Housing Questions

Last week, representatives of the National Association of REALTORS®, Mortgage Bankers Association, National Association of Home Builders, National Multi-Housing Council and National Fair Housing Alliance met with White House policy advisors to discuss the crisis.  The nation is 5.5 million homes short of the number needed for our current population.

The problem is manifestly clear.  The stakes could not be higher – housing is a human right, and far too many people in the most prosperous nation in the world are one or two paychecks away from homelessness.  The question is – what to do about it?

Owning real estate that appreciates in value over time is the most common way Americans have to accumulate wealth.  But this avenue was not always available to working people, and is becoming increasingly less available today.  Consider what was done in the past when the nation was in the midst of a housing crisis.

In the 1930s the federal government revolutionized the housing market by creating FHA loans.  Prior to 1934, it was typical for lenders to deny loans to borrowers who could not provide at least 20% of the purchase price, on the theory that anyone without substantial cash reserves was a bad credit risk.  Then as now, potential buyers who were forced to pay a substantial part of their income for rental housing had no opportunity to save that kind of money.  The situation conservative lenders were trying to avoid – the worst-case scenario – was as follows:

A borrower defaults and their property is sold at a foreclosure sale.  The proceeds of the sale are not great enough to cover the unpaid loan.  The lender then files a deficiency judgement against the borrower that forces the liquidation of all their remaining real and personal property.  But there is still not enough money to cover the debt.

That was what lenders feared, and served as the justification for denying loans to low-income borrowers.  But consider how dramatically worse it was for the defaulting borrowers, who were more than likely only in that situation because of the loss of a job, and were now also homeless as well as having sold all their material possessions without getting out from under the debt.

The FHA loan program was designed to reassure lenders by providing mortgage insurance that would pay any deficiency after a foreclosure sale.  This is not government-subsidized housing.  The money for mortgage loans comes from private lenders – not the government.  The mortgage insurance is paid for by the borrowers in monthly installments. But with mortgage insurance, lenders were willing to provide loans of up to 96.5% of the purchase price of a home.  In the midst of the Depression, home ownership skyrocketed.  More homebuyers entered the market thanks to the GI Bill after WWII and the VA loan program, which guarantees loans up to 100% of the purchase price.  In the post-WWII era, home ownership became the norm in American society.

Today the issues are different.  Since the recession of 2008 caused the home construction industry to grind to a halt, and since the pandemic has wreaked havoc with the supply chain for building materials, we are experiencing an extreme shortage of housing inventory.  It has been a “seller’s market” for the last decade with no immediate end in sight.  Meanwhile, demand is high. The population continues to grow.  In spite of fears of a recession and a substantial setback in 2020, the economy has been growing since 2009.  Unemployment is low and the cost of borrowed money is historically low.

But individual homebuyers are still at a disadvantage.   Investors are making cash offers (seen by most sellers as preferable to offers backed by loans) to take many properties off the market for conversion into rental properties.  And inflation, which is causing a rise in the prices of nearly everything, seems especially acute in the housing market.  Meanwhile, many builders are chasing high profits by building only homes in the upper price ranges.

So what can be done?  There are some commercial programs now available to make cash offers on behalf of buyers who are depending on loaned money to make home purchases.  These kinds of competition-driven innovations can level the playing field for some borrowers.  But the question remains – what solutions for the larger problems are available, and is there anything the federal or local governments can do to help?

First of all, it is clear that the federal government does have a commendable record of promoting and encouraging home ownership.  And it is clearly in the nation’s best interest to enable the creation of broad-based wealth through home ownership.  But the situation today cannot be solved by a policy exactly like the FHA loan program.  The challenges are different today.

Can the federal government take action that would increase the supply of available housing?  Is it feasible to incentivize builders to produce more moderately-priced new homes?  Is it possible to do so without placing a greater burden on the federal budget – as the FHA loan program managed to do?  Is it politically feasible to re-frame housing as fundamental responsibility of government, on par with military spending, border protection, and the defense of civil rights?

An even more difficult question is whether any level of government can reduce or eliminate the marketplace advantage investors have over homebuyers.  It is easy for frustrated buyers to point fingers at the absentee landlords who are outbidding them at every turn.  But is it good public policy to limit investment opportunities in an economy driven by commerce?  It is important also to remember that many landlords are individuals who own a rental property or two to provide a secure investment for their families.  Any time a democratically-elected government restricts economic choices for the sake of expanding economic opportunity, it must be done with great precision to eliminate unintended consequences.

These are difficult questions with no obvious solutions, prompted by easy and obvious complaints about the current state of housing in this country.

Any ideas?  We need lots of them.

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The White House Meeting – https://magazine.realtor/daily-news/2022/09/22/nar-helps-white-house-brainstorm-inventory-solutions?narmail=Member%26%23×27;s%20Edge&date=09-29-2022&user=4280380