With the 30-year mortgage rate hovering at a 23-year high, mortgage lenders, banks and home buyers have become increasingly focused on trying to bring down the cost of homeownership.
That’s fueled the growing popularity of affordability boosters like adjustable-rate mortgages, assumable mortgages, and down payments as small as 1%. But one economist thinks those solutions are solving the wrong problem.
“[T]his is the result of the symptom of lack of affordability against high supply,” Mark Fleming, chief economist at First American, told MarketWatch on the sidelines of the Mortgage Bankers Association’s annual conference in Philadelphia earlier this month.
“People are finding ways, maybe safe or unsafe, sustainable or maybe not, that create a lower monthly payment against a higher house price,” he said.
“And that’s exactly what we did back in the housing boom in 2006,” Fleming noted, “with 2/28s and 3/27s and all of that financial innovation. We were keeping the payment low with ever larger loan balances and ever higher house prices.”
The 2/28 and 3/27 refer to adjustable-rate mortgages. With the 2/28 loan, a buyer has a fixed rate for the first two years, after which the mortgage rate is pegged to the prevailing rate and adjusts every year or even more often. The 3/27 ARM is similar, but the initial fixed term is three years instead of two.
Today, home-lending standards have become much stricter, the industry says, with more attention paid to whether a borrower has the ability to pay their debts.
Yet with 30-year fixed-rate mortgage rates at 8% and home-buying demand drying up, lenders are still trying to introduce more creative ways to help buyers. “The combination of rising prices and … rising mortgage rates has pushed affordability to its lowest level since July of 1985,” Andy Florence, CEO of real-estate marketplace provider CoStar Group, said in a call with analysts after the company’s earnings were announced earlier this week.
Some real-estate agents advertise assumable mortgages, which allow buyers to take over the seller’s mortgage and its rate, which for many existing homes is much lower than current average rates. Certain home loans backed by U.S. government agencies, such as the Federal Housing Administration, Veterans Affairs and the U.S. Department of Agriculture, allow the homeowner to pass on their mortgage — and the low rate that comes with it — to the next owner, which at least in theory will make the buyer’s monthly payments lower.
Other lenders are offering mortgages to buyers that allow them to put as little as 1% down on a home. Freddie Mac recently announced a program to help housing counselors and lenders find down-payment grants and assistance for their clients. Low down payments allow home buyers to get a foot in the door without having to fork over tens of thousands of dollars up front.
And other creative ways of making the math work for buyers are also popping up: One listing agent in Chicago recently advertised “seller financing,” where the homeowner offers to pay part of the buyer’s mortgage for a fixed, short-term period. The owner would only pay a fraction of the total payment on a monthly basis.
But these solutions addressing buyer affordability don’t get to the heart of the issue, Fleming said.
Instead of focusing on boosting demand, the U.S. should focus on zoning reform and building more homes, with a focus on density, he stressed.
“The challenge is, it’s tough — we all know we need more housing, we all know it’s a supply problem,” he said, “but the challenge is it’s very difficult to fix from a federal-level perspective.” Neighborhoods are zoned based on land use, as well as how on many units can be built on a single plot of land. Zoning regulations in many areas have historically limited builders from constructing more dense housing, such as apartments or townhomes.
“So at the local government level, we have to find ways to make it easier to build more housing, and that doesn’t necessarily mean to build more single family homes further out,” Fleming said. “That means to create more density.”
Mortgage rates are at the highest level since 2000, with the 30-year fixed-rate mortgage averaging 7.9% as of October 20. “Global investors remain concerned about the prospect for higher-for-longer rates and burgeoning fiscal deficits,” said Joel Kan, vice president and deputy chief economist at the Mortgage Bankers Association.
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