The Federal Reserve surprised many in September when it cut the benchmark rate by 50 basis points. The decrease will encourage many homeowners who purchased in the past couple of years to refinance. It will also embolden builders to construct new homes.
Still, rates will need to fall even further to motivate many homeowners to put their houses up for sale. Consider that 76% of mortgage holders have rates below 5%, according to Realtor.com. And 57% have rates under 4%. If those homeowners get off the sidelines, that could alleviate the supply problems plaguing the housing market.
David M. Dworkin, president and CEO of the National Housing Conference, talked to Scotsman Guide about the affordability crisis, housing supply and how far rates could drop. He also talked about how housing has become a presidential campaign issue and what the next administration should do.
Do you see the affordability crisis getting better or worse in the near term?
If we don’t do anything different, it is going to continue to get worse because we have such a shortage of affordable housing. And if you don’t build it, then nothing could possibly change.
How do you get builders to construct new homes?
One, we need to simplify the regulations that builders have to comply with — addressing where regulations are overlapping or where municipalities are charging developer fees which combine to help increase the cost of building housing. We also need to address exclusionary zoning, because it’s designed to keep out affordable housing, and that’s simply not sustainable. We need to have policies that create tax credit incentives. Otherwise, the numbers are just not going to pencil out given the fixed costs.
Will the Fed rate cuts improve affordability?
There’s no question that over time, the Fed rate cuts, if they continue, will improve affordability. While they have an indirect impact on mortgage rates, the impact is real and so we expect mortgage rates to go down. They have a much more direct impact on business financing. It’ll be some relief for builders right away. Ultimately, there’s also a psychological effect, which helps encourage people to think about, ‘Should I be looking for a new home? Is now the time?’
Some economists worry lower rates could increase housing costs. Do you?
Anytime you increase demand without supply, you’re going to risk increasing prices. However, it’s a very one-dimensional perspective that ignores the fact that supply production is helped by lower interest rates. And rates also address the supply issue by helping people who are locked into very low-rate mortgages find it easier to move.
Are you surprised that housing affordability has become a campaign issue?
I’m surprised it took so long for it to become a campaign issue, frankly. I think that housing affordability issues are being experienced by a much broader range of incomes than ever before. Even relatively high-income families whose children are looking for homes are experiencing it through them. For most Americans, occupations that could afford to purchase a home four years ago cannot any longer.
What should the next administration do to address this?
There are several bipartisan pieces of legislation that are available that would address both the homeownership shortage — shortage of homes affordable to first-time homebuyers — as well as affordable rental properties. This is the Affordable Housing Credit Improvement Act and the Neighborhood Homes Investment Act. The passage of these two bills in the context of a tax proposal would be a really material start. We also need to look at ways we incentivize communities to address their zoning restrictions and incentivize single-family rental owners to sell to first-time homebuyers.
How much of an issue are institutional investors purchasing single-family rental housing?
Institutional investors can have a significant impact in some communities, but, in most communities, they’re really not a material factor. Generally, I’d like to see when the institutional investor is selling property, they sell to first-time homebuyers rather than other investors. We’ve also seen the business model of institutional investors moving more and more to build-to-rent and I’m very supportive of that.
How much would monthly payments have to come down for people to purchase homes? Is there a number? So, a one percentage point decrease in mortgage rates will save a homebuyer about $250 a month on their mortgage payment. We think that, before the rate cuts are over, we could see mortgage rates go down 200 basis points. That is a savings of $500 a month. That’s real money to almost anyone.
