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Why Affordability and Credit Access Both Matter in This Housing Market

July 18, 2016 | By

There’s been an “unprecedented” slide in the homeownership rate, according to Harvard’s Joint Center for Housing Studies, which released its annual “The State of the Nation’s Housing” report on June 22. The national homeownership rate fell more than 5 percentage points to 63.8 percent in 2015 from the 69 percent peak in 2004, the report highlighted. However, foreclosure and delinquency rates are falling.

“There’s still a long way to go and there are still many remaining, persistent challenges that are facing many households,” Daniel McCue, senior research associate at Harvard’s Joint Center for Housing Studies, says.

One of the major challenges, affordability, is showing signs of recovery in some parts of the country. But many low- and moderate-income households are still feeling pressure in this area, McCue says.

“There’s a mismatch between income and cost, literally,” says Anne McCulloch, Fannie Mae’s senior vice president for credit and housing access. “Household incomes have not kept pace with the cost of housing — period.”

The median price for existing home sales in May was $239,700, up 4.7 percent from the same month last year, according to the National Association of Realtors®.

Affordability Tougher for the Cost-Burdened

With home prices on the rise, many families are paying a larger share of their income on housing. After three straight years of declines, the number of renter and owner “cost-burdened” households – those paying more than 30 percent of income on housing – increased to 39.8 million in 2014 nationally from 39.6 million in 2013, according to the report.

That means more than one-third of U.S. households face cost burdens, including 16.5 percent with “severe” burdens, or those paying more than 50 percent of income for housing, according to the report’s analysis.

The main driver for the increase in cost-burdened households came from the rental market. Cost-burdened renters surged to a record 21.3 million in 2014 from 20.8 million in 2013, according to the report, while more than half were severely-burdened.

The number of cost-burdened homeowners has fallen steadily. That number stood at 18.5 million in 2014, down 4.4 million since 2008. Low interest rates may be helping owners lower housing costs, the report states. But the other reasons for the decrease in the cost-burdened homeowners figure aren’t necessarily good news for the market. Some may have already lost their homes, while other prospective young buyers remain on the sidelines, the report says.

The issue of accessibility is a problem many potential homeowners face, not just the younger ones. There’s a mismatch between the production of modestly-priced new housing and overall consumer demand, says McCulloch.

The nation’s new home supply was 5.3 months in May, the U.S. Department of Commerce reported on June 23, which is below the six months that many economists describe as a healthy inventory. Still, sales of new homes reached a seasonally adjusted 551,000 in May, 8.7 percent higher than the same month last year. Meanwhile, the average sales price for new homes was $358,900 in May, up from $340,800 in May last year, according to the Commerce Department.

What’s further exacerbating affordability is that some of the single family housing stock has transitioned into rental housing and isn’t available for homeownership, McCulloch says.

“Ultimately there’s a very tight supply of lower-priced homes,” she says.

Fannie Mae has taken steps to improve access to mortgage credit for all households, particularly consumers of low or moderate means, McCulloch says. Fannie Mae offers the HomeReady® mortgage product, a fixed-rate mortgage loan for one-unit properties that allows just 3 percent down and flexible underwriting alternatives that respond to the way families live today, she says. For example, a borrower can use income from a boarder to help qualify for a mortgage, and non-occupant borrowers are allowed so parents can help their children buy homes.

Two Fannie Mae products, HomeStyle Energy® and HomeStyle® Renovation Mortgage, provide affordable financing to borrowers who want to make improvements to houses they buy.

“We’ve refreshed our renovation products because we’ve found many consumers are buying fixer-uppers, while current homeowners need cost-effective financing to improve the energy efficiency or the accessibility of their homes,” McCulloch says.

“Our surveys show that most consumers still want to own their own home, but also show that many consumers don’t know what down payment and credit scores are required to qualify for a mortgage and so don’t know that homeownership is a real possibility,” McCulloch says.

While Fannie Mae is focused on providing mortgages that support sustainable homeownership, it is also the leading source of financing for multifamily rental housing. As McCulloch notes, “The question isn’t whether buying is better than renting or vice versa. We know that renting can be a good choice for consumers. We are focused on offering financing that supports families in making housing choices that are right for them.”

Rising home prices can be a double-edged sword when it comes to the economy, McCue says.

“[Rising prices] give people more housing wealth, which affects their ability to spend and to take equity out of their homes,” McCue says. “The feeling that you’re wealthier leads to more spending in the economy, helps people get out of negative equity positions, and relieves people who were delayed in selling their home because they were underwater.”

Whose Incomes Are Growing?

In this housing market, while home prices are increasing, real incomes are finally on the rise after years of decline. The good news for the housing industry is that the strongest growth has been among younger adults, ages 25 to 34, who are in their prime homebuying years, the report states.

More good news for homeownership: historically low mortgage rates have been an important factor in supporting affordability.

The National Association of Homebuilders reported a slight increase in its measure of affordability in the first three months of 2016. The National Association of Home Builders/Wells Fargo Housing Opportunity Index had its second consecutive quarterly gain, as 65 percent of homes sold between the beginning of January and end of March 2016 were affordable to families earning the U.S. median income of $65,700, up from 63.3 percent in the fourth quarter of last year.

NAHB Chief Economist Robert Dietz pointed to “favorable” home prices in some parts of the country and low interest rates, when the index was released on May 12.

Adds McCue: “At this point, we have the combination of rising home prices and [low] mortgage interest rates. That has helped homes become more affordable than they would be based on rising prices alone.”

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