How to Make Housing Less Affordable

A For Sale sign outside a home in Hercules, California.


David Paul Morris / Bloomberg News

Rising mortgage rates coupled with sky-high prices are making it harder for Americans to afford a new home. Now the Biden administration could make things worse by lowering government mortgage insurance premiums.

Home prices have risen nearly 40% nationwide since January 2020 and 16% in a year. The Federal Reserve is largely to blame for keeping interest rates near zero for too long while amassing a huge portfolio of mortgage-backed securities. This pushed average 30-year fixed-rate mortgage rates below 3%.

Cheap credit has fueled demand, as expected, but supply has not kept pace. Prices have particularly skyrocketed in metro areas like Austin, Phoenix, and Tampa, where many workers have relocated during the pandemic. The cost of living arbitrage from the move gave them more money to buy bigger, nicer homes.

The Fed’s housing subsidy has been a boon to current homeowners. Many have been able to refinance mortgages and cut their monthly payments by hundreds of dollars. Ninety-eight percent of homes with traditional 30-year mortgages have interest rates less than 5%. But the losers are low- and middle-income Americans who don’t own homes and can’t afford to buy them now that the Fed is finally raising rates. The 30-year fixed-rate mortgage is now hovering at 5.1% to 5.3%, the highest level since the summer of 2009.

This prompts management to look for ways to offset rising mortgage rates. One idea of ​​the housing lobby is to cut Federal Housing Administration premiums. The FHA insures mortgages for low-credit buyers with down payments as low as 3.5%. Homebuyers pay a 1.75% upfront fee on a 30-year loan and then an annual premium of 0.8% to 1.05%, depending on the size of the loan and the down payment.

The housing lobby says the FHA is well capitalized and arrears are near pre-pandemic levels. That may be true – for the moment. But a recession is possible in the next year or two. Homeowners aren’t as heavily indebted as they were during the pre-pandemic housing bubble, but Ed Pinto of the American Enterprise Institute (AEI) notes that heavily leveraged FHA loans are a vulnerability.

Many FHA homeowners could likely avoid foreclosure by selling their homes when they can’t make payments. However, this would put pressure on home prices in low-income areas, which could then lead to more foreclosures. Cutting FHA premiums would increase the risk for taxpayers, who would have to cover mortgage losses when the agency can’t.

The idea should also boomerang. An AEI study found that a 50 basis point cut in FHA annual premiums in 2015 reduced monthly payments by the same amount as a three-quarters percentage point decrease in mortgage rates. This increased the purchasing power of FHA buyers, but also raised prices in neighborhoods with more FHA credit.

The beneficiaries, no surprise, were existing homeowners and realtors, who earned larger commissions for higher prices. Mortgage lenders are pushing for an FHA premium cut because they want to keep the housing boom going, regardless of the risks. The Biden administration will fool itself and the public if it thinks it can help homebuyers by making FHA loans riskier.

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