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Every spring since the foreclosure crisis crashed the U.S. housing market, home owners, renters, and realtors alike have asked themselves the same question – is this the year we will finally see a housing market recovery? Eric Belsky, managing director of the Joint Center for Housing Studies (JCHS), discusses the state of the nation’s housing.
Q. So, the perpetual spring question – is this a good time to buy a house?
Belsky: Now is certainly a time in which the value proposition of buying a home in many markets is as strong as it’s been in the last 40 years. If you were to put 20 percent down payment on a median priced home in the United States your principal and interest payments would amount to only about $669 – that’s clearly a level that’s dramatically more affordable than it’s been since the 1970s.
So it really is a time in which purchasing a home is an affordable option for people; they're not buying at the top of the market but somewhere either near or at the bottom. It’s obviously a good time to buy, not just for affordability but also for the potential for future home price appreciation.
Q. To some it seems paradoxical that rents are soaring in some markets, decreasing affordable housing units and squeezing lower income households. What is causing the tight rental market in some areas?
Belsky: Since 2008 roughly four million foreclosures have been completed, which means four million households that owned their homes no longer do. Most of those have moved back into the rental market.
In addition, people who would ordinarily have become homeowners over the last four or five years have remained renters because of concerns about their own job security, concerns about prices continuing to fall, and waiting for the best time to buy if they are interested in buying. All of those things have added dramatically to rental demand. So, for example, over the course of the 2000s, the number of rental households increased by about 5.1 million – about 4 and a half million of those have occurred since 2005. That’s the largest increase in renter households in a single decade since the post-war period.
So there’s a lot of demand for housing but multi-family construction – which is one of the things which more directly targets renters – was down really dramatically, as low as 109,000 on an annual basis, which is a low level for multi-family starts. So you have a constrained supply of multi-family housing.
On the single family side, lots of units that were lost to foreclosure have recycled back onto the market as rental units but the demand has been so great for those units that rental vacancy rates on single family homes remain relatively steady. Overall vacancy rates are down. That causes tight markets and allows landlords to raise rents. All these things have created pressures on rents in most of the largest metropolitan areas in the United States. And this has just added to what is already a chronic housing affordability problem in the United States.
Q. You mentioned concerns about job security driving some of these dynamics. Can the housing market recover without sustained employment growth?
Belsky: Historically, housing markets have often recovered before employment does, partly because when unemployment rises, the Federal Reserve takes action to force down interest rates. And when that happens, mortgage payments tend to fall, and people come back to the market, which is why very often housing has in fact been one of the sectors that have helped lift the economy out of recession.
This time however, with the economy seemingly stuck in neutral we haven't witnessed this pattern taking place. It has been 11 months now since the recession officially ended. In all the previous housing recoveries going back to 1970, housing's contribution to GDP over that period of time, over those 11 months, was somewhere between about half a percent and one percentage point of gross domestic product. This time it's been four one-hundredths of a percent. So clearly housing hasn't played that traditional role in getting the economy revving again, and the key reason for that is just how large a hole housing was in, but another very important reason is just how tepid employment growth has been since the recovery began.
Q. It’s an election year – what are the most important issues the candidates should be addressing around housing?
Belsky: I believe that political candidates should be talking about the large number of homeowners who are in homes that are worth less than what they owe. People in that situation have difficulty refinancing their mortgages. There are several existing government programs aimed at helping homeowners refinance their mortgages in order to get lower interest rates, but there are additional things that could be done, and some of those are under consideration in Congress right now.
For example, the existing programs primarily benefit borrowers who had an FHA loan or had a loan that was sold to Fannie Mae or Freddie Mac, or one that was securitized by Fannie Mae or Freddie Mac. That leaves those people whose loans are in bank portfolios, who are under water on their mortgages, and people who purchased homes with loans that ended up going into a different market on Wall Street called the Asset-Backed Securities Market or Private Label Securities Market, unable to refinance if they are underwater on their mortgage.
When we create conditions under which homeowners can refinance their mortgages and procure lower payments, more homeowners are motivated to continue making payments despite the fact that their homes are under water. So I think that trying to help troubled homeowners is very important.
There are two million homes currently in foreclosure. There are about 1.3 million homeowners who are more than 90 days delinquent on their mortgage, with more than three months of missed payments that haven't yet entered the foreclosure process. Anything that can be done to try to help people to stay in their homes relieves pressures on the market from distressed sales and from units showing up on the market vacant and for sale, which has a depressing effect on prices. And at this point, affordability has improved dramatically; what's really important for a housing recovery is stability in home prices.
Q. No matter who is elected President in November, what are the policy steps around housing that need to be taken at the federal level in the near future and during this President’s term?
Belsky: At the federal level, because so much of the mortgage market now is either being supported by government guarantees on mortgages through Fannie Mae or Freddie Mac or through FHA, the most important things that the administration can do is to try to continue to supply credit to housing markets and to do it in a way that is prudent, safe and sound but which doesn’t overly restrict credit availability. As you can imagine, given the extent of the meltdown in financial markets and particularly in the performance of housing loans, some have argued that the banks have gone overboard in restricting access to credit. So I think it is critically important for FHA, Fannie Mae and Freddie Mac to continue to supply credit, to try to push the boundaries a little bit more on who can qualify for a mortgage.
In addition, there are so many people who are spending more than half their incomes on their housing the United States — nationally it’s at a record high of over 20 million households — I believe that it’s really important to continue to maintain if not expand the amount of assistance available to low income or very low income people who are in a position of spending that much money on their housing.
Having said that, it’s a very difficult time to achieve, given concerns about the federal budget deficit and the spirit of fiscal austerity that prevails in Washington. But these are the kinds of problems that are very difficult to address especially for very low income people unless the government acts to insure a steady flow of subsidies to them, Need is up but federal spending to meet the need is not. In fact, only about one-quarter of very low-income renters eligible for assistance with the worst case housing needs receive assistance. And that says nothing about very low-income homeowners, many of whom also spend more than half their income on housing.
And finally, as I mentioned earlier, it is critically important that the government do as much as possible for as many borrowers as possible who have remained current on their mortgages, and who have continued paying their mortgages all these years despite being in a negative net equity situation or underwater on their mortgage, in order to ensure that as many of them as possible can refinance at lower rates.
Q. Is there anything you’d like to add in summing up about the state of the nation’s housing?
Belsky: The paradoxical situation we find ourselves in today is with a market that seems to be recovering and, therefore a lot of reports of recovery in the housing market, a market that seems to have become dramatically more affordable because of falling home prices and lower interest rates.
Yet it’s really a market in which rents are going up, causing affordability pressures on people who are renting who represent a larger share of the population than before because so many more people are renting and these things can, in fact, exist at the same time and there’s really a concern that should the recovery continue to stay on track, which would be wonderful and of course very important for the broader economy for the recovery and home prices to help people get above water on their mortgages.
It also means that we’re going to be in a situation where a lot of the aftermath of the financial crisis and the ill effects of it will still be with us and there’s a risk that policy makers will lose a focus on those issues, maybe the most significant of those issues being the really significant problem of concentrated foreclosures, especially in low income communities and communities of color where subprime lending was much more common, where unemployment rates are often higher and therefore they’re struggling more to recover.
In those places, for example, mortgage lending has fallen fully by three quarters the number of loans that are being extended to the hardest hit communities by HUD’s definition and it’s really very, very important that as we move into a hopefully stronger housing market recovery, that the credit needs of those communities and trying to find ways to meet the credit needs of those communities and trying to help those communities mend and heal their housing markets not be lost in broader policy debates and discussions.