Affordability in housing is top of mind for many both inside and outside of the mortgage industry. For many potential first-time homebuyers, the combination of rising rates and a continued climb in housing prices has left them feeling that homeownership is becoming increasingly out of reach.
In fact, 70% of Americans say young adults today have a harder time buying a home than their parents’ generation. Redfin reports that the average monthly mortgage payment is up nearly 40% year over year from 2021. Further compounding the problem, home prices increased by almost 18% from June 2021 to June 2022, according to the Case-Schiller Index. These extra expenses far outweigh income growth. Not only does this impact the ability to save for a down payment, but it also puts a strain on qualifying for a mortgage due to higher debt loads.
Though the affordability challenges may be mounting, there are both short-term and long-term solutions borrowers can leverage to achieve affordable and sustainable homeownership today and in the future.
The Impact of Student Loans
Debt-to-income (DTI) ratios are a critical factor that affects not only whether a borrower can secure a mortgage but how much that mortgage costs. As student loan debt has climbed in recent years, there has been more conversation around the impact of student loan debt on potential homebuyers.
A 2021 report from the National Association of Realtors and Morning Consult indicates that 72% of non-homeowner student debt holders believe that student loan debt will delay them from purchasing a home. In that same report, 47% of student debt holders said the reason for the delay is an inability to save for a down payment and 45% don’t think they will qualify for a mortgage. Additionally, John Burns Real Estate Consulting, LLC reports that the average monthly payment for student loans has doubled in the last fifteen years, now averaging $413 a month according to U.S. Department of Education data.
The recent student loan forgiveness program announced by the White House in August will likely have positive impacts on potential homebuyers with student debt. The White House estimates that if all borrowers eligible claim the relief to which they are entitled, 43 million borrowers will receive some amount of relief, and approximately 20 million borrowers will have their entire remaining balance canceled.
Other provisions include adjustments to repayment plans to create more manageable monthly payments. With these changes, many potential homebuyers will have new financial flexibility that may make homeownership more attainable.
Supply and Zoning Challenges
Supply and demand have played a big role in housing affordability as well. Home prices have risen significantly over the past few years, in part driven by limited supply. Realtor.com reports that if the rate of household formation continues at the current 5-year average, housing completion would need to triple to close the gap between new home completions and household formations in the next 5-6 years.
The long-standing housing supply shortage has been further exacerbated by the pandemic. This has resulted in supply-chain challenges that have complicated new construction and slowed the addition of new units available for purchase. Inflationary pressures have caused significant increases to labor costs and construction materials, adding thousands of dollars to the cost of new construction.
Beyond the effects of construction challenges, exclusionary zoning laws also have negatively impacted housing supply. Some areas have laws which mandate lot sizes or limit certain densities of housing, and consequently restrict the number or type of housing units that can be built. In the long-term, addressing the challenges of zoning limitations at a local level will provide greater capacity for construction and increase supply, consequently improving affordability.
The lending community plays a critical role as an agent of change by helping borrowers overcome the obstacles to financing a home. Lenders can create flexibilities that help credit-worthy borrowers with a non-traditional credit history or difference sources of income. Lenders also can consider rent and utility payments as part of their credit assessment which can help qualified borrowers with a limited traditional credit history. Similarly, lenders can establish guidelines for income that reflect our changing economy and changes in the workforce. “Gig economy” jobs are relatively new but are here to stay. Having flexible terms to account for these new and different streams of income also will help more borrowers qualify for home financing.
Lenders also can leverage special purpose credit programs to help borrowers. Generations of unfair laws and policies have created barriers to fair access to credit, and thus, barriers to the wealth creation benefits of homeownership.
Creating targeted lending programs under a special purpose credit program (SPCP) can help lending institutions meet the unique needs of underserved markets and historically disadvantaged groups of people, particularly minority communities. Lenders can leverage these programs to create flexible lending products that will help close the minority homeownership gap and open the door to many more borrowers. These programs can be leveraged now and have an impact on potential homebuyers immediately, mitigating a long-term barrier to affordability.
The lending industry cannot solve all the challenges facing today’s market, such as low inventory, but the industry can, and is, evolving to address financing obstacles with innovative and flexible terms and programs
Moving the Needle
The battle against housing affordability challenges is not yet over, and there is no single solution. It will take a combination of short-term and long-term solutions to truly move the needle on housing affordability. With concerted efforts from the industry and community leaders, we can bring affordability and increased access to credit within reach.
Terrence Evans is vice president, strategic account manager at Enact (formerly Genworth Mortgage Insurance) and is responsible for collaborating with strategic lender partners to successfully implement Enact’s products and services that help borrowers buy and keep their homes. The statements in this article are solely the opinions of Terrence Evans and do not necessarily reflect the views of Enact or its management.