Can Anything be Done to Help First-Time Buyers Afford Houses?
Written By: Joel Palmer, Op-Ed Writer
The headline is optimistic.
“Redfin Reports Buying a Starter Home Is Now Cheaper Than It Was a Year Ago,” may lead somebody to think housing is becoming more affordable.
Further down, however, one would discover the problem of housing affordability is far from solved.
For starters, Redfin reports that U.S. homebuyers need to earn $76,995 per year to afford the median priced starter home ($250,000), a level that is down just 0.4 percent year over year. While it may be the first annual decline since August 2020, when mortgage rates were nearing their record low, it’s doubtful prospective buyers are getting too excited.
Furthermore, starter home prices are actually up 4.2 percent. The reason these homes are slightly more affordable is because mortgage rates dropped a little. Which may not last.
There’s a catch, also, said Redfin Senior Economist Elijah de la Campa: “Starter homes aren’t what they used to be. A decade ago, a turnkey four-bedroom house in a nice neighborhood was often considered a starter home, but today, a small fixer-upper condo is often all a first-time homebuyer can afford. The American Dream is changing; for many, it no longer involves a house and a white picket fence.”
A chart in the Redfin release showed how profound the affordability trend has become.
Just five years ago, household income of $40,000 could afford the typical starter home, and 98 percent of starter-home listings were affordable to the typical household.
Today, a household has to earn $77,000, and about 75 percent of starter-home listings are affordable to the typical household.
As housing affordability continues to be one of the biggest challenges facing consumers and the mortgage and real estate industries, a number of possible solutions have been brought forth.
That includes a list of ideas from the two candidates running for U.S. President. These ideas are largely based on increasing the supply of housing. Vice President Kamala Harris and the Democratic National Committee platform proposes building two million to three million new homes through various tax credits. They also want to offer mortgage relief for first-time buyers and downpayment assistance for first-generation homebuyers.
Former President Donald Trump and the Republican National Committee platform propose increasing supply by making public lands available for building. They further address affordability by reducing mortgage rates by reducing inflation, promote homeownership through tax incentives and support for first-time buyers, and cut “unnecessary regulations that raise housing costs.”
Others have proposed solutions that also aim to create more building and rehabbing opportunities, such as changes to zoning laws, linking zoning reforms with increased housing subsidies, expanding housing trust funds, and providing direct federal funding to state and local governments to fund housing construction.
Even if implemented, these ideas, especially those surrounding home building, will take time; a nation can’t build millions of homes overnight. Others have proposed solutions designed to offer more immediate assistance.
To address the immediate need to make homeownership more accessible, the 40-year mortgage has been lifted up as a solution.
John Hope Bryant, the founder of Operation Hope, a non-profit that promotes financial literacy, has been a leading proponent of this idea. He has proposed a 40-year mortgage using the Federal Home Loan Bank (FHLB) system as the framework, with federal subsidies for first-time homebuyers who complete financial literacy training.
The 40-year mortgage isn’t a new concept. Some lenders already offer 40-year loans as a nonqualified mortgage. Others incorporate a 40-year term into loans in which the lender pays only interest in the first several years before principal payments are added. Fannie Mae and Freddie Mac, as well as the Federal Housing Administration, will modify 30-year mortgages to extend to 40 years for distressed borrowers.
While stretching a mortgage an extra decade lowers the monthly payment, a 40-year term has plenty of downsides. In addition to being a riskier proposal for mortgage lenders, the slower buildup of equity can be a detriment to owners. With less equity, owners would have more trouble refinancing or selling their homes if circumstances required a move.
At the same time, any solution to the current market forces will come with obstacles and downsides? Are there enough workers and materials available to build millions of new homes? And if the U.S. is able to flood itself with new homes, how will that impact existing homeowners who are enjoying the benefits of higher equity while paying low rates they locked in several years ago?
About the Author
As an NAMU® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.
