from a year ago, the biggest gain since 1991. Stubbornly high inflation means the Fed is likely to take aggressive action on your meeting next week
with a 75 basis point increase in interest rates, or potentially a 100 basis point increase.
but there are some first signs of cooling
in the housing market. Home sales have been falling for six months in a row
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 eventually mortgage rates will settle.
Where is the housing shortage felt the most?
WHAT MATTERS: What parts of the country are most affected by this problem?
Sun Belt cities like Phoenix and Austin saw some of the higher increases in housing costs
during the pandemic. in miami the the price of a house has risen 33%
a year ago and rents up 26%
from last year. But the affordability crisis is happening nationally, in every region of the country.
The median priced home is now $749 more per month
WHAT MATTERS: The Fed’s medicine for inflation is to raise interest rates, which has pushed up mortgage rates. That might control sales prices, but won’t it drive up the cost of housing?
BAHNEY: The Federal Reserve has been aggressively raising interest rates to curb inflation, which may reduce demand but also drives up the cost of buying a home even more.
But the Federal Reserve does not directly set the rate that borrowers pay for mortgages. Instead, mortgage rates tend to track the 10-year US Treasury yield. As investors anticipate Fed rate hikes, they often sell government bonds, driving up yields and, with them, mortgage rates.
The rate on a typical 30-year fixed mortgage has more than twice as much as a year ago
making a home purchase that was then possible, out of reach for some today.
A year ago, a buyer who put a 20% down payment on a median priced home 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 $1192.
Today, a homeowner purchasing a median priced home, now $403,800, with a mortgage at the current average rate of 6.02%, would pay $1,941 per month in principal and interest. That’s $749 more each month.
Americans now spend more than 35% of their median income on monthly principal and interest payments on that median-priced home. Historically, Americans spent about 25% of their median income on payments.
To get back to that level, some combination of these things would have to happen, according to mortgage data company Black Knight: A person’s income would have to grow 40%, mortgage rates would have to be cut in half, or it would have to be a 30% drop in the median price of a home.
None of them are likely to happen any time soon.
Homeownership is out of reach
WHAT MATTERS: If house prices fall, millions of people will lose value in their main asset. If home prices don’t go down, it means millions of Americans will never own a home. It seems like an impossible situation.
Some housing economists have been saying lately
that the housing industry is in a recession, but homeowners don’t feel that way. Sure, there are plenty of examples of refrigeration in the housing industry (mortgage company layoffs
, home builders backing down
, home sales fall
). But homeowners still have tremendous equity in their homes, which has increased by an average of $60,000 in the last year
Still, millions of people are being locked out of home ownership as affordability challenges prove insurmountable.
In April 2021, a household had to earn about $80,000 a year to afford a median-priced home with a modest 3.5% down payment. A year later, the income requirement was $108,000. This cost increase means that about 4 million renter households who could have bought the median-priced home last year couldn’t do it anymore 12 months later
How can I solve this problem?
WHAT MATTERS: What are some ideas to solve this problem? Is there an effective way for the government to act?
BAHNEY: Most housing policy experts say that building a steady supply of new, affordable homes is job number one. But because those homes aren’t as profitable for builders as larger, higher-priced homes, it will take a concerted effort from the public and private sectors.
In May, the Biden administration announced a Housing Supply Action Plan
to close the affordability gap and alleviate housing costs. The plan aims to boost the supply of affordable housing by enhancing existing federal funding and incentivizing areas to reform zoning and land use policies to build more affordable housing. It also asks homebuilders to adopt more efficient construction methods.
But none of this is a quick fix, and some of it requires action by Congress.
Separately, the Federal Housing Finance Administration, which oversees mortgage giants Fannie Mae and Freddie Mac, has announced plans
this summer to expand home financing options for buyers, particularly those of color, to close the racial gap in home ownership. These programs include down payment assistance, lower mortgage insurance premiums, and a credit reporting system that takes into account rent payment history.
Some of these ideas, including new zero down payment loans
with no closing costs for buyers in specific black or Hispanic neighborhoods, are already underway.