This piece originally appeared in the May 2022 edition of MReport magazine, online now [1].
For many Americans, achieving the American Dream of homeownership is the be all, end all of goals in life.
Stashing away savings and accumulating the funds required to make what is often the largest financial purchase of one’s life is the endgame for many Americans. Outside of the basic need for shelter in which to function and raise a family, many also see homeownership as an investment that will financially secure their future.
However, for today’s homebuyer, the doorway leading to the American Dream has become more elusive than ever, with many seeing the door slam shut in their face as affordability factors block the path for a whole new generation of potential buyers.
Imagine working to achieve enough for a down payment, disciplining your credit score to qualify for the lowest rate possible, and narrowing down that hunt to a select few identified as “dream homes” … only to have the carpet pulled from beneath your feet because you were outbid by a cash-flush borrower who swooped in at the last minute. Hopes and dreams can be dashed in an instant as competing market forces wipe away aspirations of homeownership nationwide.
With the stakes high and the aspirations of many on the line, MReport spoke with mortgage industry experts about the challenges currently facing homebuyers—and whether there is any relief in sight.
The Players in the Game
To understand the affordability struggle, one must realize that it’s not just some individual waltzing into a closing to literally steal the day away that is the sole factor in this game.
The first character in this chess game of affordability is mortgage rates.
It had been 732 days since the Federal Reserve Open Market Committee (FOMC) cut interest rates in an emergency meeting in light of the COVID-19 pandemic. But all that changed on March 16, 2022, as the FOMC raised the nominal interest rate by 25 basis points (Editor’s note: As this book went to press, on May 4, the FOMC increased the federal funds rate interest rate by another 50 basis points to 0.75-1.00%). This move was akin to tossing a boulder into a calm, still pond.
The first ripple witnessed was the upward rise in mortgage rates, which have, as of this writing, rose for the seventh consecutive week, hitting the 5.11% mark.
“I have deeply rooted concerns about homeownership in the U.S.,” said Stanley Middleman [2], CEO of Freedom Mortgage [3]. “We are a country that prizes homeownership as part of our culture, yet forces seem to be at work that make this an ever-increasing challenge today.”
And although home starts are beginning to show signs of life, the lack of homes available is the second major player in the affordability game. Zillow recently reported that after six consecutive months of dwindling inventory, 11.6% more homes were available in March than in February, the largest one-month jump in Zillow’s records. According to Zillow, inventory remains 22.5% lower than just one year ago, as the estimated 754,000 homes that were on the market in March represent a figure lower than in any month on record before January 2022. The number of newly listed homes in March jumped 35.8% from February to about 386,000, but this still remains 8.5% lower than last March’s pace of new listings.
“The largest issue outside lender control is inventory, which long-term must adjust to market needs to make real headway on affordability,” said Joe Puthur [4], President of Mortgage Coach [5]. “Builders are not constructing enough homes for first-time homebuyers because the margins are not there and a reluctance to retrofit commercial to high density housing is unnecessarily present.”
Persistent supply chain challenges have served as a roadblock for many builders in their attempt to bring housing supply numbers up to keep pace with demand.
The National Association of Home Builders (NAHB) notes that volatility in lumber prices has raised the cost of a typical single-family home by more than $18,600, and has added approximately $10,000 to the cost of a typical apartment since last August.
“The four ‘L’s—Legal, Labor, Land and Lumber—are working against the economics of homebuilding,” explained Rob Chrane [6], Founder and CEO of Down Payment Resource [7]. “Until we can incentivize new construction, there will continue to be a dearth of affordable, entry-level housing. Many localities across the country are reevaluating zoning, permitting, and other regulations that inhibit the development and preservation of affordable housing, but by definition, that’s a piecemeal effort and will take years, maybe decades.”
The spike in home prices is yet another thorn in the side of homebuyers nationwide, as the latest RE/MAX National Housing Report for March 2022 found home sales jumping 32.2% over February, posting a median sales price of $360,000 as buyers continued to outnumber sellers.
While these three factors have merged to pull many buyers out of contention, Paul Buege [8], President and CEO of Inlanta Mortgage [9] in Pewaukee, Wisconsin, advises that consumers ignore the forces, yet focus on what they do have power over.
