A new report from the American Enterprise Institute said returning to 2019 levels of affordability would be a daunting task even as President Donald Trump has been releasing elements of his affordability initiatives in housing.
AEI said that growth in the housing supply is an important part of preventing higher home prices.
Mortgage rates would need to fall 2.5 percentage points, or incomes rise 56%, or home prices fall 35%, AEI said.
Even then, Trump has cautioned against “creating a lot of housing all of the sudden, and [driving] home prices down.”
AEI noted that inaction on supply has its own risks and that implementation of multiple demand boosters combined with a strong economy would ignite strong home price appreciation.
According to AEI, the Trump administration is projecting strong economic growth and lower interest rates on 30-year fixed rate mortgages to 4.5% from 6.25%. At 6.25% the monthly principal and interest payment on a $240,000 mortgage loan would be $1,478 compared to $1,216 for the same mortgage loan at 4.5%.
Two Scenarios
AEI said its analysis takes into account two possible supply and home price appreciation (HPA) scenarios over the next three years:
Under Scenario 1:
A 10% increase in cumulative HPA over the next three years, if a rate drop of this magnitude were combined with no change in the level of supply additions. The 10% increase in HPA would increase the monthly payment at 4.5% from $1,216 to $1,338, cancelling out about half of the benefit.
Scenario 2:
A 5% increase in cumulative HPA over the next three years, if a rate drop of this magnitude were combined with an increase in single-family supply additions to about 875,000 – 1,050,000 homes from the current annual level of 700,000 (roughly a 25–50% increase in production).
That 5% increase in HPA would increase the monthly payment at 4.5% from $1,216 to $1,277, cancelling out about one quarter of the benefit. AEI said that both the supply increase and economic growth likely will not be evenly distributed, meaning some areas will see much higher HPA growth than others.
Furthermore, AEI said the HPA increase could be even larger given higher levels of economic growth.
Single-Family Home Production
Lastly, AEI said that it is reasonable to infer it would take a very large increase in single-family home production (on the order of 50%-100%) to result in a 0% increase in cumulative HPA over the next three years.
AEI noted that there is broad agreement among housing analysts that the way to make housing more affordable is to build more homes.
It said that Congress and President Trump could make housing more affordable by providing a small lot bounty to incentivize states to allow the building of more starter homes currently made illegal by state and local lot size and other land use regulations.
The post AEI: Housing Supply, Economic Growth are Keys to Avoiding Higher Home Prices first appeared on The MortgagePoint.
