Mortgage lenders must find innovative, affordable ways to help buyers
Homebuyers are feeling the pinch. With home prices rising across the board, almost everywhere across the United States, many potential buyers are shying away from seeking a mortgage.
From 2010 to 2019, the Case-Shiller 20-city composite index, which measures residential real estate has increased almost 50%. While there has been modest deceleration among home prices in recent months, high prices are still the norm. Here are three key reasons for the high prices, and more importantly, how we can mitigate this trend with tax breaks and affordability products.
1. A shortage of housing inventory: Home prices are a function of supply and demand. Supply has been tight — inventory fell 1.8% in August and 2.5% in September 2019. Limited inventory may be a product of the success of the U.S. economy, as we’re all experiencing one of the longest periods of growth in this country’s history. Moreover, low unemployment and modestly increasing wages have helped drive demand among Americans for homes.
2. Labor costs are increasing: The prices of materials and resources needed to build residential real estate have been going up. Some 60% of a home’s price can be attributed to the underlying construction costs. The largest costs include acquiring a permit, preparing the lot, and buying raw goods. Lumber prices were up 20% and steel prices rose 14% in 2018, up from the previous year. What’s more, labor costs have surged, as there is a shortage of construction workers in the U.S. There is a higher amount of vacancies in these jobs than at anytime in the past 18 years.
3. A dearth of affordability products: In the years before the Great Financial Crisis of 2008, many lenders provided financing options so that millions of Americans could afford to purchase a home. On its face, this was a noble goal, but in practice, many lenders provided financing — in the form of adjustable rate mortgages (ARMs) — with little compunction and without conducting necessary diligence on the financial situation of borrowers. During the crisis, ARMs defaulted in higher rates than customary 30-year fixed rate mortgages. Since the crisis, ARMs have fallen to 10% of the total share of mortgage originations from 50%.
Perhaps the most effective way to counter rising home prices is through government policy. For starters, let’s resume a tax break for first-time home buyers. A similar measure was first adopted in 2008 and established a $7,500 tax credit for those purchasing their first home. Such a policy could function as a zero-interest loan that would be paid back over the course of the mortgage payments. While several states have their own form of tax credits for home buyers, it’s important that there is a federal measure so that everyone can take advantage of this opportunity.
The brunt of increasing home prices has been most acutely felt among millennials — the demographic group that makes up the largest share of home buyers. Many of them simply can’t afford to purchase a house, or for that matter, to refinance their existing mortgage at a lower rate. On average, millennials put down 8.8% of the down payment amount towards a new home. So, a tax credit may go a long way to helping them afford a house.
Read: Millennials are needlessly missing out on refinancing their home mortgages
Plus: Millennials shouldn’t need the ‘Bank of Mom & Dad’ in order to buy a house
Mortgage lenders ought to re-think their affordability programs and find more efficient and responsible ways of providing financing for consumers who are keen to purchase a home. We in the housing sector need not shy away from such affordability programs, but must offer financing in a responsible and careful manner.
My firm, for example, provides financing to those who may not qualify for a traditional mortgage but have the intention and capacity to repay. We make sure to offer ARMs responsibly, conducting due diligence on borrowers. Our loan officers work closely with customers to make sure they understand the attributes of each financing option. We also offer financing for self-employed borrowers in which we check their personal or business earning statements.
Many borrowers simply aren’t familiar with these types of affordability programs. Lenders must promote these programs so that borrowers can pursue a pathway to homeownership. Housing lenders need to evaluate alternative forms of income verification, doing so in a responsible manner. This is how we will help make housing more affordable for millions of Americans.