Solutions to re-establish housing as a source of economic growth
Housing has always been a driving force behind economic development. However, if action isn’t made to boost the supply of affordable homes and expand credit options to marginalized families, the engine may stall.
Housing accounts for 15% to 18% of the nation’s gross domestic output on average. In 2020, spending on housing investment and services accounted for 17.5 percent of GDP. Housing’s influence has been well below its peak for the past 15 years, since the subprime housing crisis.
Housing should be bolstered as an economic engine by:
Non-bank lending institutions are required to lend in low-income regions and to minorities in the same way as banks are required to do so under the Community Reinvestment Act.
Fees for government-insured and guaranteed mortgage loans should be reduced.
Action must be taken to ensure that homebuyers have enough financing access and to promote the housing market to enhance options for American families. The percentage of black people who own a home has decreased from 48.4% in 2001 to 44.8 percent in 2021. The Hispanic homeownership percentage increased slightly to 48.4%, thanks to organized activism and the efforts of Latino Realtors and lenders.
With a restricted supply of dwellings and a severe scarcity of construction workers, housing costs have risen, particularly at the bottom of the market. Since 2016, the number of lawful immigrants has decreased by 40%. Increasing the number of lawful immigrant construction workers would help the economy grow more quickly.
Increased spending on housing building materials, home furnishings, commodities, and services results from an increase in the selling of new and existing homes. An economic boom results from these higher expenditures. A dramatic drop in property prices, on the other hand, has traditionally been thought to signal the start of an economic downturn.
Increasing the availability of low-cost housing
The 3.8 million housing units in limited supply in the United States are all at the bottom of the market. This raises housing costs and has a negative impact on lower-income households. The wealth gap between renters and owners is widening, forcing more families to reside further away from jobs and limiting their upward mobility.
Housing prices increased by 19 percent in 2021, the largest increase in half a century, while the percentage of first-time homebuyers fell to its lowest level in decades (31 percent).
The chances for first-time buyers are dwindling as housing inventories remain low. The cost of living is rising. Institutional investors and consumers with excellent credit scores benefit from the competition.
Programs to increase the availability of cheap housing
The Build Back Better Bill, introduced by Vice President Joe Biden, offers funding to expand the availability of affordable housing. Even if it isn’t passed, other initiatives are in place to assist. The Housing Trust Fund and the Capital Magnet Fund, for example, give grants to nonprofit groups that invest in low-income housing. Both projects might scale up and provide cheap housing where it is most needed if they are fully supported.
Incentivizing developers is necessary
Increasing the overall housing supply requires reforming land-use and zoning laws. To stimulate production, local governments can incentivize developers to set aside affordable housing for underserved households, especially by granting tax breaks and density bonuses. Another option would be to require the construction of high-density housing units when planning transit-based development plans around employment centers. Local governments could also rezone commercially zoned properties to reuse them for housing or they could allow homeowners to convert existing single-family structures into more units.
It is vital to incentivize developers.
Reforming land-use and zoning rules is required to increase overall housing availability. Local governments can encourage production by incentivizing developers to set aside affordable housing for underprivileged households, particularly through tax incentives and density bonuses. Another alternative is to make the construction of high-density dwelling units a requirement when establishing transit-based development plans around employment areas. Local governments could potentially allow homeowners to convert existing single-family houses into extra apartments by rezoning commercially zoned assets for residential usage.
The federal government might potentially increase the supply of affordable housing by simplifying and expanding the HUD 203(k) program, which allows homeowners to repair, remodel, or upgrade their current homes. President Biden might designate an official to oversee housing initiatives targeted at expanding the availability of both rental and owned units at the executive level.
Current mortgage underwriting guidelines must be changed.
The mortgage market is failing to meet the needs of disadvantaged populations. Hispanic households, in particular, are frequently made up of extended family members, many of whom contribute to housing costs on a regular basis. However, most mortgage underwriting standards only take into account the income of the person who is mentioned on the loan.