“It’s hard not to notice the headlines, as everything we are reading and experiencing today points to increased prices for food, gas, housing, and rents. Affordability has everyone’s attention,” Buege said. “Yet, as with many things in life, placing too much focus on what cannot be controlled can make the current situation seem more difficult. Instead, consumers should focus on the things they can control, including their spending habits, their savings, and their credit profile.”
A Time of Prosperity?
Marketwatch reported on a recent Oxford Economics study that found rising stocks and financial assets helped U.S. household wealth grow by $19 trillion during the time of the pandemic, reaching approximately $137 trillion.
Discretionary spending or non-essential spending slowed to a halt during the pandemic, as stay-at-home orders kept people from vacationing, dining out, going to the movies, etc., leaving many with newfound savings.
In addition, payments from the government’s $2.2 trillion economic stimulus bill, the CARES Act, further added to Americans’ savings, increasing the nation’s household net worth 16% from the end of Q4 2019 through Q1 2021.
This wealth accumulation positioned many first-time buyers with the foundation for a solid down payment, opening the doors of homeownership for many.
While first-time buyers seized the opportunity to spend their newfound wealth, remote work opportunities also paved the way for more second-home buyers. This segment was seeking larger, more spacious homes in rural areas, away from the hustle and bustle of the city, as business could now be conducted virtually anywhere via electronic means.
The home investor market share hit a record in Q4 of 2021, as Redfin recently reported the number of homes bought by investors declined 9.1% from the Q3 peak; however, this was still up significantly from pre-pandemic levels. Investors purchased 80,293 homes in Q4, up 43.9% year-over-year.
These new segments had a huge impact on housing inventory, as the number of homes available trended downward at a time when more buyers were seeking available options.
Is There an Answer?
What options are available to those who are simply priced out of the market? Even renting is becoming an affordability nightmare. Those looking to save are hampered by continual increases in rental prices nationwide. Redfin recently reported that the median rent price surged 17% in March 2022 to $1,940, the largest annual hike since February 2020. In conjunction, the median price of a mortgage rose twice as fast, rising by 34% compared to last March to $1,910, which was also the biggest increase in Redfin’s records.
“The truth is that not many affordable housing options are available,” said Jennifer Rasmussen [10], VP and Head of Thought Leadership for SitusAMC Insights [11]. “One may argue that people who cannot afford single-family housing could find financial relief by renting either single-family or multifamily housing instead. In actuality, SitusAMC Insights finds that while homes are the least affordable they have been since 2007, owning a home is still more affordable than renting nationwide, as multifamily rents began skyrocketing in most metros in the middle of 2021. This is one of the reasons why so many adults are still living with their parents. The share of people living in multigenerational households is 18%, and it’s 31% for young adults (aged 25 to 29).”
For others, inflationary issues are forcing them to seek higher-paying jobs to keep pace with today’s economic pressures. Moving to a lower-cost area may be another solution for prospective buyers who have the means, as suggested by Louis Zitting [12], Founder & CEO of Murray, Utah-based MonitorBase [13].
“Homebuyers should consider their current job … they either need to increase their income or move to a lower cost area,” Zitting said. “This is happening more rapidly now with many employers embracing the ability to work remotely. Or, they should consider buying a condo. That will allow them to start building equity and have the tax benefits of owning versus renting.”
Cake Mortgage [14] CEO David Abelyan [15] echoes these sentiments.
“Don’t be afraid of moving to a different area to get a starter home that’s affordable,” Abelyan said. “Continue being smart with your money and saving, look at different geographical areas to purchase to get your foot in the door. It’s much better to move and buy a home and at least bank in the appreciation based on inflation alone than continue to sit on the sidelines.”
Another option—as noted by ClearPath Lending [16] Director of Operations Adam Mercado [17]—is pooling your funds together to achieve the American Dream of homeownership.
“Co-buying is an interesting concept that is becoming more popular,” Mercado said. “Find a like-minded friend and pool your assets and income to buy a property together. You can even consider a duplex, so you both have separate living spaces for privacy and comfort.”
When Will the Dust Settle?
Is there an end in sight to remedy the affordability issue? Will more and more Americans be shut out of the elusive American Dream of homeownership by forces out of their control? CBC Mortgage Agency [18] Founder Richard Ferguson [19] has an idea on how to turn the affordability tide.
