The housing mess, explained |  CNN Politics

The housing mess, explained | CNN Politics

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Homeowners, tenants and potential buyers look at housing and the real estate market from different, often contradictory, angles.

There have been alarming headlines for all three in recent weeks:

This convergence speaks to the larger problem of the shortage of affordable housing in the United States, as well as the broader question of affordability, and leads to stories like this: The majority of Americans say they are worried about to be able to pay for their accommodation.

I went to Anna Bahney, CNN Business’ real estate writer, to find out why there’s a housing shortage and what, if anything, anyone is doing about it.

Our conversation, conducted via email, is below.

WHAT MATTERS: I read both that there was a housing shortage and that there was a housing crisis. Is there a difference between these ideas – a scarcity and a crisis? And is the problem that there literally aren’t enough houses for the number of people in the United States?

BAHNEY: The “housing crisis” is actually an “affordability crisis”. Part of the reason housing has become so expensive for Americans is that there is a national housing shortage. Historically low interest rates during the pandemic, coupled with more than a decade of underbuilding, have created a supply-demand mismatch that has driven home prices higher.

The United States has fallen behind by about 5.5 million housing units over the past 20 years as builders have failed to keep up with historical building trends. If you add property destruction from demolition or natural disasters, among other things, the total shortfall could be $6.8 million during that time, according to the National Association of Realtors.

It’s a gap so deep that it would take more than a decade to catch up. But even if more houses and apartments are built, it won’t matter unless people can afford it.

Mortgage rates are the highest since 2008 and house prices remain near record highs, excluding many potential buyers from the market. These people then remain in the already tight rental market, which drives up rents even further.

As renters reach the limits of what they can afford to pay each month, home ownership is becoming increasingly out of reach as they struggle to save for a down payment. This widens the wealth gap and locks in inequalities between those who benefit financially from home ownership and those who do not. It also widens the racial homeownership gap, in which 72% of white Americans are homeowners while only 43% of black Americans own a home.

WHAT MATTERS: The cost of housing has been cited as a cause of inflation. How true is this, and what is the market force that could drive down the cost of housing?

BAHNEY: Soaring housing prices have been a major driver of inflation. For most people, housing is their biggest expense. About one-third of the consumer price index, a basket of goods and services that the Bureau of Labor Statistics uses to track inflation, is the “shelter” component.

Last month, the index showed inflation was worse than expected and the housing component was up 6.2% from a year ago, the biggest increase since 1991. Stubbornly high inflation means that the Federal Reserve will likely take aggressive action at its meeting next week with either a 75 basis point hike in interest rates or potentially a 100 basis point hike.

But there are some early signs of cooling in the housing market. Home sales have fallen for six straight months as rising costs of buying and financing a home push more people out of the housing market. As demand dries up, prices will fall and mortgage rates will eventually stabilize.

WHAT MATTERS: Which parts of the country are most affected by this problem?

BAHNEY: Sun Belt cities like Phoenix and Austin have seen some of the biggest increases in housing costs during the pandemic. In Miami, home prices are up 33% from a year ago and rents are up 26% from a year ago. But the affordability crisis is happening nationally, in every region of the country.

WHAT MATTERS: The Fed’s remedy for inflation is to raise interest rates, which has pushed up mortgage rates. This may control selling prices, but won’t it increase the cost of housing?

BAHNEY: The Federal Reserve has aggressively raised interest rates to stem inflation, which may reduce demand but also make the cost of buying a home even more expensive.

But the Fed does not directly set the rate borrowers pay on mortgages. Instead, mortgage rates tend to follow the 10-year US Treasury yield. As investors anticipate Fed rate hikes, they often sell government bonds, driving up yields and, with it, mortgage rates.

The rate on a typical 30-year fixed-rate mortgage has more than doubled from a year ago, making buying a home that was possible then out of reach for some today.

A year ago, a buyer who had staked 20% on a home with a median price of $359,900 and financed the rest with a mortgage rate of 2.86% – which was the average at the time – had a monthly payment of $1,192.

Today, a homeowner buying the home at the median price, which is now $403,800, with a mortgage at the current average of 6.02%, would pay $1,941 a month in principal and interest. That’s $749 more each month.

Americans are now spending more than 35% of their median income on monthly principal and interest payments for that home at the median price. Historically, Americans have spent nearly 25% of their median income on payments.

To get back to that level, a combination of these things would have to happen, according to mortgage data firm Black Knight: A person’s income would have to rise 40%, mortgage rates would have to be halved, or there would have to be a drop 30% of the median price of a house.

None of these are expected to happen anytime soon.

WHAT MATTERS: If housing prices fall, it will mean that millions of people will lose value in their main asset. If housing prices don’t go down, that means millions of Americans will never own a home. It seems like an impossible situation.

BAHNEY: Some housing economists have said recently that the housing industry is in a recession, but landlords don’t feel that way. Of course, there are plenty of examples of housing cooling (mortgage company layoffs, homebuilders pulling out, home sales plummeting). But homeowners still have huge equity in their homes, which has increased by an average of $60,000 over the past year.

Yet millions of people are locked out of buying a home as affordability challenges prove insurmountable.

In April 2021, a household needed to earn about $80,000 a year to pay payments on the median price home with a modest down payment of 3.5%. A year later, the required income was $108,000. This cost increase means that about 4 million renter households who could have bought the house at the median price last year could not do so 12 months later.

WHAT MATTERS: What are some of the ideas to solve this problem? Is there an effective way for the government to act?

BAHNEY: Most housing policy experts argue that building a steady supply of moderately priced new homes is task number one. But since these homes are not as profitable for builders as larger, more expensive homes, it will take a concerted effort from the public and private sectors.

In May, the Biden administration announced a housing supply action plan to close the affordability gap and lower housing costs. The plan aims to boost the supply of affordable housing by enhancing existing federal funding and encouraging areas to reform zoning and land use policies to build more housing at lower cost. It also calls on home builders to adopt more efficient building methods.

But none of these are silver bullets, and some of them require congressional action.

Separately, the Federal Housing Finance Administration, which oversees mortgage giants Fannie Mae and Freddie Mac, announced plans this summer to expand home financing options for buyers, especially those of color, to fill the gap. race between owners. These programs include down payment assistance, reduced mortgage insurance premiums and a credit reporting system that takes into account rental payment history.

Some of these ideas, including new no down payment loans with no closing costs for buyers in specific black or Hispanic neighborhoods, are already in place.

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