Housing costs remain a hot topic for both Millennials and Gen Z. Many articles and commentaries have cited issues of supply and affordability, with young people being hit the hardest.The latest topics were as follows CNET article:
“The housing affordability crisis means people are taking longer to become homeowners, particularly impacting millennials, Gen Z, economically disadvantaged families and ethnic minorities. There is no single factor contributing to the crisis; multiple factors are colliding to make homeownership unaffordable, including rising home prices, high mortgage rates, and limited housing supply. A myriad of economic challenges are compounding, including slowing wage growth and rising student loan and credit card debt among middle- and low-income Americans.”
The Housing Affordability Index graph below certainly supports those claims.
As CNET points out, there are many obvious reasons why housing can become unaffordable, from lack of supply to rising mortgage rates and rising prices. In recent years, as the Federal Reserve has aggressively raised interest rates, the supply of housing on the market has increased. This is because when interest rates rise, your mortgage interest rate will rise and your monthly home payment will increase. It is also worth noting that previously, when the housing supply exceeded his 8 months, the economy was in recession.
At the same time, higher interest rates and increased supply should equate to lower house prices and therefore generate more house prices. “Affordable price. ” As shown, house prices have skyrocketed after the pandemic, although this was also the case in previous periods. “Stimulus Check” This spurred a rapid increase in the number of buyers.
As always with all things economics, prices are always a function of supply and demand.
Many wrong decisions caused this problem
The following economics example can be taught in any school. “Econ 101” class. Naturally, when supply is restricted and demand increases, the result is inflation.
As was the case after the economic shutdown of 2020, the current housing affordability problem is the result of bad decisions taken at the beginning of this century. Before 2000, the average home buyer had good credit and he needed a 20% down payment. These constraints maintained a certain balance between supply and demand. While housing increases with inflation, median household income is likely to follow suit.
However, in the late 1990s, banks and real estate agents strongly lobbied Congress to change the law to allow more people to buy homes. Then-Fed Chairman Alan Greenspan promoted adjustable-rate mortgages, mortgage companies began using installment mortgages to avoid the need for mortgage insurance, and credit requirements for borrowers were relaxed. By 2007, mortgage loans were being given to subprime borrowers with no credit or verifiable sources of income. These measures inevitably led to an increase in demand that exceeded the available supply, pushing house prices far above what incomes could afford.
This event in the housing market resulted from the Federal Reserve’s zero interest rate policy. This policy and the massive injection of liquidity into financial markets brought in large numbers of speculators, both individuals and institutions. Institutional investors such as Blackstone and BlackRock purchased 44% of all single-family homes and converted them into rental housing in 2023. As prices rose, advancements like AirBnB increased rental demand from individuals, further reducing the available housing pool. These effects further increase the price of available inventory.
What is important to note is that there is no shortage of housing construction. The Total Housing Activity Index is not far from its all-time high following the 2020 pandemic “housing rush.” The problem is that too many homes are being demolished. “Purchasers other than residential properties” From available stock.
Additionally, there are no sales of used homes. Current homeowners are reluctant to sell a home with a 4% mortgage rate and buy a home with a 7% mortgage rate. As you can see, existing home sales are still not growing significantly.
All of these actions made the problem worse. At the root of it all is the Federal Reserve, which has kept interest rates too low for too long. This leads to an oversupply of liquidity and repeated spikes in house prices. It is not too difficult to realize that a large part of the housing problem is directly attributable to government forces.
So what does this have to do with the Democratic Party?
Democrats want to make the housing problem even worse.
Sen. Elizabeth Warren (D-Mass.) and three other Democrats are endorsing Jerome Powell. Lower interest rates at the next Fed meeting to make housing more affordable.
“As the Fed considers its next actions in the new year, we encourage it to consider the impact of its interest rate decisions on the housing market. The direct impact of these astronomical interest rates is a significant increase in the overall cost of purchasing a home for the average consumer. ” – Letter to Jerome Powell
As discussed above, lowering interest rates is not the solution to lowering home prices. Lower interest rates would attract more buyers to an already low-inventory market, driving up home prices. The impact of lower mortgage rates on house prices has already been seen since October. Prices rose as yields fell on expectations that the U.S. Federal Reserve would cut interest rates in 2024. If mortgage rates return to the 4% they have been for most of the past decade, home prices will rise significantly.
terrible terrible solution
There is only one solution to getting housing prices back affordable for most people. It’s about reducing existing demand. If Elizabeth Warren is serious about doing this, passing legislation today would go a long way toward solving that problem.
- Restricting the purchase of private housing by corporate and institutional interests.
- Raise lending standards, requiring a minimum 15% down payment and a good credit score. (This would also make banks more stable against a new housing crisis.)
- Increases the debt-to-income ratio of homebuyers.
- Returning the mortgage market to straight fixed rate mortgages. (Adjustment of rate, division, etc. is not possible)
- Requires all banks that extend mortgage loans to hold 25% of the mortgages on their books.
Yes, these are very strict standards to meet and will initially exclude many people from homeownership. However, the cost of homeownership is high, so homeownership must be a standard that is required to be met. For individuals, such standards would ensure that home ownership is attainable and ensure the financial stability of such ownership and its subsequent costs, including fees, taxes, maintenance costs, etc. For lenders, the inevitable stabilization of the housing market means that their liability in the event of another financial crisis will be reduced to almost zero.
But most importantly, such strict standards can immediately cause housing demand to evaporate. If there is a complete lack of demand, house prices will fall, reversing the huge gains caused by a decade of big fiscal and monetary policy. Yes, it will be a very tough market until these excesses are reversed, but this is the result of banks and financial institutions allowing the housing market to run amok.
Of course, this will never happen and will never be considered because there is simply too much money in the housing market for businesses, institutions and banks to support. But one thing is certain: If Democrats get their wish and the Fed cuts rates again, home prices will become even more unaffordable.
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2024/02/09
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