The apartment mess explained – CNN | Jewelry Dukan

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Homeowners, tenants and potential buyers view housing and the real estate market from different, often conflicting, perspectives.

There have been alarming headlines for all three in recent weeks:

This convergence addresses the larger issue of the lack of affordable housing in the US, as well as the broader issue of affordability, leading to stories like this: The majority of Americans say they are concerned about their ability to pay for their housing.

I went to Anna Bahney, CNN’s real estate business writer, to understand why there is a housing shortage and what, if anything, is anyone doing about it.

Our email conversation is below.

WHAT MATTERS: I’ve read about both housing shortage and housing shortage. Is there a difference between these ideas – a shortage and a crisis? And is the problem that there are literally not enough houses in the US for the number of people?

BAHNEY: The “housing crisis” is actually an “affordability crisis”. Part of the reason housing has become so expensive for Americans is because there is a nationwide housing shortage. Record-low interest rates during the pandemic, combined with more than a decade of under-development, created a supply/demand mismatch that has pushed house prices higher.

The US has fallen behind by about 5.5 million housing units over the past 20 years as builders have failed to keep up with historic building trends. If you add property destruction due to demolition or natural disasters, among other things, the total deficit during that time could be 6.8 million, according to the National Association of Realtors.

This is a gap so deep it would take more than a decade to close. But even if more houses and apartments are built, it doesn’t matter unless people can afford them.

Mortgage rates are at their highest since 2008 and home prices remain near record highs, leaving many prospective homebuyers out of the market. These people then stay in the already tight rental market and drive up rents even more.

As renters reach the limits of what they can afford each month, homeownership continues to slip out of reach as they struggle to save for a down payment. This widens the wealth gap, including inequalities between those who benefit financially from home ownership and those who do not. It also widens the racial homeownership gap, where 72% of white Americans own a home while only 43% of black Americans own a home.

WHAT MATTERS: The cost of housing has been cited as the cause of inflation. To what extent is this true and what market forces could lower housing costs?

BAHNEY: Rising housing costs were a key driver of inflation. For most people, housing is the biggest expense. About a third of the Consumer Price Index, a basket of goods and services that the Bureau of Labor Statistics uses to track inflation, is the “protection” component.

Last month, the index showed that inflation was worse-than-expected and the housing component was up 6.2% year-on-year, the biggest rise since 1991. Persistently high inflation means the Federal Reserve is likely to be aggressive at next week’s meeting Action will be either a 75 basis point rate hike or possibly a 100 basis point hike.

But there are first signs of a slowdown in the housing market. Home sales have declined for six straight months as the rising cost of buying and financing a home forces more people out of the housing market. When demand falls, prices will fall and eventually mortgage rates will level off.

WHAT MATTERS: Which parts of the country are most affected by this problem?

BAHNEY: Sunbelt cities like Phoenix and Austin have seen some of the biggest increases in housing costs during the pandemic. In Miami, the price of a home is up 33% year over year and rents are up 26% year over year. But the affordability crisis is happening nationally, in all regions of the country.

WHAT MATTERS: The Fed’s inflation medicine is to raise interest rates, which has pushed up mortgage rates. That might control selling prices, but won’t that make housing costs more expensive?

BAHNEY: The Federal Reserve has aggressively raised interest rates to curb inflation, which could reduce demand but also make the cost of buying a home even more expensive.

But the Fed doesn’t directly set the interest rate that borrowers pay on mortgages. Instead, mortgage rates tend to follow the US 10-year Treasury yield. As investors anticipate Fed rate hikes, they often sell Treasuries, pushing up yields and, in turn, mortgage rates.

The interest rate on a typical 30-year fixed-rate mortgage has more than doubled compared to a year ago, making a home purchase that was possible then now unaffordable for some.

A year ago, a buyer who paid 20% less on a home with an average price of $359,900 and financed the rest with a mortgage rate of 2.86% — the average at the time — had a monthly payment of $1,192 to make.

Today, a homeowner buying the house at the current median price of $403,800 with a mortgage currently averaging 6.02% would be paying $1,941 per month in principal and interest. That’s $749 more every month.

Americans are now spending more than 35% of their median income on monthly principal and interest payments on that median price home. Historically, Americans spent almost 25% of their median income on payments.

To get back to that level, according to mortgage data company Black Knight, a combination of these things would have to happen: a person’s income would have to increase by 40%, mortgage rates would have to be halved, or there would have to be a 30% drop in the average price of a house.

None of this is likely to happen anytime soon.

WHAT MATTERS: When real estate prices fall, it means millions of people are losing value in their most important asset. If home prices don’t go down, that means millions of Americans will never own a home. It seems an impossible situation.

BAHNEY: Some housing economists have said recently that the housing industry is in a recession, but homeowners don’t feel so. Sure, there are plenty of examples of a slowdown in the housing industry (mortgage lenders being laid off, homebuilders pulling out, home sales collapsing). But homeowners still have tremendous equity in their homes, which has increased by an average of $60,000 over the past year.

Yet millions of people are being left out of home buying as affordability issues prove insurmountable.

As of April 2021, a household needed to earn about $80,000 a year to be able to afford the house payments at the median price with a modest 3.5% down payment. A year later, the income requirement was $108,000. This increase in costs means that about 4 million renter households that could have bought the house at the average price last year could not do so 12 months later.

WHAT MATTERS: What are some of the ideas to fix this problem? Is there an effective way the government can act?

BAHNEY: Most housing policy experts say that building a steady supply of new housing at moderate prices is the number one task. However, since these homes are not as profitable for builders as larger, more expensive homes, it takes a concerted effort from both the public and private sectors.

In May, the Biden administration announced a housing supply action plan to close the affordability gap and reduce housing costs. The plan aims to increase the supply of affordable housing by improving existing federal funding and encouraging areas to reform zoning and land-use policies to build more lower-cost housing. It also urges home builders to adopt more efficient construction methods.

But none of this is a quick fix, and some of it will require action from Congress.

Separately, the Federal Housing Finance Administration, which oversees mortgage giants Fannie Mae and Freddie Mac, has announced plans this summer to expand home financing opportunities for buyers, particularly those of color, in a bid to close the racist homeownership gap. These programs include down payment assistance, lower mortgage insurance premiums, and a credit reporting system that takes into account rental payment history.

Some of these ideas, including new no-down payment loans with no closing costs for buyers in certain black or Hispanic neighborhoods, are already in place.

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