Wanna Buy a Home?

 

Wanna Buy a Home?

Good Luck with That… Unless You’re Rich or Already Own One

We know that like many developed nations, the birthrate for the United States – 1.62 live births per couple – is well-below the 2.1 replacement number. We know that masses of older Americans (Boomer and beyond) are soon going to die off, leaving what should theoretically be a plethora of housing with fewer people to live in them. Add the potential of further culls and curbs to immigrants – which should have a nasty impact on manufacturing and construction costs and job growth – the maybe result: an America with an overabundance of unsold, vacant homes.

But relying on that future eliminates a large chunk of Y and Z Gen buyers who should be buying that housing now. Inventory is low, and even with a fed rate cut, housing costs today are on average 50% higher than they were just a decade ago. Like that nice and small Santa Ana, California “starter” home above (2,225 square feet), priced at $1 million, and not exactly in a high-end neighborhood. Sure, you can find seriously less expensive homes in more rural areas all over the United States, but that’s not exactly where the jobs are that younger buyers want. Housing in major urban Texas and Florida is no longer a bargain. And no, remote work does not remotely fix the problem, even as available remote work is falling fast.

Writing for the September 6th Yale Insights (Ideas from the Yale School of Management), Assistant Professor Cameron LaPoint, summarizes the issues and suggests some possible, and hopefully viable, solutions. He begins with the scope of the problem: “There are many ways to define housing affordability, but common indicators point to much higher costs of both owning and renting than what we have seen since pre-COVID times. Average home prices grew more than twice as fast as average incomes between 2020 and 2023. This is an historically unprecedented rise in the U.S. home price-to-income ratio. At the same time, there has been a steady long-term trend of more and more renters spending high fractions of their income on housing costs. The share of cost-burdened renters —defined as those who spend greater than 30% of their income on rent—grew from 20% in 1960 to 45% in 2022. Rental prices have also spiked by 22% nationally since right before the onset of COVID, but this is on par with the rise in wage incomes over the same period.

“We might also be concerned about measures of affordability for those who currently own a home or are looking to buy one. The costs of maintaining a home include property taxes, maintenance and repairs, and paying off a mortgage, net of any tax benefits such as itemized deductions. Nationwide, property taxes as a share of income have modestly fallen since the Global Financial Crisis. But compare a new homeowner who locked in a fixed-rate mortgage (the most common type of mortgage in the U.S.) with a 20% down payment on the eve of the pandemic in 2019 to another hypothetical new homeowner who did the same in 2023. The 2023 homeowner would be paying about 50% more each month to service their mortgage than the 2019 homeowner, due to a combination of higher interest rates and purchase prices…

“If you were to enter average cost numbers in each major metro area in the U.S. right now, the buy vs. rent calculator would probably tell you it is cheaper to rent than to buy unless you plan to stay in the house for longer than the average six years Americans tend to spend in any one place…

“Property taxes may not seem very relevant to the debate about the current proposal of down payment support for first-time buyers, but they are! We find that offering property tax exemptions to current owners who live in their home puts first-time buyers at a disadvantage. This is because incumbent homeowners benefit from such tax breaks, which lowers their ownership costs, and therefore buyers are willing to pay more for a house. Economists call this the capitalization effect of lower property taxes. Owners are also less willing to give up their tax benefits by selling their current home. Meanwhile, renters receive no immediate cash benefit from these tax breaks, which are pervasive.

“Down payment grants like the one being proposed can help counteract these forces. However, this also means a one-size-fits-all amount like [Kamala Harris’ proposed federal $25,000 downpayment help to first time home buyers] is not likely to go nearly as far in certain parts of the country, including California, where Proposition 13 has helped prop up home values by capping increases in property tax bills for current owners... Overall, cash assistance to first-time homebuyers would likely benefit a small number of younger households and might even be counterproductive to improving the overall affordability of homeownership…

“Policymakers can influence demand for housing through tools like down payment assistance and mortgage regulation, or supply through changing the incentives to build… On the demand side, there is a wide body of evidence from outside the U.S. that making mortgages harder to access helps make ownership more affordable in terms of the sticker price. This is typically done by increasing the standard required down payment—for instance, from 20% to 30% of the sticker price. Down payment requirements lower the attractiveness of buying, freeing up single-family homes for sale…

“Down payment restrictions are often politically infeasible and difficult to enact unless done in a top-down way through powers delegated to the central bank. In the U.S., the Federal Reserve does not have this power in its toolkit, but we do have something called the conforming loan limit, set by the Federal Housing Finance Agency, which indirectly rations credit by making it more difficult for banks to sell off low–down payment mortgages on the secondary market.

“On the supply side, encouraging developers and builders to provide more housing units would help bring down both rents and prices. Construction of entry-level homes is at historic lows, and my research shows that, across most states, permit numbers filed for new housing construction have not recovered since the Great Recession.”

In a nation where existing taxpayers are reluctant to forgive even student loans which are crippling younger workers, the notion that they would fund those same younger grads to help buy their first home – through federal guarantees of mortgages, subsidies at any level, property tax exemptions, etc. – seems extraordinarily unlikely among a pool of “what about me” older voters. Further, by curtailing immigration, that cadre of lower-priced construction workers would be replaced by much more expensive American citizens… which would only make a bad situation so much worse. 

I’m Peter Dekom, and housing affordability is a clear sign that upward mobility in these shifting times has been relegated to history (paused?), a reflection of a nation living on its past economic power, choosing to keep borrowing versus belt-tightening investing as its path forward.