This piece originally appeared in the April 2024 edition of MortgagePoint magazine, online now.
Life, liberty, and the pursuit of happiness. Since that phrase appeared in the Declaration of Independence, the American experiment has been a work in progress to determine not only what they mean, but how to use the instruments of both the government and the private sector to enable the citizenry to pursue them. In the twentieth century, that pursuit often became associated with a concrete ideal: the American Dream of homeownership—white picket fence optional.
Even before our own heavily partisan and divided age, the conversation about how best to expand access to this American Dream for as many as can responsibly carry it has been a work in progress.
In the years since the pandemic, the market has been defined primarily by rising rates, rising home prices, and not enough inventory to go around. How can both government forces and the private sector of the mortgage industry shape the 21st century’s chapter of this long story?
Will it prove to be a chapter of progress and accomplishment, or gridlock and frustration?
On March 7, President Joe Biden delivered his 2024 State of the Union Address to the nation. Among the many topics he addressed were several initiatives designed to address various aspects of the U.S. housing economy, ranging from homeowner tax credits to adjusting insurance fee requirements for federally backed loans. There was much to digest, and the cause of promoting and strengthening American homeownership was certainly a worthy one.
However, most of the problems being targeted—such as home affordability, insufficient housing inventories, and driving down rental prices—are neither new nor easily solved. With a long history of federal intervention in the housing market—some more effective than others—were these new initiatives positioned to make a real difference for Americans?
To find out, MortgagePoint spoke with an array of industry insiders, economists, and policy experts to get their feedback on whether these latest proposed actions will have the intended impact on the housing economy, or if they will prove to be a case of good intentions leading to unintended consequences.
The State of the State of the Union
During the State of the Union, President Biden said that he wants to create a temporary, two-year tax credit that will give homeowners $400-per-month to put towards their mortgages when they buy a first home or trade their home in for one with a little more (or less) space as their needs change.
Biden also announced that he is directing federal agencies to eliminate title insurance fee requirements for federally-backed refinance loans. He stated this move alone could save the average home[1]owner $1,000 or more in refinancing fees.
He also advocated “cutting the red tape” so homebuilders can get more federal financing, which, according to him, is already helping build a record 1.7 million dwellings nationwide. He then called upon Congress to make his housing plan a law that would build and renovate two million affordable homes, which would also be intended to help lower rental prices for those who do not own a home.
“The lack of affordable housing supply is hurting the middle class and depriving first-generation and first-time homebuyers of the financial security that homeownership and the American Dream provide,” said National Association of Realtors (NAR) President Kevin Sears in a statement at the time. “We commend President Biden’s commitment to an all-of-government approach to solve this problem. … Tax incentives can help close the affordable housing gap, and we are especially grateful for the President’s willingness to explore new tax measures. NAR also supports an all-of-the-above approach to this crisis—from tax incentives to zoning reforms to expanded financing.”
President Biden also announced actions to lower costs and promote housing stability for renters. The White House Blueprint for a Renters Bill of Rights lays out key proposed principles of a “fair rental market.” Biden’s plan includes several additional steps to crack down on practices he says are driving up rental costs. From the official White House statements:
- Fighting Rent Gouging: As part of the Strike Force on Unfair and Illegal Pricing announced by President Biden, the President is “calling on federal agencies to root out and stop illegal corporate behavior that hikes the prices on American families through anti-competitive, unfair, deceptive, or fraudulent business practices.”
- Cracking Down on Rental Junk Fees: Last fall, the Federal Trade Commission (FTC) proposed a rule that, if finalized as proposed, would ban misleading and hidden fees across the economy, including in housing rental agreements. Last month, the U.S. Department of Housing & Urban Development (HUD) released a summary of banned non-rent fees within their rental assistance programs. These actions build on commitments the President announced last summer from major rental housing platforms to provide customers with the total, upfront cost of rental properties on their platforms.
- Expanding Housing Choice Vouchers: The president is calling on Congress to further expand rental assistance to more than half of a million households, including by providing a voucher guarantee for low-income veterans and youth aging out of foster care.
“By announcing several proposals to enable more families to achieve homeownership or have access to suitable rental housing, the President has made it clear that housing is an urgent national priority,” said Carl Harris, Chairman of the National Association of Home Builders (NAHB). “These common-sense solutions will bend the housing cost curve, reduce housing inflation and the overall inflation rate, enable builders to boost attainable housing production, and put the economy on a firmer footing.”
The programs outlined in the State of the Union continued the Biden Administration’s focus on housing initiatives, which have recently also included a slate of proposals announced in late February.
Those included moves to bolster federal programs with a track record of producing affordable housing, boosting the supply and affordability of manufactured homes, and promoting “a more fair and transparent rental market.”
Are the Proposals on Target?
Mitria Spotser, VP and Director of Federal Policy for the Center for Responsible Lending, called the president’s proposals “a step in the right direction,” adding, “I applaud the president for acknowledging that housing and what’s going on in the housing market is something that we all need to be paying attention to.”
Spotser spotlighted the president’s tax credit initiative that would “allow middle-class individuals to get essentially $5,000 a year for two years.” She noted that this credit would, in theory, be the equivalent of being able to write down the existing interest rate by 1.5%. “If we took that 7% interest rate, that puts the interest rate closer to 5% or 5.5%, which is more feasible for people in terms of a monthly payment than some of the payments people have had to deal with as of late. I hope that we can put aside partisan politics to help the housing market and help Americans and pass some sort of incentive that would allow people to access the housing market in an affordable way.”
Jacob Channel, Senior Economist for LendingTree, told MortgagePoint that: “On the whole, the Biden administration’s proposals seem reasonable and could be more helpful than not. That said, there is certainly room for debate.”
