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The Two Sides of Housing Affordability

This story originally appeared in the June edition of DS News.

Looking at housing through the lens of COVID-19 is reminiscent of looking through the lens of an old View-Master toy. With each click— each passing day—a new picture is presented. Each click represents a new normal, a new outlook, and new challenges to overcome. The housing affordability crisis, which had worsened prior to the virus, has only escalated as more than 36 million Americans have filed for unemployment due to the pandemic. More than 4 million people have entered into forbearance plans to either defer or pay reduced amounts on their mortgages.

All the while, home-price growth shows no signs of stopping. An April article by Business Insider said more than 95% of Americans were under stay-at-home orders, and this virus has led to greater housing inequality, housing insecurity, and homelessness. MReport spoke to leaders at the Inlanta Mortgage, TD Bank, and the American Enterprise Institute’s Housing Center, as well as economists from Freddie Mac, First American Mortgage Solutions, Realtor.com, and more to discuss the state of affordability in America, tightening lending standards, further inventory strain with a possible suburban boom, and just how long the virus’ impacts could last.


The Affordability Conundrum


Median-home prices across the nation continue to ascend. CoreLogic’s Case-Shiller Home Price Index revealed home prices rose 4.2% in February—an increase from January’s 3.9% rise. Additionally, the National Association of Realtors (NAR) found home prices in 174 in 181 of the cities studied rose in Q1 2020. The median-home price during Q 4 2019 was $254,900 and jumped to $274,600 during Q1 2020.

Paul Buege, President and COO, Inlanta Mortgage, said COVID-19 has impacted “virtually everyone,” and each person has been affected in different ways— just like the mortgage credit market. “With rates at or near all-time lows, consumers who are still working and continue to have favorable credit profiles will find that mortgage financing couldn’t be more affordable or better right now,” Buege said. “Those in that position should absolutely consider taking advantage by financing the purchase of a home or refinancing a current loan.”

He added that credit availability has fallen for consumers with less than strong credit or for those seeking finance options that are considered nonconforming. “The costs associated with financing a home will be more expensive for these folks, both in rates and fees. At the same time, some loan programs are simply no longer available,” Buege said. He added that mortgage credit will likely improve with the economy, but it’s important for consumers to do everything possible to protect their credit now. “Having a positive credit history is always central to getting a mortgage approval,” he said.

Steve Kaminski, Head of US Residential Lending for TD Bank, observed that when discussing affordability, it is important to look at the consumer’s financial position. “It was at a very strong point coming into the pandemic. The ratio of debt service to disposable income was at historic lows, unlike prior to the liquidity crisis of the Great Recession, where there was a lot of stress on the borrower’s financial position,” Kaminski said. “Comparing the high debt levels of that time versus consumers’ current position, which is much stronger, debt was the lowest it’s ever been, frankly.”

He added that while sellers have pulled back and inventory is down, with the declines on the higher end, and there could be a shift in competition—but no decline in home prices. Kaminski said home prices will be important to watch, as values are expected to stay level or decline slightly. “If demand holds and rates stay low, you will likely see a consistent position here as Americans get back to work, which is the key to normalizing the economy.

The sooner that happens, the sooner things will improve economically and in the housing market throughout the rest of the calendar year,” he said. Regarding home prices, Kaminski said values overall have remained stable, despite certain pockets showing movement, as “prolonged conditions” related to the coronavirus have caused little movement.

Additionally, prior to the COVID-19 outbreak, housing was strong, with low rates, strong buyer demand, and housing starts rising. However, housing starts, permits, and completions all declined in March, as the U.S. Census Bureau reported permits fell 6.8% for the month, completions declined 6.1%, and starts fell off by 22.3%. Every region in the nation posted declines in permits, with the largest drop being the 12.7% drop in the midwest.

“Economic conditions were relatively strong, and we were positioned well for a growing purchase market, but April’s unemployment results were devastating,” Kaminski said. “This is an employment situation here where we’ve never seen such a drastic movement in employment, and that’s driving the concerns and the uncertainty about increased job loss and duration.”

The low-rate environment has been one of the few advantages brought on by COVID-19. Freddie Mac’s Primary Mortgage Market Survey on May 14 said the average 30-year fixed-rate mortgage averaged 3.28%—essentially unchanged from the prior week’s 3.26%. The average 30-year fixed-rate mortgage was 4.07% at this time last year. Danielle Hale, Chief Economist for realtor.com, said there are three factors that impact housing affordability: income, home prices, and mortgage rates—and COVID-19’s interaction with these factors is “complicated.”

