The American dream and the affordability crisis

Many housing economists — including the chief economists for the National Association of Home Builders (NAHB) and Moody’s Analytics — have called out the current affordability situation as a “crisis.” Americans feel the same way. A slew of recent market research surveys highlight increasing consumer pessimism toward homebuying conditions.

A survey by Pew Research published in October of last year found that about half of all Americans (49%) think the lack of affordable homes is a major problem where they live. That’s up 10 percentage points from early 2018.

Affordability concerns were also reflected in USMI’s 2021 National Homeownership Market Survey, which reported that 69% of Americans say lack of affordable housing is the biggest homebuying challenge. Buyer morale is at an all-time low for good reason.

The National Association of Realtors (NAR) sounded the alarm last year saying, “first-time buyers, in particular, are having trouble securing that first home for a multitude of reasons, including not enough affordable properties, competition with cash buyers, and properties leaving the market at such a rapid pace.”

Homebuyer concerns are clearly displayed in Fannie Mae’s Home Purchase Sentiment Index, which in April 2022 was down 8.5 points year-over-year with only 24% of consumers saying now is a good time to buy. Making matters worse, people who already own homes are reluctant to sell for fear that once they step out of the market, they’ll be unable to get back in or have to do so at a much higher cost.

According to the Radian Home Price Index, provided by Radian subsidiary Red Bell Real Estate, home price appreciation set a record in 2021, rising 14.2% year-over-year. And prices continued to climb in the first quarter of 2022 at an annualized pace of 13.9%. While housing forecasters may differ on the expected rate of appreciation going forward, most agree that prices will continue to increase.

With the median price of a home in the United States now above $300,000, that means first-time homebuyers need to have more than $60,000 cash in their pockets to make a 20% downpayment.

“Affordability from a home price/down payment perspective is the worst it’s ever been, meaning extreme barriers to entry,” according to a Bank of America Global Research note published in March. For the past two years, mortgage rates were at historic lows, giving buyers more purchasing power.

But in the first few months of 2022, mortgage rates have risen at the fastest rate since 1987. On March 16, 2022, the Federal Reserve announced its first rate increase of 25 basis points. One month later, the Mortgage Bankers Association (MBA) reported the 30-year fixed rate rose to 5.2% — the highest level since 2010.

Compared to the average 3.2% mortgage rate a year ago, today’s rate increases the monthly payment for a median priced home by more than 25% or nearly $300. As home prices and rates continue to increase, many would-be homebuyers are at risk of being priced out of the market.

A disproportionate impact

Buying a home is getting more expensive for everyone, but the affordability crisis disproportionately affects first-time and low-income homebuyers, especially people of color. Homeownership is the surest way to build generational wealth, and in a country with deep disparities in wealth often along racial and ethnic lines, homeownership provides a path to a more just, prosperous and resilient society.

Owning property is also one of the best ways to offset inflation pressure, which is expected to continue for the foreseeable future. Fixed mortgage payments are stable and predictable, unlike rent payments which can fluctuate and tend to increase along with rising prices and home values.

Not to mention, mortgage payments slowly build equity each month and create long-term generational wealth. According to fourth quarter 2021 census data, homeownership rates for Black and Hispanic Americans — 43% and 48% respectively — remain significantly lower than the white homeownership rate of 74%.

Black households, a majority of which are living on lower-than-average incomes, are more likely to rent their homes and are therefore more vulnerable to disruptions, instability, eviction and even homelessness, according to the National Low Income Housing Coalition.

The affordability crisis is not just preventing people from achieving their dreams of homeownership, it is preventing people of color from achieving financial stability and the opportunity to build generational wealth.

Thereby further exacerbating historical institutional biases and discrimination that negatively impact governmental policies, industry practices, education and income opportunities. In addition to a racial homeownership gap, minority homebuyers tend to have more misconceptions about the homebuying process.

According to the USMI 2021 National Homeownership Market Survey cited above, more than 40% of Hispanic and African Americans mistakenly believe that you need a down payment of 20% or more to qualify for a home purchase. This creates a perception of a higher financial barrier to homeownership, which may seem insurmountable to many.

Improving access to affordable homeownership

The affordability crisis is particularly significant to Radian, where our mission is to ensure affordable, sustainable and equitable homeownership. Mortgage insurance (MI) is an affordable solution that has helped millions of Americans become homeowners by reducing the 20% downpayment barrier and enhancing their ability to borrow in an affordable way.

MI represents a small expense to the homebuyer that in turn gives them greater financial flexibility. However, low-down-payment solutions alone are not a remedy to the problem. The affordability crisis is a complex, multifaceted problem that requires a multifaceted approach from all players in the industry, including mortgage service providers, lenders, servicers, investors and real estate professionals.

There are several key opportunities where we can work together to advance affordability and promote higher levels of sustainable homeownership, including:

• Improving the quality and accessibility of educational information for homebuyers Increasing diversity in the mortgage profession to better reflect the communities we serve
• Engaging local community leaders to advocate for policies that increase supply of affordable homes
• Examining traditional underwriting criteria and finding alternatives that can responsibly expand the credit box
• Exploring alternatives to foreclosure and promoting solutions that help homeowners with hardships preserve and maximize the value of the equity in their homes

These are some of the initial objectives Radian is focused on through our Affordable Homeownership Initiative. Working together as an industry, we can find solutions to help close the homeownership gap, particularly for underserved minority communities, and make a meaningful impact that improves access to affordable and sustainable homeownership.

The housing affordability crisis impacts us all in one way or another. For young families, it means deferring plans for the future. For older homeowners it could mean being locked into a home they can no longer maintain.

And for far too many Americans who have been excluded from the real estate market, it means a continuation of historic injustice. This month, as we observe National Homeownership Month, let’s focus on working together to make the American Dream of owning a home a reality for more people.

This article was first featured in the June HousingWire Magazine issue. To read the full issue, go here.

As president, mortgage, for Radian Group, Derek Brummer is responsible for overseeing the company’s Mortgage Insurance and Mortgage Risk Services businesses, including developing strategies for continued growth as the mortgage industry evolves. 

This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.

To contact the editor responsible for this story:
Brena Nath at [email protected]