Residential Magazine

More Rungs on the Ladder

The U.S. faces a massive housing shortage that needs to be addressed

By Tino Diaz

The lack of available homes for sale in the U.S. is a mounting crisis. The Wall Street Journal reported a mind-boggling statistic earlier this year that there were more licensed Realtors than homes for sale. Another way to look at it is that the supply of available homes averaged about 2.5 million between 1985 and 2020. Now it’s well below 1 million.

It doesn’t have to be this way. There are ways to get the homebuilding industry into gear and construct new homes for the homebuyers of today as well as tomorrow. But it will take a concerted effort by policymakers — urged on by those in the housing industry, including mortgage professionals

First, how did the U.S. get into this situation? There are a number of reasons, but three major ones stand out: low interest rates; increased demand for single-family homes, especially from investors; and restrictive public policy impinging on the opportunity for builders to meet the surging demand.

With mortgage rates reaching record lows over the past year and rent prices rising sharply, owning a home looks quite attractive to many people. More people are looking to buy and take advantage of these rates, and this is true not only for owner-occupants. Single-family rentals are investment opportunities for small businesses as well as for major corporations. This has made for a highly competitive market that’s making it almost impossible for first-time owner-occupants to buy a home.

So, what can be done? First, build more affordable homes. By adding more supply to the market, it would create more opportunities for younger people to buy their first home and for current homeowners to move up into a larger or newer house. This also would equate to more business for mortgage originators, real estate agents and others involved in the housing industry. Second, use targeted tax incentives to stimulate the listing and sale of existing properties to owner-occupants.

Massive demand

A progressive work group (the Affordable Homeownership Coalition) formed in Washington, D.C., about three years ago to tackle the housing-supply shortage. The group came up with a “moonshot proposal” of adding 20 million homes by 2030. That’s the amount of inventory needed in this country.

There’s a housing shortage of about 3.8 million homes, up from 2.5 million in 2018, according to Freddie Mac. This shortage is occurring right when the massive millennial generation is reaching prime homebuying years, with Generation Z right behind. The demand is there.

Recently, bank regulators have relaxed some of the restrictions on acquisition, development and construction financing for builders. More needs to be done. Policymakers at both the federal and local levels need to realize that building homes is a priority. It isn’t necessary to relax standards for million-dollar homes, but it should become easier to build homes valued at $400,000 and less. That’s where the frenzied demand is.

Consider this: The National Association of Home Builders reported that the average regulatory compliance cost in the U.S. escalated this year to $94,000 per home. It’s impossible for builders to meet the demand for affordable homes if it costs that much just to obtain permits and begin construction. Add in the cost of land, building materials, landscaping and appliances, and you can see why housing costs are accelerating to the point where many families lose hope of ever owning a home.

Every level of government needs to look at the costs of housing through the lens of regulations and compliance. Congress should immediately create a commission that seeks to substantially cut regulatory costs.

Expanding supply

Billions of dollars are flowing from Washington, D.C., to cities across the country through pandemic-related aid packages. More will be coming after Congress approved a $1.2 trillion infrastructure spending bill this past November. This is an opportunity for the federal government to require local governments to focus on affordable housing.

Before this money is distributed, the federal government should require cities to relax zoning and municipal restrictions that are creating obstacles for building affordable homes. Lawmakers also should require cities to develop plans that incentivize builders to construct more affordable homes. City leaders should already be thinking of doing this, but it clearly hasn’t been happening due to inertia, special interests and/or a lack of leadership.

Cities could use a portion of these federal dollars to retrofit or renovate vacant homes and add them into the housing supply. Additionally, cities could convert vacant commercial properties into affordable, owner-occupied homes.

This is an area where the housing supply could greatly be expanded. Local municipalities, as well as government agencies and the government-sponsored enterprises Fannie Mae and Freddie Mac, own large volumes of single-family homes. These properties were repossessed due to delinquent mortgages or taxes, or other legitimate reasons. In addition, banks and other types of lenders own similar volumes of vacant properties.

These properties need to be added into the supply of available homes. Moreover, potential owner-occupants need to have a head start at actually purchasing these properties. Rather than allowing corporations or investors to buy these homes, city and state governments, along with mortgage companies, should market these homes for six months to individuals and families who want to live in them. This would give these people a first-look opportunity at buying a home along with enough time to secure financing and, if needed, complete repairs.

One loan program that could help these borrowers is the Federal Housing Administration’s 203(k) mortgage. This program allows borrowers to secure financing to buy a home and make necessary repairs. The money for the renovations is put into an escrow account and is dispersed to reputable contractors. In addition, there is a provision in the loan program that allows nonprofit organizations and local governments to use the program as if they were the owner-occupants. Nonprofits and cities can borrow money, make repairs and make the homes habitable, thereby boosting available inventory. And after the rehabilitation, these homes and their 30-year fixed-rate mortgages are assumable by owner-occupants. The FHA 203(k) mortgage program is terrific – but has been in dormancy for nonprofits and cities for a couple of decades.

New incentives

Another way to address the housing-inventory problem is to create incentives for existing homeowners to list their homes for sale and purchase an upgraded home. Why not deliver a meaningful tax incentive to sell for these current homeowners?

Downpayment-assistance programs benefit new buyers while developers receive tax relief for building multifamily rental units. But existing homeowners are reluctant to list their homes because they’re worried that they won’t be able to find a move-up house.

These incentives could be targeted plans for homeowners with houses valued at $500,000 or less. It could come in the form of a loan program that offers a lower interest rate to these existing homeowners if they purchase a different home and sell their old one to an owner-occupant.

Homebuilders could then focus on creating more properties for these move-up buyers. It would help solve the affordable owner-occupant housing shortage while creating incentives to build move-up homes. Additionally, this would add jobs to the economy.

Policymakers need to look at how to ease costs on homebuilding supplies. For example, tariffs contributed to soaring lumber prices — the cost of 1,000 board feet of lumber jumped from $400 to $1,600 earlier this year. If there’s a way to ease building-material costs, decisionmakers should consider it.

Another way to boost homebuilding supplies is to review environmental laws, including restrictions on trees that can be harvested in U.S. forests. While these may be well-meaning restrictions, they’re exacerbating the housing-supply issue. Reviewing tariffs and environmental restrictions seems to be the prudent thing to do.

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The supply of housing in the U.S. is failing to meet the demand of consumers. To fix this, the construction industry needs to build millions more homes. Policymakers need to look clearly at this problem and stimulate production. Mortgage originators, real estate agents and other housing-industry stakeholders need to put pressure on elected officials to make this a priority. ●


  • Tino Diaz

    Tino Diaz is managing director of America’s Homeowner Alliance, where he is focused on protecting and promoting sustainable homeownership for all segments of current and aspiring homeowners. He has served in key leadership roles in banking for more than 40 years, and as an adviser to the chairman of the Federal Reserve and its governors. He was the chairman and president of the National Association of Hispanic Real Estate Professionals (NAHREP) and is the architect of the NAHREP Code of Trust.

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