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Breaking the Housing Affordability Cycle

Odeta Kushi, Deputy Chief Economist, First American Financial Corporation

With lingering concerns over housing affordability hanging like a black cloud over many prospective buyers, there seems to be little end in sight in terms of relief. Record high rates, combined with sky soaring prices are putting the squeeze on the remaining inventory. 

DS News had a chance to chat with Odeta Kushi, Deputy Chief Economist at First American to get her thoughts on the topic and what solutions lie on the horizon to remedy this dilemma. 

As Deputy Chief Economist for First American Financial Corporation, Kushi prepares analysis, commentary, and forecasts on trends in the real estate and mortgage markets. She conducts research around demographic trends, millennials, and homeownership, and monitors and analyzes quarterly surveys and economic data related to the housing industry. Top national business media outlets, including CNBC, Yahoo! Finance, and Reuters TV, consult with Kushi for insight and her perspective on the forces shaping the housing industry. Her research has been published in leading business and industry trade publications, including The Wall Street Journal, News and World Report, and Business Insider, among others. 

The housing affordability issue seems like a vicious cycle as inflation and the rise in rates are forces acting against first-time buyers looking to purchase. What needs to change in order to remedy this issue and break this cycle?
Kushi: Housing affordability is a function of three factors: mortgage rates, household income, and nominal home prices. While household incomes are rising, potential home buyers are feeling the one-two punch from rising house prices and fast-rising mortgage rates in today’s supply-constrained market. More supply is one way to bring balance to the housing market. The other way, ironically, is through rising mortgage rates. When rates rise alongside house prices, it will cause some buyers to pull back from the market and sellers to adjust their price expectations, resulting in fewer or less intense bidding wars and, ultimately, a moderation of house price growth.” 

Do you foresee housing affordability issues lingering throughout the remainder of 2022, or do you think the issue will extend beyond?
Affordability will likely worsen before it improves. While nominal house price growth may moderate due to the affordability squeeze on buyers who are on the margin, the severe supply-demand imbalance means the housing market is unlikely to cool enough to result in a material improvement in affordability in the near-term. Even if demand moderates due to an affordability squeeze, it will take time for supply to catch up with demand, keeping house price growth positive. 

Besides renting, what are some options you would suggest to a buyer currently shopping in this ever-competitive market?
Kushi: One tip for potential buyers is to shop around for your mortgage rate. Interest rates may vary dramatically between lenders, so failure to shop is money lost. Additionally, the housing market remains in a fiercely competitive sellers’ market, which means bidding wars are common. Make sure you structure your offer to say you will pay a certain amount over the next highest bid up to a maximum amount. This allows you to win the bidding war without paying too much more than the next highest and assures you do not end up offering more than you are willing to pay. You may not win the bidding war, but this is the safest way to fight it. 

Are down payment assistance plans and first-time buyer plans feasible options to turn to in this market?
Kushi: Potential first-time buyers tend to be younger, and do not have the equity from the sale of an existing home to bring to the closing table. The most significant impediment for first-time home buyers has always been the challenge of saving the money necessary for a down payment. It is always a good idea to explore assistance options available to first-time home buyers. Down payment assistance programs providing grants or loans to potential home buyers exist in every state, while government-backed loans from the FHA, and lower down payment conventional loans allow many more potential home buyers to qualify for a mortgage with only 3% down. It is important for potential buyers to realize they do not necessarily need a 20% down payment to buy a home. Dispelling this myth could open the path to homeownership for many more. 

What advice would you give to a prospective buyer forced to sit on the sidelines due to affordability concerns?
Kushi: Buying a home is the largest financial decision you will ever make, and it is not to be taken lightly. Sitting on the sidelines may allow a potential buyer to continue to pay down their debt, build up their credit, and save for the down payment and closing costs. And in the meantime, they may find that more inventory is hitting the market that aligns with their preferences. Sometimes it pays to wait. 

About Author: Eric C. Peck

Eric C. Peck has 20-plus years’ experience covering the mortgage industry, he most recently served as Editor-in-Chief for The Mortgage Press and National Mortgage Professional Magazine. Peck graduated from the New York Institute of Technology where he received his B.A. in Communication Arts/Media. After graduating, he began his professional career with Videography Magazine before landing in the mortgage space. Peck has edited three published books and has served as Copy Editor for Entrepreneur.com.

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