Sunday, June 27, 2021

The dream of homeownership is becoming more elusive by the day.

Rod Williams- I think the term "crisis' is overused so I am not going to call what is happening in housing affordability a crisis.  However, a concerning trend is taking place before our eyes.  The dream of homeownership is getting further and further out of reach for many Americans. While I would not call what is happening a crisis, it is a serious concern.  This trend can have profound consequences for the stability of the middle class, can lead to greater wealth inequality, and can have social and political consequences. 

When one spoke of the issue of "affordable housing" in the past one was often thinking of low-income people and their inability to buy a home. Homeownership was out of reach of the working poor unless they got some sort of assistance or subsidy. Over time, there was a realization that it was not only the poor for whom housing was out of reach but also those who one would not consider poor but simply of modest income.  Housing became hard to afford for teachers and firemen and people in the hospitality industry.  "Workforce housing" became a term to refer to the housing needed by this segment of our society. And, it was in short supply.

Home prices have gone through the roof.  It is happening here in Nashville but this is not just a Nashville problem. (Look at chart #1 below.) 

Why is the happening?  There are several reasons.  One, the Federal Reserve has kept home mortgage rates extremely low. It has increased its purchase of mortgage-backed securities, which drives interest rates lower and frees up more money for mortgage lending. With low rates, the same amount of monthly payment will purchase more house and prices rise. 

When prices rise, if you were a couple that could afford a $500,000 and prices increase 12% you may not be able to afford a $560,000 house and may have to settle for a $500,000 that last year was only a $446,000 house. If, however, you are a couple that can afford only a $250,000 house, good luck; there are almost none.  But there are a few, however.  If that $250,000 house goes up to $280,000, you may not qualify for that price home and there are no cheaper price houses to fall back to.  You are out of luck. 

This is one reason why home price appreciation hurts the person of modest means more than the person of better means. Another reason is that lower price homes experience greater HPA than higher-priced homes. (See chart 3 below.)

When we say that Home Price Appreciation was 6.6% over last year that may not sound like a lot, but it is cumulative.  If the appreciation was a steady 6% the price of a home would double in twelve years.

This chart from the most recent Federal Housing Finance Agency (FHFA) Price Index report shows the cumulative housing appreciation in the Nashville MSA.

Since the 3rd quarter of 2013, homes in Nashville have increased 93.6%.  If one compares Nashville's cumulative price appreciation since 2007 we have had considerably higher price appreciation than the nation, represented by the gray line above.  

So what does this mean for the future? I hate to be so pessimistic but I believe the dream of homeownership will remain a dream for more and more people.  Homeownership which has been a source of middle-class security and stability and the greatest source of wealth creation for the majority of people will be less and less obtainable for more and more people. Are the good times really over for good? Maybe. I do not see this situation getting better anytime soon.  Government at the federal, state, and local levels continue to make the problem worse.  

One thing that I think should happen is that the Federal Reserve should allow mortgage rates to rise. This would, unfortunately, in the short term, put homeownership out of reach for some low and moderate-income people.  Some people who can afford to buy a home today at current rates could not afford to buy a home with higher rates. However, it would slow home price appreciation and in the longer term help more people of modest means. To have any chance of reversing this trend and saving the dream of owner ownership, we must slow HPA.

In addition to the Federal Reserve causing home price inflation, there is a slew of other things that cities and states are doing across the country to destroy affordable housing and inhibit the development of affordable housing. At the end of this article are some links that explore some of these issues.

Unfortunately, Nashville like many other big cities will continue to make the problem worse. Taxes will continue to rise, redevelopment plans will promote gentrification of what is the remaining affordable parts of town, the city will continue to discourage manufactured housing, restrictive zoning and downzoning will restrict the supply, and government imposed overhead cost and the obstacles government puts in the way of developers will continue to inhibit the construction of homes at a more modest price-point. 

In addition to the wrong government policies, the market is going to drive up prices in Nashville. Oracle will bring over 8500 jobs to Nashville over the next decade with an average salary of over $110,000.  There will certainly be a plus to this kind of economic growth, but it also means there will be 8500 people who can afford to pay more for housing than what the average Nashvillian can pay. That will cause even greater HPA. 

So, while I have lots of advice to government for making housing more affordable, I also have advice for the young couple of modest means dreaming of homeownership. Don't delay!  Every day one delays makes the dream of homeownership more elusive.   Homes only stay on the market for a few days.  Make looking for a home like a job.  Be aggressive.  Get a good realtor to help you find a home.  By the time a home gets listed on Zillow, it is probably already sold.  Get pre-approved by a mortgage company. Get something, even if is not your dream home, and start building equity and benefiting from that home price appreciation. If you think there is not much in your price range, next year there may be nothing. 

For more on this topic see the following:
Forbes: Fed Policy Has Kept Mortgage Rates Low. It’s Also Driving Up Home Prices

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