Kevin Erdmann is the author of “Shut Out: How a Housing Shortage Caused the Great Recession and Crippled Our Economy.” He researches housing trends at the Erdmann Housing Tracker.
By Kevin Erdmann
The most effective and immediate tool for a housing recovery is sitting in the underwriting departments of Fannie Mae, Freddie Mac and the Federal Housing Administration.
Democratic presidential nominee Kamala Harris announced a housing plan last month with some worthwhile proposals, including incentivizing construction of affordable homes and speeding up permitting and review processes. But to have a real impact, she should include one more: loosen rules at lending agencies to make it easier for them to approve mortgages.
In 2008, amid the fallout from the subprime mortgage crisis, lawmakers strong-armed banks and lending agencies into tightening their standards for getting a loan, which included higher down payments and credit scores. Well-intentioned rules meant to stabilize the housing market drove an affordability crisis more effectively than all the NIMBYs at every city council meeting ever could.
For decades, Fannie Mae serviced mortgages for the bottom half of the housing market. In 2007, about 60 percent of Fannie Mae’s mortgages went to borrowers with credit scores below 740. Suddenly, from 2007 to 2009, that dropped to 26 percent.
Hundreds of billions of dollars in mortgage loans for low-cost housing dried up nearly overnight. In 2007, Fannie Mae issued about $647 billion in new mortgages, and $388 billion went to people with FICO scores below 740. In 2009, it issued about $687 billion, but only $179 billion of that went to sub-740 scores.
Borrowers with lower credit scores tend to buy less expensive homes. In 2005 and 2006, values of houses purchased with a Fannie Mae mortgage averaged about $245,000. By 2009, home prices across the country had collapsed, but the average price of homes getting new Fannie Mae mortgages jumped sharply to $327,000.
As Fannie Mae made fewer mortgages for the cheapest homes, the values of those homes plummeted. The change in mortgage requirements devastated working-class home values across the country.
Take Atlanta, for example. The average Atlanta home that had sold for $350,000 at the end of 2007 fell to about $279,000 by the end of 2011, a decline of about 22 percent. That’s pretty stiff. But Atlanta homes that had been worth $100,000 at the end of 2007 dropped to $43,000, a drop of 57 percent.
There was no bubble in Atlanta before 2008 to drop 57 percent from — no unusual rise in home values, construction or homeownership. Rents were affordable. The average home price in Atlanta had risen only about 12 percent from 2003 to 2007 — roughly in line with inflation. The only change to the equation was mortgage lending.
After that, construction activity in Atlanta dropped by 90 percent, and it is still half of what was typical in the decade before 2008 on a per capita basis. The same dynamic played out in many cities: Values of homes on the high end flattened or dropped a little, while the values of houses on the low end dropped a lot.
The lowest-end units were too cheap for builders to compete with. Builders, in turn, stopped constructing entry-level, single-family homes. Since 2008, this has amounted to 8 million missing homes.
The construction of apartments recovered quickly and is higher today than before 2008. And builders returned to building the single-family homes with higher prices that Fannie and Freddie were still funding. The drop is entirely in the construction of more affordable, entry-level homes.
That shortage has caused unprecedented rent inflation. Ironically, cheap homes have meant expensive rents.
Families that can’t get mortgages anymore still need homes. Since 2008, general price inflation has added up to about 42 percent, but rents have gone up about 75 percent. And rent inflation has been highly regressive. Incomes after rent expenses for many working-class families have been flat or declining for years.
Many families live in homes today where the rent payment is much higher than the mortgage payment would be if they could get one.
Visit Zillow and you can find homes in cities across the interior of the country that would sell for less than $200,000. The estimated mortgage payment for those homes would likely be less than the estimated rent. Frequently much less.
For example, a newly renovated little three-bedroom bungalow in Kansas City is currently listed for sale at $128,500. Zillow estimates the monthly mortgage payment at $769 and the rental value at $1,235. A few years ago, when 4 percent mortgages were available, the monthly mortgage payment would have been about $550.
Some will warn that loosening lending standards back to previous norms will lead to rising prices — but that’s not a bad thing. In fact, that’s the point! A family renting that house in Kansas City would lower their monthly expenses by buying that house, even if a bidding war pushed the price up to $170,000.
Builders that have been dormant for 16 years, because it would cost them $160,000 to build a new version of that home, will suddenly find willing buyers again. After they start building, those homes might start renting for $1,000 or $1,100 instead of $1,235.
The price of homes would rise, yet everyone would be better off. The White House is not powerless on the housing crisis. In fact, they are sitting on the most critical piece to fix it.