Over the next quarter-century, Hispanics will make up more than half of new households in the United States, with many of them achieving significant improvements in education, income, and company ownership. Many minority borrowers are also self-employed and immigrants. Nonetheless, borrowers must obtain paychecks from full-time work in order to qualify for a mortgage. Many purchases are also made in cash by immigrants and self-employed people. Nonetheless, credit history is widely used in mortgage underwriting to determine future creditworthiness.
Many mortgage lenders are not accurately assessing credit risk due to the disconnect between traditional underwriting and how underserved households manage their finances. Borrowers with fewer than three established lines of credit or with low credit histories are penalized in credit rating. Minorities, underbanked Americans, foreigners, and people with weak credit histories are all being harmed by this system.
Lenders require criteria that take into account a prospective homebuyer’s history, such as on-time rent payments, multigenerational households with numerous income streams, or creditworthy borrowers who don’t fit into traditional credit boxes. To keep up with the changing needs of the country, the mortgage industry must rethink its rules and implement new credit scoring methodologies.
Most of us are aware that homeownership is a critical tool for Americans seeking economic prosperity, starting businesses, and accumulating the money necessary to enter the middle class. The inability to build equity is a substantial impediment to the housing sector and the economy as a whole.
Non-bank lending institutions that are committed
It is vital to ensure that non-bank lenders are obligated to lend in low-income areas and to minorities. Nonbank mortgage lenders accounted for 68 percent of total mortgage originations in 2020.
The Community Reinvestment Act (CRA) is designed to satisfy the credit needs of low- and moderate-income communities. The CRA mandates that each institution’s performance in meeting the needs of its entire community be evaluated on a regular basis. Non-bank lenders are not required to follow CRA guidelines, but they do have a responsibility to support marginalized communities and people of color.
Many of these non-bank lenders exclusively work with higher-income clients with excellent credit where they can make the most money. Many of these independent mortgage bankers (IMBs) do not serve all of their communities’ households, particularly the most underserved.
Lenders claim they are unable to find and hire minority loan officers who live in these communities, hence some communities are underserved. Lenders must increase, recruit, and train culturally competent workers who are passionate about addressing the homeownership needs of underrepresented populations and have the potential to advance to leadership positions.
Currently, record-low loan rates and increasing availability of low-down-payment and down-payment assistance programs should enable more American families to become homeowners. Down payment aid can also be effectively leveraged; for example, it can be utilized in conjunction with the VA’s zero-down payment program, HUD’s Voucher Homeownership Program, or USDA’s 502 rural homeownership program.
Fees on government-insured and guaranteed mortgage loans should be reduced.
If the Administration cuts the Federal Housing Administration’s mortgage insurance charges and GSE fees, hundreds of thousands of hardworking families will have more opportunity to acquire a home. FHA premiums are currently preventing the agency from reaching its aim of providing mortgage insurance to more underrepresented customers.
Currently, the FHA program is proving to be extremely profitable. Its Mutual Mortgage Insurance Fund Capital Ratio has risen to 8.03 percent, surpassing the statutory requirement of 2 percent for the seventh year in a row. Despite the pandemic, FHA is projected to do well and has sufficient funds to handle future losses. FHA, as the key resource for minority and underserved homebuyers, should cut its prices, expand homeownership options, and contribute to the nation’s housing sector and economy’s long-term sustainability and growth.
Reduce the price adjustment at the loan level.
Loan-level price adjustment (LLPA) costs should be reduced by Fannie Mae and Freddie Mac. These traditional loan costs significantly increase loan prices and the real mortgage rate paid by “riskier” customers. For loans that are already covered by private mortgage insurance, these costs should be eliminated.
The GSE costs are already unreasonably high, discriminating against households with poor credit scores and short credit histories. If mortgage insurance pricing and underwriting were more carefully regulated, overall costs to borrowers may be decreased.
Millions of American families will be able to attain sustainable homeownership by increasing housing availability, successfully addressing the homeownership requirements of underserved households, encouraging lenders to provide loans to all households in the communities they serve, and lowering mortgage rates.
When these initiatives are combined with solid and better underwriting, as well as increased usage of low down payment and down payment assistance programs, housing will once again become a crucial engine of the nation’s economic growth.