Housing affordability: US is the envy of the developed world

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  • Housing markets were already affordable when the #government's "affordable" housing policies left us worse off

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  • Mortgage limits still aren't reduced - #nolessonlearned

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  • Channel #Reagan : private #job creation polices will help the housing market too

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Affordable markets are those where the median house price is less than or equal to three times median income. The United States as a whole is affordable with an average score of 3.0. As the nearby chart indicates, this places the U.S. at the head of the affordability class among seven ranked countries, with the other six ranging from moderately unaffordable to severely unaffordable.

Significantly, half of the 211 housing markets in the U.S. are ranked as affordable, with another 35% ranked as moderately unaffordable. For the other six countries, almost eighty percent of their 114 markets were ranked as either seriously or severely unaffordable. While the U.S. has 15 severely unaffordable markets, they are concentrated in a few geographies, including Honolulu, nine markets in California, and two in the Northeast, including New York City.

The U.S. high affordability ranking is noteworthy in at least three respects:

Government policy made things worse:

In the early 1990s Congress, responding to pleas by community groups such as ACORN for loosened underwriting standards to make home ownership "more affordable", imposed affordable housing mandates on Fannie Mae and Freddie Mac. Their goal was to replace common sense credit standards based on a reasonable amount of equity, a good credit history, and adequate income.

Yet in 1989 nearly 90% of U.S. markets were already rated as affordable with only 4% rated as severely unaffordable. Not much has changed as these four were Honolulu, San Francisco, Los Angeles, and New York City. In 1992 the national home ownership rate was 64.4% and had changed little over the previous 30 years.

By 2005, after more than a decade of government affordable housing policies that led to hollowed out lending standards, less than a third of markets were rated affordable and 20 markets were now rated severely unaffordable. By 2011 the homeownership rate had slipped back to 65.9% from a 2004 high of 69.2%. Subtract homeowners currently in foreclosure and the 2011 rate falls to 63%. Some policy-a lower homeownership rate, reduced affordability, and trillions wasted.

No lessons learned:

Second, federal housing policy has long been driven by an undue focus on using broad policy interventions to address narrow or geographically limited problems. We saw an example of that short-sightedness just last week when the Senate approved legislation to restore modest reductions to the loan limits applicable to Fannie Mae, Freddie Mac, and FHA.

Except for the housing lobby, there is widespread agreement that reducing these limits is a key first step towards ending the government's chokehold on the now nationalized housing finance market. Yet sixty senators voted to raise the mortgage limit from $625,000 to $729,750 for homes that sell for about $1 million.

Notwithstanding that these limits help relatively few potential homebuyers, they were initially a temporary measure, and were passed at a time when home prices were substantially higher. Is it reasonable to postpone reducing interventions that distort our markets in order to preserve federal benefits for buyers of million dollar homes?

Yet there is good news:

Even though overall affordability today is lower than in 1989, homes in most areas of the country are affordable and that's before taking into account current low interest rates and the impact of rising rents. This means that once policies promoting permanent private job creation are put in place, the housing market is poised to respond.

This worked for Ronald Reagan in the 1980s when his pro-growth policies helped spark a recovery from both 10% unemployment and, what was then, the biggest foreclosure crisis since the 1930--the result of the collapse of a regional housing bubble in the Oil Patch. The sooner this takes place, the sooner the Fed can end its price-setting policies for long term interest rates.

Edward Pinto is a resident fellow at AEI

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About the Author

 

Edward J.
Pinto
  • American Enterprise Institute (AEI) resident fellow Edward J. Pinto is the codirector of AEI’s International Center on Housing Risk. He is currently researching policy options for rebuilding the US housing finance sector and specializes in the effect of government housing policies on mortgages, foreclosures, and on the availability of affordable housing for working-class families. Pinto writes AEI’s monthly Housing Risk Watch, which has replaced AEI’s FHA Watch. Along with AEI resident scholar Stephen Oliner, Pinto is the creator and developer of the AEI Pinto-Oliner Mortgage Risk, Collateral Risk, and Capital Adequacy Indexes.


    An executive vice president and chief credit officer for Fannie Mae until the late 1980s, Pinto has done groundbreaking research on the role of federal housing policy in the 2008 mortgage and financial crisis. Pinto’s work on the Government Mortgage Complex includes seminal research papers submitted to the Financial Crisis Inquiry Commission: “Government Housing Policies in the Lead-up to the Financial Crisis” and “Triggers of the Financial Crisis.” In December 2012, he completed a study of 2.4 million Federal Housing Administration (FHA)–insured loans and found that FHA policies have resulted in a high proportion of working-class families losing their homes.

    Pinto has a J.D. from Indiana University Maurer School of Law and a B.A. from the University of Illinois at Urbana-Champaign.

  • Phone: 240-423-2848
    Email: edward.pinto@aei.org
  • Assistant Info

    Name: Emily Rapp
    Phone: 202-419-5212
    Email: emily.rapp@aei.org

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