Housing industry officials are warning the Biden administration that the market is headed for disaster without help and, so far, have received only a muted response.
In recent months, homebuying has become so expensive that it is out of reach for most people. The industry, which usually accounts for about a sixth of economic output, has taken a massive hit. And families are having to put off major life decisions because the market lacks homes within financial reach.
INTEREST RATES FOR RETAIL CREDIT CARDS HIT RECORD AS FED WORKS TO CONTAIN INFLATION
The housing chaos, along with broader inflation, is a major drag on President Joe Biden’s economic approval ratings, which are poor, even though the labor market is strong and GDP growth has proved resilient. Yet the administration has taken only the merest of steps to address the problem by policy or messaging — a stark contrast to its efforts, for example, to counteract criticisms about its handling of inflation or even its measures to aid student loan borrowers.
Housing markets have been driven to near-crisis because mortgage rates have soared from nearly 3% at the start of last year to around 8% in recent weeks.
In theory, higher mortgage rates could be offset by lower home prices — because fewer people would be able to finance a home at each price point, demand should fall, and prices should go down accordingly.
And indeed, prices did fall after mortgage rates began rising in 2022 — a bit. But not much, and then they began rising again in 2023.
The problem is that while demand for homes did decrease, supply did as well. Sales of existing homes have cratered. That’s because many homeowners who’d taken out mortgages with interest rates closer to 3% or 4% have realized that if they sell, they’d need to take out new mortgages to buy a new home — and those mortgages would be far costlier. In other words, interest rates shot up so fast that it locked many people in their homes, putting their life plans on hold and freezing the market.
The net result is the worst of both worlds: Higher mortgage rates and high prices, meaning that mortgage payments are extremely high. Affordability in August was the worst in records going back to 1989, according to the National Association of Realtors, or NAR, and it has only gotten worse since.
The typical homebuyer’s monthly mortgage payment was $2,866 in August, according to the real estate company Redfin, roughly double what it was as recently as mid-2020. A homebuyer must earn about $115,000 a year to afford the typical U.S. home, which sold for roughly $420,000, yet the typical household only earns $75,000, according to the Census Bureau.
For months, the broader housing and construction industry has been kept afloat by a supply of newly built homes — the lack of supply of existing homes has pushed buyers toward new construction. The rental market, too, has performed well, with huge amounts of new multifamily supply keeping rents low and construction employment surprisingly high.
But as mortgage rates have breached the 8% mark, even construction is threatened. Higher interest rates, generally, have also made it harder for builders to finance new projects.
Housing starts have drifted lower over the course of the year, and homebuilder sentiment also dropped off in recent months, according to the National Association of Home Builders, or NAHB, suggesting that the market is cooling.
INDUSTRY GROUPS ASK FOR HELP
The darkening outlook has led industry groups to ask the federal government for relief.
Earlier this month, NAR, the NAHB, and the Mortgage Bankers Association petitioned Federal Reserve Chairman Jerome Powell to swear off interest rate hikes.
In an effort to address the historic inflation wracking the country, the Fed raised its interest rate target from near zero at the start of 2022 to now as high as 5.5%. Changes in that short-term rate affect rates on all other credit instruments, including mortgages.
In fact, mortgage rates have soared even beyond what would be expected based on other interest rates, the industry groups noted.
“They have gone sort of out of whack,” said Scott Olson, the executive director of Community Home Lenders of America.
Although it’s not well understood why mortgage rates have soared beyond what might be expected, housing sector representatives are looking for two responses from the government.
The first is for the Fed to stop selling off its massive holdings of mortgage-backed securities. The central bank has removed about $200 billion of mortgage bonds over the past year, leading to greater supply in the market and driving up rates on mortgages.
The second is for the government-sponsored enterprises Fannie Mae and Freddie Mac to be allowed to purchase mortgage-backed securities for their own portfolios. Fannie and Freddie support the secondary market for mortgages by buying them from originators such as banks and bundling them into securities to sell to investors. They also hold mortgages in their own portfolios — once, as much as $800 billion apiece. Under the terms of the 2008 government bailout, though, those portfolios are being wound down, and they now each have less than $100 billion.
NAR, the Independent Community Bankers of America, and the Community Home Lenders of America asked Treasury Secretary Janet Yellen earlier this month to amend the terms of the Treasury’s agreements with Fannie and Freddie to allow them temporarily to hold more MBSs to relieve pressure on the market.
“That’s one thing that directly the Biden administration could do,” Olson said.
THE ADMINISTRATION RESPONSE
So far, the Biden administration’s response has been limited.
The soaring interest rates, in part, are out of its control. Control of monetary policy is the Fed’s role, and the Biden administration has said it will not weigh in on interest rate decisions out of respect for the Fed’s independence. (That’s a change in course from the previous administration. President Donald Trump pressured the central bank to cut rates when he thought money got too tight.)
The Treasury could allow the GSEs to rebuild their MBS portfolios, as requested by the industry groups. The agency did not respond to a request for comment from the Washington Examiner about that possibility.
Otherwise, the White House has not done or said much regarding the problem in recent weeks.
Last week, with little publicity, it put out a fact sheet listing a few new efforts to boost homeownership, including a Federal Housing Administration policy allowing prospective borrowers to use income from renting out accessory dwelling units to count as income for the purposes of qualifying for an FHA mortgage. The White House also touted the nearly $10 billion Homeowner Assistance Fund authorized by the 2021 Democratic pandemic relief bill, which it said has assisted 400,000 homeowners at risk of foreclosure.
Still, the lack of urgency is notable, especially considering the signs that unaffordable housing and high interest rates are taking a toll on Biden’s approval ratings. Higher interest rates have fed into negative perceptions of the economy in recent months, according to the Conference Board’s index of consumer confidence.
In contrast, the Biden administration went to great lengths to convince the public that it was responding to the problem when the problem was soaring oil and gas prices. As with interest rates, there is little the White House can do in the short term to bring down the price of oil. Yet when oil soared to near $115, Biden ordered huge releases from the Strategic Petroleum Reserve, called on Congress to suspend the gas tax, directed the Federal Trade Commission to investigate oil companies for gouging, and asked drillers to increase supply. He gave public speeches meant to reassure voters that he was trying to bring down gas prices.
So far, though, the housing troubles have not elicited a similar response.
SUPPLY
Over time, building more housing would lower prices, if not necessarily mortgages, bringing housing costs down.
“What we’re seeing now is an increase in prices that is directly tied to a lack of supply,” said David Dworkin, president and CEO of the National Housing Conference. “The only way you can address that is with more supply. We’ve got to build more housing.”
Dworkin noted two bipartisan bills his group backs to boost supply. One is the Affordable Housing Credit Improvement Act, which would expand and strengthen the low-income housing tax credit, which rewards developers who build or restore housing targeted at lower-income households.
CLICK HERE TO READ MORE FROM THE WASHINGTON EXAMINER
The other is the Neighborhood Homes Investment Act, which would create a new tax credit to increase the incentive for developers to build new homes in areas where prices are so low that there is little benefit to investing in new construction.
Recent White Houses, including Biden’s, have identified local land-use regulations and zoning laws as a major barrier to supply, meaning that the problem, in some ways, is not the federal government’s. Still, Biden’s economic team has launched several initiatives to coax lower-level governments to ease off such rules, by rewarding them with funds through the Department of Housing and Urban Development, by giving priority in Department of Transportation funding to cities and towns to reform their zoning, and by changing rules in existing housing programs.