Opinion of Janneke Ratcliffe for CNN Business Perspectives
Millions of Americans are losing the chance to reap the benefits of home ownership due to a shortage of supply. This shortage is most acute among affordable housing, where low- and middle-income renters, young first-time home buyers and people of color are losing confidence that they will be able to live this part of the American dream.
We must do better. The United States needs approximately 3.8 to 5.5 million housing units. Building more homes for low- and middle-income families and first-time buyers, and equipping these families with reliable and affordable financing tools so they can compete to buy those homes, is essential if we are to resolve the crisis. of affordable home ownership in the country.
In many ways, this crisis originated during the Great Recession. The rate of new single-family home production per capita fell in the mid-2000s and remained at about half that of the previous four decades. This deficit has quietly accumulated even as millennials, who initially delayed homeownership in the aftermath of the financial crisis, began to enter the market.
Then came Covid-19. Low interest rates and quarantines have boosted housing demand, while labor and material shortages and supply chain issues have slowed construction and increased costs. Land prices and development costs are also rising in many parts of the country. The result is an environment in which developers are discouraged from building smaller, more affordable homes in favor of high-end homes that can absorb these increased costs while generating a profit. Meanwhile, many sellers of existing homes are inundated with generous cash offers, often from investors, and discouraged from accepting offers from typical first-time buyers who need more time. to arrange and secure a mortgage.
Past experiences can provide valuable lessons on how to deal with this crisis. After World War II, the federal government, recognizing “an unprecedented emergency housing shortage“, took a number of measures, including limiting non-residential construction, removing import duties on lumber for the construction of houses and requiring the allocation of building materials for the production of housing. for a period of time. At the same time, the government allowed families to buy houses with a low down payment, fixed rate and long-term amortization mortgages facilitated by government guarantees, which stimulated demand for new construction of such houses. From 1950 to 1959, an estimated 15 million new homes were built, and the homeownership rate rose from 43.6% in 1940 to 61.9% in 1960.
The strategy was flawed, however, as homes and beneficial financing were largely reserved for white households. Layers of federal and local policies have effectively excluded people of color from owning property, inequalities that have contributed greatly to our current racial gap in homeownership. Today, 72% of white households own their homes, compared to 42% of black households, 48% of Hispanic households, and 58% of Asian American and Pacific Islander households.
This is unacceptable. The government was right to treat the housing shortage as an emergency after World War II, and we need to rekindle that same emergency today. But we also have to consider who we are building houses for.
Here are some ways to start addressing the housing shortage:
Encourage the construction of new affordable homes
Financial incentives can encourage builders to build new homes that are affordable to many first-time buyers. Possible incentives run the gamut, from federal grants and subsidies, to better construction loan terms, to fewer local regulations and restrictions that dramatically increase construction costs.
Lift restrictions on co-ownership loans
The construction of condominiums, which constitute a potential springboard for first-time buyers, is at historically low levels. State and local government and federal sponsored agency restrictions on condominium loans are a significant impediment to first-time buyers needing a loan, and therefore to the development of condominiums for sale.
Focus on prefabricated houses
Prefab, modular, panel, and pre-cut homes are a key piece of the puzzle. Built entirely or partially in the factory and assembled on site, these different forms of prefabricated housing are an interesting solution because they cost less to produce than houses built on site.
Before 1995, approximately 240,000 manufactured homes were shipped each year, compared to less than 100,000 each year today. Similarly, modular, panel, and pre-cut homes made up 7% of new single-family homes in the 1990s compared to just 3% today. The Urban Institute estimates that we could add 200,000 new affordable housing units each year by increasing production in these areas. Expanded zoning and building code flexibilities can help spur the creation of manufactured homes.
Improve financing for existing homes
In our existing housing stock, there are millions of affordable but older homes in need of repair. Many people looking for an affordable home can’t just buy a house and fix it because of the way mortgage financing works. Most lenders only lend against the current value of the property, which does not allow for necessary repairs. As a result, a potential buyer may lose the opportunity to purchase the home to investors and corporations who can afford to buy homes wholesale, finance repairs, and then rent the property out, prohibiting ownership to come back on the market as affordable housing. house to buy.
Lenders, the Federal Housing Administration, and Fannie Mae and Freddie Mac can improve the terms of purchase/rehab loan financing, which can help unlock this potential supply by allowing new homeowners to buy, repair, and live in these houses.
Another way to get preserved housing stock into the hands of owner-occupiers is to simply update homes before they go on the market, so potential owners don’t have to fight over financing. and building. In many places, community developers are filling that gap with local grants or by acquiring foreclosed properties on preferential terms, allowing them to prioritize offers from buyers who plan to live in the home.
None of these measures will succeed in increasing access to stable and affordable homeownership if we do not also equip households with better financing tools. Mortgage credit has remained excessively tight since the Great Recession, excluding many strong potential first-time buyers. Government and federally sponsored organizations should consider easing funding restrictions in general. Specifically, allowing more low-balance mortgages, those under $100,000, with underwriting flexibilities, simplified processes, and reduced fees and costs, will help many low- and middle-income families secure modest homes. . Down payment assistance, especially for first-generation homebuyers, will also provide low-income families with a much-needed start on the path to homeownership.
The data shows that right now, millions of renters, low- and moderate-income households, and people of color qualify for a mortgage. They worked hard to position themselves to become owners. Now we need to do our part by ensuring there are homes to buy and reliable financing tools to do so.
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