“Mortgage rates had been steady to end 2019, but as concerns around COVID-19 grew, mortgage rates began to drop. From the end of December 2019 until now, mortgage rates are roughly half a percentage point lower,” Hale said. She added that this is actually boosting buyer affordability and helping current owners who are able refinance into a lower mortgage rate. While continually growing, home prices are not helping affordability, the growth rate of prices has slowed, which is a welcome assist to buyers, Hale added. “We expect this growth rate to continue to slow, and in some markets, we are seeing mild price declines, so on the price side, COVID-19 is improving affordability,” Hale said.

Edward Pinto, Director, American Enterprise Institute’s Housing Center, agreed with Hale’s remarks, suggesting that affordability has improved due to falling interest rates. He added that home-price growth was at6-7% in February and early-March, dropped to about 4% in late-March and early-April, but recent data shows that has recovered to 5-6% in mid-May. “If it hadn’t been for the market disruption caused by the coronavirus, our estimation was that we would have seen a very high house price appreciation in this buying season.

So that combined with lower interest rates, has made housing more affordable,” he said. “The negative impact is that lending standards have been tightened, so potential homebuyers who would have barely qualified for a mortgage two months ago may have to wait to improve their financial picture before buying,” said Brian Koss, EVP of the Mortgage Network. Odeta Kushi, Deputy Chief Economist for First American Financial Corporation, echoed those sentiments. She said recent events have created an affordability “tug-of-war.”

“On the one hand, the 30-year, fixed-rate mortgage hit a historically low level of 3.2% in April, and on the other, the unprecedented labor market decline will reduce affordability for those that lose their jobs and experience a decline in household income. Meanwhile, house prices have continued to appreciate,” she said. Freddie Mac’s Chief Economist Sam Khater said the pandemic has caused forces to pull in opposite directions. “There’s of course the downturn in the economy which has caused unemployment to rise and will cause income growth to stagnate, which will worsen affordability,” Khater said. “But for those whose incomes have not been impacted, it’s improved affordability due to the drop in mortgage rates and at the margin, less competition for the same home on the market.” Kushi added that it is the prevailing thought that mortgage rates will remain below 3.3% for the remainder of the year, which will continue to boost affordability.

Kushi added, however, that it is too soon to tell what path housing appreciation will take, as past recessions have shown prices are “downside sticky”—meaning the pace of annual appreciation may slow but is unlikely to decline. “The path of household income will be dependent on how fast the labor market rebounds,” Kushi said. “Affordability looking ahead will depend on the tug-of-war between lower mortgage rates and continued house price appreciation amidst a backdrop of rising unemployment.” Richard Ferguson, President, CBC Mortgage Agency, said affordability could improve—momentarily and in pockets—but long-term affordability will not improve unless there is a prolonged recession.

“There are fewer buyers for now, given the uncertainty in the market. But on the other hand, supply is tight and getting tighter as more potential sellers opt out of selling,” Ferguson said. He added that the supplydemand dynamic will settle back into pre-pandemic levels “within months,” and housing will be back where it was a few months ago: Too little supply and high levels of household formation among millennials, meaning that rising pricing pressures will continue to be the norm.


Impact on Younger Generations

Millennials, and now Generation Z, were making headway in the housing market prior to COVID-19. A study by the National Association of Homebuilders found that while the number of prospective Gen Z buyers fell from 20% in Q1 2019 to 13% in Q1 2020, the millennial share grew to 16% from 15%. Additionally, 61% of buyers in Q1 2020 were first-time buyers, which is a minimal increase from Q1 2019’s 60%.

Kaminski said a good portion of millennials entering the housing market went through the Great Recession more than a decade ago, and therefore may approach homeownership more cautiously during times of economic uncertainty. The demographic Kaminski is most concerned with is Gen Z, as many are just starting their professional careers, with them having jobs in the industries hardest hit—retail, hospitality, leisure, travel, and entertainment. “I think some of these younger generation workers are certainly feeling the impact like everybody else who works in those industries—in some cases, the strain is much more significant because they don’t have savings to fall back on. This could certainly play a role in delaying homeownership,” Kaminski said.

Kushi said that, while nearrecord low mortgage rates make housing more affordable, especially with those with stable incomes, tightening credit standards, and ficult for potential buyers. “Saving for a down payment is one of the biggest obstacles faced by first-time home buyers, and, un - surprisingly, millennials are much more likely to get a mortgage with a lower down payment (3-5%),” she said. “The recent credit tightening will likely disproportionately hurt potential first-time home buyers.”

Buege, however, noted the effects of COVID-19 have made homeownership more achievable for the “majority looking to own a home.” He added while the economic shutdown has impacted many people, these individuals represent 15-20% of those negatively impacted. “While they have been tem - porarily sidelined, they should remain optimistic, because current setbacks may reverse themselves quickly,” Buege said. Ferguson said the pandemic has made homebuying more difficult, especially for younger buyers, who have been working to improve their financial situation by reducing debts, paying off student loans, or improving their employment position.