“There is no one thing that needs to happen, but rather a concerted effort by policymakers, central bankers, and regulators to break the affordability cycle,” Ferguson said. “First and foremost, the Fed needs to get inflation under control. Waiting too long to pump the brakes in the midst of unprecedented government spending has led to the predictable outcome of rising inflation and rising interest rates. The Fed has a number of tools to curb inflation and needs to use them.”
And, as Odeta Kushi [20], Deputy Chief Economist at First American [21], suggests, more bumpy roads may lie ahead before the path smooths out.
“Affordability will likely worsen before it improves,” Kushi noted. “While nominal house price growth may moderate due to the affordability squeeze on buyers who are on the margin, the severe supply-demand imbalance means the housing market is unlikely to cool enough to result in a material improvement in affordability in the near-term. Even if demand moderates due to an affordability squeeze, it will take time for supply to catch up with demand, keeping house price growth positive.”
Middleman adds, “In my opinion, it will take the will of the government, either through owner-occupied tax credits or down payment assistance (without burdensome rules) to overcome the market forces currently in play. I would not be surprised to find a lower percentage of homeownership in the future unless something dramatic occurs to change the paradigm.”
But will the dust ever settle, and will the market ever return to a state of normalcy? That remains to be seen, but as Redfin shows, the typical homebuyer’s monthly mortgage payment shot up 39% in March, the largest year-over-year gain recorded.
One option that can assist with affording a home is down payment assistance programs. As noted by Chrane, who serves as Founder and CEO of Down Payment Resource, in the first quarter of 2022, there were 2,238 active homebuyer assistance programs—a figure that includes down payment and closing cost programs, Mortgage Credit Certificates, and affordable first mortgages—with at least one program available in each of 3,143 U.S. counties, and 10 or more programs available in more than 2,000 U.S. counties.
“For many people, down payment assistance provides the best pathway to homeownership,” Puthur notes. “If somebody has the ability to repay, they should have the ability to benefit from the wealth building benefits of homeownership, and the ability to invest in things like better neighborhoods, better education, and better life outcomes.”
However, rising costs can put a damper even on the buyer who is leveraging down payment assistance to purchase their home.
“While we certainly believe down payment assistance is an important tool for many first-time borrowers, it is not a cure-all for every possible homeownership obstacle,” Ferguson said. “Down payment assistance does solve one of the largest hurdles for borrowers, which is the down payment. Many would-be borrowers have good income and credit, but due to ever-increasing rental rates, they have not been able to save enough for a down payment on a home. For these types of credit worthy borrowers, down payment assistance can be of great help, especially for minority buyers, who often do not have familial wealth to assist them in buying their first home.”
Chrane agrees that even with down payment assistance, there are bumps in the road.
“Purchasing a home with homebuyer assistance isn’t without its challenges,” Chrane said.
“As housing professionals, we have enormous influence over the ability of fund-strapped borrowers to achieve homeownership, and we must challenge ourselves to be better informed about the affordability programs available to borrowers in our markets. To make competitive offers with homebuyer assistance, consumers need both lenders and Realtors to be informed and on board. The best results are achieved by Realtor-loan officer teams who are experienced, able to facilitate a smooth transaction, and effectively able to educate and allay the concerns of listing agents and sellers.”
The ‘Wait and See’ Approach
“What makes today’s affordability issues even more difficult is that there are no short-term fixes to make the inflationary pressures we are feeling go away,” Buege said. “And housing affordability may be one of the more challenging struggles. We should remain hopeful because the forces of the market that have created the current housing environment will eventually run out of steam, so look for the housing market to settle in to a new normal by next year.”
For many, going back to the drawing board is the best option to wait out the affordability storm.
“Buying a home is the largest financial decision you will ever make, and it’s not to be taken lightly,” Kushi said. “Sitting on the sidelines may allow a potential buyer to continue to pay down their debt, build up their credit, and save for the down payment and closing costs. And in the meantime, they may find that more inventory is hitting the market that aligns with their preferences. Sometimes it pays to wait.”
With no clear end in sight, the saga continues and left in its wake is a generation eager to fulfill their homeownership goals yet forced to hit the pause button for the time being.
“I believe affordability is going to be a long-term issue,” Zitting added. “Most first-time buyers are in their ‘30s, and the population of this demographic is growing rapidly. The supply of affordable homes will continue to have trouble keeping up.”