TheMReport — News and strategies for the evolving mortgage marketplace.
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22 | M R EP O RT FEATURE market that has created a chal- lenge for other homebuyers. In a low-interest-rate environ- ment, the traditional low-risk forms of savings such as bank deposits and Treasuries are no longer attractive enough for individuals and families saving for retirement. Therefore, more people are seeing homeownership as a vehicle for building wealth. Prior to the pandemic, home prices had grown by an average of almost 6% a year between 2013-2019. Housing as an asset class has performed well in the pandemic. Home price growth rate accelerated beginning in the second half of 2020, with the growth rate reaching 13.9% in March. Today's low rates make it a great time to buy property to rent, develop, or sell later—again, taking inventory away from pro- spective first-time homebuyers or other potential buyers. Many potential first-time homebuyers are now under great pressure to snap up whatever prop- erties they can get, often competing against both second-home buyers and investors. Inventory has been low since the housing bust, but recently properties are being ac- quired so quickly that there are not enough houses left for those that want to buy. Due to that, home prices have continued to increase. This demand, however, is the very thing that is pushing the American Dream further out of reach for so many. With low rates, everyone is looking to buy. Affordability Issues W ithout enough inventory to keep up with demand, prices are surging. Annually, the percentage increase in home prices is usually between 5% and 6%. This year has come in at three times as much, with an increase of somewhere between 13% and 15%, causing home prices to increase by tens of thousands of dollars. As a result, even if buyers can find a home available on the market, it may be unaffordable. The lack of inventory also leads to bidding wars. Too many buyers want the same house, as not many are available for the number of buyers in the market. These bidding wars drive prices up even further, creating another affordability issue. New builds also can help lower home prices and ease inventory challenges, but with supply chain challenges, labor issues, and the price of lumber, prices to build a new home are high as well. Solutions—and Warnings I t is important to note that there is no one solution for this complex issue. The challenge facing buyers and policymakers is to create affordable conditions for housing on the supply side. New builds and relaxed zoning policies can help with the issue of inven- tory, but they will take time to bring any meaningful benefit. While subsidies for first-time or low-income homebuyers can help with affordability for some groups of buyers, it still does not address the issue of insufficient inventory for the entire market. From an economist's perspective, higher home prices are, in itself, a solution. Previously unattractive parcels of land suddenly became attractive for development because of higher prices. Builders and de- velopers build smaller homes and find ways to reduce cost. Housing is always competing for land that could be used for agriculture, commercial, industrial, and office space. Rising home prices will mean more land will go to hous- ing instead of alternative uses. Again, local governments need to find ways to allow land to be used for housing. To get people into homes, lend- ers can help borrowers prequalify and make sure they have enough money upfront to win any bidding wars, however, lenders also must be cautious about this. Sustainable homeownership is important. If a borrower ends up paying too much and it is not sustainable, we risk another crisis like we saw in 2008. For potential first-time homebuy- ers, owning your own home is a worthwhile goal, but not at any cost. Stay within your budget and resist the social pressure. One lesson that economist Robert Shiller has taught us is that, over the long-term, housing should see only moderate appreciation; think of the rate of inflation plus one to two percent. That means buying after a period of strong appreciation will likely mean lower return in the future. Like so many things, it pays to be patient. There has been so much in- novation in both mortgage and housing over the past year, and that innovation will have to con- tinue with mortgage lenders, real estate agents, and policymakers in order to solve for a lack of inven- tory and affordable options. Keep Dreaming W e have seen time and again that most Americans still aspire to own their homes. Low interest rates have kept homes af- fordable, while more and more mil- lennials are thinking about buying homes. The last decade has been a good time for those who bought their homes, delivering steady and consistent price gains and helping homeowners build wealth. The pandemic has made housing even more desirable, heating up the housing market once again. The challenge facing the market now is the lack of inventory, which made rising home prices inevitable, but which at the same time are neces- sary to encourage more supply. As with challenges the market has overcome in the past, innova- tion and a free market are two key elements of the housing in- dustry that provide a foundation for making the American Dream possible. . TIAN LIU has served as Chief Economist for Enact (formerly Genworth Mortgage Insurance) since 2014. He is responsible for tracking and analysis of U.S. and regional economic conditions. He authors the company's Weekly Economic Report and provides regular updates on housing and mortgage markets. Liu began covering the U.S. housing market in 2007. His commentary on the housing market has appeared in the Wall Street Journal, New York Times, CNBC, Washington Post, and other notable publications. Liu has a Masters in economics from the University of Chicago and an undergraduate degree in economics from the Australian National University. The statements provided are the opinions of Tian Liu and do not reflect the views of Enact or its management. As we continue to work our way through the pandemic and begin to see light at the end of the tunnel, there is more demand than ever to own a home.