“Now they’re having to spend their savings or go back into debt while their income has either decreased or been lost entirely. While the government has passed certain stimulus bills with the aim of putting money into consumers’ pockets, it is doubtful that they will be enough to offset the larger impacts from loss of income,” he said. Khater said the pandemic has “clearly made it harder” for millennials, as they graduated in the worst recession since the Great Depression, making it more difficult to become homeowners. “Now, Generation Z is going through an even worse recession than millennials, and the impact of graduating during a recession means their earnings will be lower and for an extended number of years, similar to millennials,” Khater said.


A Suburban Boom

Analysis by Zillow found the majority of workers have had no issue ditching the office cubicle for the home office. A Harris Poll conducted in May found 75% of those forced to work from home due to COVID-19 said they would prefer to continue at least half of the time, if given the option, once the pandemic passes. Also, 66% of those surveyed said they would be open to moving if they had the flexibility to work from home as often as they wanted.

Where would they move? According to Zillow, these consumers would be drawn to larger homes in the suburbs with larger rooms and offices, as workers would no longer be concerned about their commute. Kushi said this was a trend that First American was following, even prior to the COVID-19 pandemic, as there was a movement from larger metros to smaller metros and a migration to the suburbs and exurbs from the metro centers.

Also, she said there is data by the U.S. Census Bureau that shows Americans are moving from Rust Belt and Northeastern cities to markets across the Sun Belt. Data from the Census found that Texas continues to grow at a rapid pace, with four of the 10 fastest-growing counties since 2010 located within the Lone Star State.

Also, three of those counties sit between San Antonio and Austin, and the fourth, Fort Bend, located in southwest Houston suburbs. Those four counties have added more than 320,000 residents—a 36% increase over their 2010 population. Kushi said while markets such as San Francisco, Los Angeles, and Boston are attractive destinations, especially for younger buyers, smaller cities such as Oklahoma City; Louisville, Kentucky; and Memphis, Tennessee, are more affordable.

“It is likely that the trend of migrating to smaller metros and suburbs will continue because of millennials’ lifestyle choices as they begin to age into homeownership, but it is too soon to tell if the pandemic will accelerate this trend,” Kushi said.

Living within high-density populations, Ferguson said, has lost its appeal.

“People who have been in quarantine and working from home in their urban apartments are now realizing they want more space,” he said. “This is going to cause a migration of wealthier whites from the city to purchase more affordable and larger homes in the suburbs, which in turn will cause a decrease in affordable suburban inventory and an increase in home prices in these areas, leading to a new form of gentrification.”

Kaminski said this is a trend that TD Bank is beginning to follow, as they are trying to collect information about the movement, or potential movement, from urban living to the suburbs. However, he noted it may be “a little too soon to tell” and said that more information is needed before decisions are made. “If you do see that movement—looking for more affordable living with more space out in the suburbs—you’re going to see some impact to inventory or demand, and then ultimately maybe some shifts as it relates to pricing, but I think it’s too early to tell,” he said.

Buege, though, offered a different point of view, saying a move away from the cities is not likely to happen. He said people are learning how to be safe together and are becoming more optimistic about their future. “Lower mortgage rates have reduced the cost of homeownership, so if you’re thinking about it, now is the time to act,” he said. “Inventory will likely remain tight, but not because people are afraid of moving or unwilling to put their home on the market, but due to ongoing demand by those seeking homeownership.

Demand for housing has mostly remained unchanged.” Hale said if there is a pattern showing migration away from the urban centers, the data is mixed. She added that if there is a boom in the suburbs, the market could see more homes for sales in the urban centers, extended time on the marker, and weaker price growth—possibly declining prices. Hale explained, “When I refer to mixed data, here’s what we see so far: essentially, when looking at total traffic trends, we don’t see a shift out of urban centers yet. While the share of traffic going to suburban areas is bigger (59%), in the COVID19 crisis the urban share grew while the suburban share shrank among active shoppers.”

Hale said in the cities of Washington, D.C., and New York City, the suburban view share has not only recovered but is higher than in 2019. Khater said the lack of inventory and low affordability have caused homeowners to look away from the city center, or potentially to other cities. “While homes are more affordable further from city centers, the lack of inventory is still an issue even in the suburbs and marginal demand that flows from the city to the suburbs simply means more competition for a limited set of homes for sale which, longer term as the economy recovers, puts more upward pressure on suburban home prices,” Khater said. Pinto added that the narrative for the years’ prior was that everyone was moving to the urban centers, which he said was “somewhat exaggerated.” In fact, there has been a move away from large metros for a number of years, noting New York City and Chicago have reported falling populations for several years.

