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from https://realinvestmentadvice.com/housing-is-unaffordable-dems-want-to-make-it-worse/

(It is best, to go to the above citation to see the
charts and graphs they show to understand the problem.)

Housing Is Unaffordable. Dems Want To Make It Worse.
By Lance Roberts | February 9, 2024
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The cost of housing remains a hot-button topic with both Millennials and
Gen-Z. Plenty of articles and commentaries address the concern of supply
and affordability, with the younger generations getting hit the hardest.
Such was the subject of this recent CNET article:

“The housing affordability crisis means it’s taking longer for people to become homeowners — and that’s especially impacting millennials and Gen Zers, economically disadvantaged families, and minority groups. There’s
not one single driver of the crisis, but several colliding elements that
put homeownership out of reach: rising home prices, high mortgage
interest rates and limited housing supply. That’s on top of myriad
financial challenges, including sluggish wage growth and increasing
student loan and credit card debt among middle-income and low-income Americans.”

The chart below of the housing affordability index certainly supports
those claims.

NAR Housing Affordability Index
As noted by CNET, there are many apparent reasons causing housing to be unaffordable, from a lack of supply to increased mortgage rates and
rising prices. Over the last couple of years, as the Fed aggressively
hiked interest rates, the supply of homes on the market has grown. Such
is because higher interest rates lead to higher mortgage rates and
higher monthly payments for homes. It is also worth noting that
previously, when the supply of homes exceeded eight months, the economy
was in a recession.

Fed rates and housing supply
At the same time, higher interest rates and increased supply should
equate to lower home prices and, therefore, create more “affordability.”
As shown, such was the case in prior periods, but post-pandemic housing
prices skyrocketed as “stimulus checks” fueled a rash of buyers.

Home prices vs Fed funds.
As is always the case with everything in economics, price is ALWAYS a
function of supply versus demand.


A Host Of Bad Decisions Created This Problem
The following economic illustration is taught in every “Econ 101” class. Unsurprisingly, inflation is the consequence if supply is restricted and
demand increases.

Supply vs Demand chart
While such was the case following the economic shutdown in 2020, the
current housing affordability problem is a function of bad decisions
made at the turn of the century. Before 2000, the average home buyer
needed good credit and a 20% down payment. Those constraints kept demand
and supply in balance to some degree. While housing increased with
inflation, median household incomes could keep pace.

However, in the late 90s, banks and realtors lobbied Congress heavily to
change the laws to allow more people to buy homes. Alan Greenspan, then
Fed Chairman, pushed adjustable-rate mortgages, mortgage companies began
using split mortgages to bypass the need for mortgage insurance, and
credit requirements were eased for borrowers. By 2007, mortgages were
being given to subprime borrowers with no credit and no verifiable
sources of income. These actions inevitably led to increased demand that outpaced available supply, pushing home prices well above what incomes
could afford.

Median and average home prices vs wage growth
This episode in the housing market resulted from zero-interest policies
by the Federal Reserve. That policy and massive liquidity injections
into the financial markets brought hoards of speculators, from
individuals to institutions. Institutional players like Blackstone,
Blackrock, and many others purchased 44% of all single-family homes in
2023 to turn them into rentals. As prices rose, advances like AirBnB
brought more demand from individuals for rentals, further reducing the available housing pool. Those influences lead to even higher prices for available inventory.

Notably, it isn’t a lack of housing construction. The Total Housing
Activity Index is not far from its all-time highs following the 2020
pandemic “housing rush.” The issue is the removal of too many homes by “non-home buyers” from the available inventory.

Total housing activity index
Furthermore, existing home sales are absent. Current homeowners are
unwilling to sell homes with a 4% mortgage rate to buy a home with a 7% mortgage. As shown, existing home sales remain remarkably absent.

Existing home sales
All of these actions have exacerbated the problem. At the root of it all
is the Federal Reserve, keeping interest rates too low for too long. Oversupplying liquidity and creating repeated surges in home prices. It
is not a far stretch to realize the bulk of the housing problem directly results from Governmental forces.

Housing process and the Fed.
So, what does this have to do with the Democrats?

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Dems Want To Make The Housing Problem Worse
Sen. Elizabeth Warren, D-Mass., and three other Democratic lawmakers are pushing Jerome Powell to lower interest rates at the upcoming Fed
meeting to make housing more affordable.

“As the Fed weighs its next steps in the new year, we urge you to
consider the effects of your interest rate decisions on the housing
market. The direct effect of these astronomical rates has been a
significant increase in the overall home purchasing cost to the average consumer.” – Letter To Jerome Powell

As discussed above, lowering interest rates is not the solution to
lowering housing prices. Lower interest rates would bring more buyers
into a market already short inventory, thereby increasing home prices.
We can already see the impact of lower mortgage rates on home prices
just since October. Prices rose as yields fell on hopes the Federal
Reserve would cut rates in 2024. If mortgage rates revert to 4%, where
they were during most of the last decade, home prices will significantly increase.

Housing prices vs 30-year mortgage
The Terrible Terrible Solution
There is only one solution to return home prices to affordability for
most of the population. That is to reduce the existing demand. If
Elizabeth Warren is serious about doing that, passing laws today would
go a long way to solving that problem.

Restrict corporate and institutional interests from buying individual homes. Increase the lending standards to require a minimum 15% down payment and
a good credit score. (such would also increase the stability of banks
against another housing crisis.)
Increase the debt-to-income ratios for home buyers.
Return the mortgage market to straight fixed-rate mortgages. (No
adjustable rate, split, etc.)
Require all banks that extend mortgages to hold 25% of the mortgage on
their books.
Yes, those are very tough standards to meet and initially would exclude
many from home ownership. But, home ownership should be a demanding
standard to meet, as the cost of home ownership is high. For the
individual, such standards would ensure that home ownership is feasible
and that such ownership, along with the subsequent fees, taxes,
maintenance costs, etc., would still allow for financial stability. For
the lenders, it would reduce the liability of another financial crisis
to almost zero, as the housing market’s stability would be inevitable.

But most importantly, such strict standards would immediately cause an evaporation of housing demand. With a complete lack of demand, housing
prices would fall and reverse the vast appreciation caused by a decade
of fiscal and monetary largesse. Yes, it would be a very tough market
until those excesses reverse, but such is the consequence of allowing
banks and institutions to run amok in the housing market.

Naturally, none of this will ever happen or considered, as there is too
much money in the housing market for corporations, institutions, and
banks to feed on. But one thing is for sure: if the Democrats get their
wish and the Fed cuts rates again, housing prices will become even more unaffordable.

Talk with an Advisor & Planner Today!

lance_sig

Lance Roberts is a Chief Portfolio Strategist/Economist for RIA
Advisors. He is also the host of “The Lance Roberts Podcast” and Chief Editor of the “Real Investment Advice” website and author of “Real Investment Daily” blog and “Real Investment Report“. Follow Lance on Facebook, Twitter, Linked-In and YouTube
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