雅虎香港財經 What Would It Take for Homes To Be Truly Affordable for the Lower Middle Class?
The median homeowner has a net worth ($396,200) nearly 40 times higher than the average renter ($10,400), according to the Federal Reserve.
For many middle-class families, home equity makes up a huge percentage of their net worth. Home equity builds over time, leading to greater financial security, wealth and often a debt-free retirement. If nothing else, it sets up the down payment for a trade-up home purchase later.
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But lower-income earners face uphill battles to buy their first homes. So how can we as a society make homeownership easier for lower-income families? And what are some tangible steps you can take to buy your first home?
First, we need a little backstory on how we ended up where we are today.
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Demand: Higher Household Incomes Fueled Home Prices
Market pricing changes based on what buyers are willing and able to pay.
At a high level, you can blame high home prices on the expanding middle class over the last half-century. As more Americans earned more, they were willing and able to spend more on housing — bidding up home prices.
Female labor force participation played a huge role. More families became two-income families, allowing homebuyers to pay more for the same houses. One analysis of historical data found that for every 10% increase in female labor force participation, home prices rose 12.5%. The economists also found that a 10% increase in local per capita incomes boosted home prices by 9%.
Higher incomes are indisputably a good thing. But the advancement of some households does leave others behind. Families that haven’t see higher wages, or those with a single breadwinner, now find themselves in a world where home prices leapt but their household income didn’t.
It’s a recurring theme: As you put homeownership within reach of more people, you juice demand and drive up home prices even further.
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Supply: Slower Growth Than Household Formations
Between 2012 and 2023, 17.2 million new households formed but only 13.4 million new housing units were completed, according to the National Association of Realtors. That leaves a gap of 3.8 million homes.
When you look at the supply imbalance for single-family homes, the shortfall looks even more dire: 7.2 million.
The news actually gets worse from there. Most new home construction falls at the “luxury” end of the spectrum — not affordable housing. Why? Because the profit margins on more expensive homes are higher for homebuilders.
Incentivizing More Supply
As a society, we don’t want to suppress demand by telling people, “Don’t have children or move out on your own.” Instead, we want to encourage the construction of more supply — particularly at the affordable end of the spectrum.
That starts with streamlining the zoning and building permitting process, rather than blocking new construction. California has notoriously struggled with new housing supply and subsequent lack of affordable housing.
But encouraging more housing supply goes beyond cutting red tape. If the government wants more affordable housing, it could incentivize homebuilders to create more of it.
It can expand tax credits for building new affordable homes. For example, the Low Income Housing Tax Credit provides credits to encourage builders to create more affordable housing, and successfully so. However, it mostly supports affordable apartment rental housing, not single-family homes.
If we want more affordable single-family homes, we need more robust tax incentives to build them.
The Cash Constraint
Ask the average would-be homebuyer what’s holding them back, and they’ll likely tell you, “I don’t have the money for a down payment and closing costs.”
Several government programs have tried to solve this problem, many successfully. The FHA mortgage program allows a 3.5% down payment for homebuyers with credit scores as low as 580. More recently, Fannie Mae launched its HomeReady program, and Freddie Mac its parallel Home Possible program, each allowing a down payment as low as 3%.
That puts homeownership in reach for more buyers — which spurs demand and drives up home prices further.
To limit the benefits to lower-income buyers, the Neighborhood Assistance Corporation of America created a program with no down payment, minimal closing costs and, in many cases, no private mortgage insurance. They even allow for below-market interest rates, especially if you make a down payment.
Buyers must either have lower than the median local income or buy in specified priority zones. They also must attend trainings before buying and ongoing program events afterward.
Other programs offer 0% down payment loans for certain borrowers (such as VA loans for veterans or Good Neighbor Next Door assistance for police officers and teachers) or in specific areas (like USDA loans for rural properties).
These sorts of programs work wonders, but most low-income buyers have never heard of them. As an individual looking for help, check out this table of assistance programs.
Credit
There is a correlation between income and credit scores.
People with lower incomes tend to have lower credit scores. And lower credit scores can make it nearly impossible to get approved for a mortgage.
That largely drove the success of the FHA loan program: It allowed borrowers with weak credit to buy with a small down payment. But these borrowers are more likely to default, which is why FHA loans now require borrowers to pay the mortgage insurance premium for the entire life of the loan, not just until they pay it down below 80% of the property value.
In other words, performing borrowers subsidize these loans by paying for default insurance long after they no longer pose any risk themselves. Somebody has to pay for the higher risk associated with these mortgage loans, but it reduces affordability for everyone.
At the individual level, you can get serious about improving your credit. Build an emergency fund so unexpected bills don’t send you into a tailspin of default. With a higher score, you can qualify for a 3% down HomeReady or Home Possible loan, and ditch PMI payments once your loan balance drops below 80% of the property value.
NACA mortgages allow for weaker credit histories as well, so look into it and similar programs designed for lower-income, lower-credit buyers.
Final Thoughts
At the government level, expanding programs such as NACA would help more low-income households buy their first home. Greater tax incentives and less zoning and permit red tape can boost new construction of affordable homes.
Individuals can smooth their path to homeownership by improving their credit, saving a down payment and researching homeownership assistance programs.
As a contrarian view, it’s worth mentioning that homeownership is not for everyone. It requires a long-term commitment to living in a specific home, because it takes time to build enough equity to cover the costs of buying and selling. It also requires greater financial stability and budgeting, as homeowners get hit with irregular but enormous repair bills.
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