Another point of concern for Pinto is the aging baby boomer generation. He said a large number of homeowners in this generation are “going to try to figure out a way not to go into a nursing home or an assisted living facility,” with some questioning if they should remain in their house in the suburbs, rather than move to denser living within the city. Also, Pinto said more children are staying at home longer, whether they are in college or grown children.

He himself said his son, wife, and their one-year-old son are temporarily living with them and it would be “impossible” to downsize into a two-bedroom condominium. He noted there are many people who have left New York City for markets such as Connecticut, upstate New York, or New Jersey, citing a need to “keep my options open.”


Credit Where Credit is Due

Black Knight reported that more than 4.7 million homeowners have entered into mortgage forbearance programs since the pandemic’s outbreak. However, this growing population of homeowners electing to forgo and make reduced payments is causing banks to grow wary. Information by the Mortgage Bankers Association revealed mortgage credit availability has fallen by more than 35% since the virus spread. In March, riskier borrowers “could get a mortgage but just pay a higher price than other people,” wrote Michael Neal, a Senior Research Associate at the Urban Institute Housing Finance Policy Center.

“Now, some people are just not going to get mortgages.” JPMorgan Chase & Co. tightened its standards in May, requiring borrowers to have minimum credit scores of 700 and to make down payments of 20% of the home price on most mortgages, including refinances if the bank didn’t already manage the loan. Wells Fargo & Co. increased its minimum credit score to 680 for government loans that it buys from smaller lenders before aggregating them into mortgage bonds.

“Tighter lending standards will likely make it harder for younger buyers to afford a home, especially if they have student loans to pay off or if they do not have sufficient savings for a down payment,” Koss said. Buege added that the industry doesn’t know how many of the borrowers seeking forbearance actually needed the relief, as opposed to simply applying as a “backup measure” in case they lose employment. “The mortgage credit markets are rightfully concerned—spooked if you will—about what is mostly still unknown. How long will the economic shutdown last, and how many will suffer financially?” Buege said.

Kushi said rising jobless claims—with more than 36 million Americans filing for unemployment since the middle of March— indicates a higher risk of mortgage delinquencies. Lenders, in reaction to this, are tightening credit criteria to account for a higher likelihood of forbearance and delinquency.

“First-time home buyers tend to have lower credit scores and down payments than repeat-buyers, indicating that this will be a significant credit hurdle for first-time home buyers,” Kushi said. “Despite the uncertainty and stricter credit standards, mortgage rates hit a historically low point of 3.2%, and homebuyers responded, with pur chase applications increasing on a week-over-week basis for the fourth straight week. It seems some buyers are not deterred, just delayed in this year’s spring homebuying season.” Kaminski said it is the hope that consumers can safely get back to work sooner rather than later, especially within the industries that were hit the hardest.

“As states and counties move to re-open, we will be watching the impacts closely. But I think we now have a better gauge of the duration to expect and what some of the potential ripple effects to the economy really are,” he said. Kushi observed that the longer this pandemic continues, the more likely it is the economic fallout results in a prolonged recession and high unemployment. This could cause demand and the number of sellers willing to put their homes on the market to drop.

“But remember, buying and selling a home is a lifestyle and financial decision, and for those that feel financially confident, they will continue to pursue homeownership,” she said. Hale said Realtor.com’s forecast calls for sales s to fall by 15% annually in 2020, with home prices growing just 1.1%. “We expect the second quarter/ spring of 2020 to bear the brunt of the COVID-19 impact, with some improvement in the sales pace in late summer and fall before another decline as the market adjusts to ongoing infections and weaker overall economic growth,” she said.

Khater said it is difficult to gauge how long this pandemic will last, as many within housing and mortgage are trying to understand the depth of the recession. “Home sales that hit a trough in mid-April with sales dropping by about a third. However, sales began to slowly rebound in midMay.

Currently, purchase demand is almost on par with where it was a year ago, which is remarkable given that other segments of the economy are experiencing much larger declines with only a moderate recovery so far,” he said. Buege said there are two sides to the historic moment. Some have, and will continue to be, hurt financially by COVID-19, while others escape the pandemic unscathed. “Fortunately, many remain only minimally impacted or not at all, although their confidence may have been set back,” he said. “As these people regain confidence, they will move forward. The housing market may be a bit bumpy for a while, but we expect a positive housing market the rest of this year and into next.”

About Author: Mike Albanese

A graduate of the University of Alabama, Mike Albanese has worked for news publications since 2011 in Texas and Colorado. He has built a portfolio of more than 1,000 articles, covering city government, police and crime, business, sports, and is experienced in crafting engaging features and enterprise pieces. He spent time as the sports editor for the "Pilot Point Post-Signal," and has covered the DFW Metroplex for several years. He has also assisted with sports coverage and editing duties with the "Dallas Morning News" and "Denton Record-Chronicle" over the past several years.

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