Channel said that one example of potential unintended consequences is that the president’s proposed $10,000 tax credit for first-time homebuyers might not work exactly as intended. To achieve the desired effect, it would need to be coupled with significantly increased new home construction. While the president’s proposals also include initiatives designed to spur construction, if those do not have the desired effect, Channel notes that “it could end up making home affordability worse by boosting demand and further reducing the nation’s already too-small supply of housing.”
He added, “Indeed, the debate about whether or not tax credits designed to spur homebuying/reduce housing costs even work is a contentious one.”
Nevertheless, Channel agrees that the Biden Administration’s calls for more construction and improvements to existing housing infrastructure should ideally be a bipartisan issue.
“The single biggest hurdle standing in the way of more affordable housing in the United States is a lack of housing supply,” Channel said. “The only way prices are likely to become more manageable is if we see more housing supply hit the market.”
“When you are trying to deal with high interest rates and low supply, and you are also dealing with no incentives for buyers to put their homes on the market,” Spotser said. “Traditionally, about 40% of the people who buy a home every year are first-time homebuyers. Recently, it’s been closer to 30%. People are having a hard time being able to simply enter the market.”
However, Channel, echoing other critics of the Biden Administration’s plan, notes that spurring large-scale ramp-ups in home construction “is much easier said than done for a variety of reasons.”
Tim Rood is Founder & CEO of Impact Capitol, a real-time AI chatbot for real estate and mortgage professionals. He previously held roles at SitusAMC, First American, and Fannie Mae. Rood said that he appreciates the Biden administration’s attempts to “get their arms around the challenges for Americans to buy a home and/or afford their home,” and credited the president for prioritizing housing and homeownership issues during his term.
“Recent proposals by the Biden Administration have offered more demand-side support for prospective homeowners, and some welcomed and creative supply-side solutions, including a tax credit for some home sellers,” Rood continued. “However, demand-side subsidies in the housing space are often problematic since they have the effect of raising prices for all while only benefiting a few.”
Ed Pinto, Senior Fellow and Co-Director of the AEI Housing Center, and former EVP and Chief Credit Officer for Fannie Mae during the 1980s, also understands the challenges the government and GSEs face when trying to help guide, support, and regulate the American housing economy. When we spoke, he opened by pointing out that, “just focusing on multifamily and community development, Congress has passed, when I checked this several years ago, 41 bills that became law in 82 years. That’s one every two years. If they had been successful, we wouldn’t be having this conversation.”
Pinto brought a critical eye to a recent op-ed response piece to President Biden’s State of the Union, entitled “State of the Union—Biden’s Housing Proposals Would be Harmful, Not Helpful.” In the piece, Pinto shared his thoughts as to why many of the president’s initiatives are, in his opinion, approaching the problems incorrectly, or, at minimum, at risk of leading to unexpected consequences.
For example, in response to the president’s proposed $10,000 tax credit for middle-class first-time homebuyers, Pinto argues that the credit will “increase demand for starter homes, which are already in short supply, thereby driving up prices,” as well as being likely utilized by people who could have afforded a home without the credit, thus providing this segment of homebuyers with “additional purchasing power to bid up the price of homes.” His op-ed levels similar criticisms at both the president’s proposed down payment assistance for first-generation homeowners and the credits designed to encourage homeowners who may have remained on the sidelines due to the lock-in effect to finally put their starter homes back on the market.
Spotser, however, is optimistic about the potential impact of the president’s initiatives designed to spur more construction. “It’s those starter homes that are the type of inventory we are looking to bring into the market,” she said. “The reality is that construction has been significant over the past couple of years. It’s just that the houses that are being constructed are not the houses that are going to be affordable housing.”
She added, “What the administration is doing even in their tax credit policies is freeing up the existing affordable housing supply and allowing people to move from those starter homes.”
However, she acknowledges that it’s a complex landscape full of many competing factors. Even if homeowners are inclined to put their homes back on the market, “but you’re having to compete with extreme housing demand at a higher interest rate in whatever market you want to go to, it makes it to where people are not incented to go ahead and do the transaction.”
Pinto, however, cautions that “because it crowds out private sector development, [this type of policy has] historically created far fewer housing units than advertised. On top of that, these units are costly and often poorly targeted. The system’s beneficiaries are the various intermediaries that can navigate the program’s complexity—not low-income families.”
Pinto also notes that, historically, programs of this type have often been both costly and vulnerable to corruption and overcomplication.
The LIHTC credit is roughly designed to be about 65% of the total development costs,” said Pinto, with the remainder of the costs intended to be provided by the private sector. “The problem is, that’s never really worked that way. It’s been a stacking of one subsidy on top of another.”
For example, “In California, a LIHTC development costs about $800,000 a unit. That’s just the development cost. But at $800,000, even if the cost out of pocket to the developer is zero, which it tends to be with all these subsidies, the cost of running that development is still very expensive. They still have to subsidize the rents to make them affordable to the people that they’re supposed to be helping. And 90% of those rental subsidies come from the federal government.”
Pete Carroll, Executive and Head of Public Policy for CoreLogic, acknowledged that, if implemented, “the Biden administration proposals would go a long way toward stimulating the development or renovation of new housing, including single-family starter homes for owner-occupants.”
But there are, unsurprisingly, some significant asterisks attached to that possibility.
“Altogether, the proposals would help restore the balance of housing supply and demand, moderate the growth of home prices, and increase homeownership accessibility for low-to-moderate income and first-time homebuyers. However, while a subset of the tax credits and subsidies outlined in the proposals require congressional approval and enjoy bi-partisan support, we do not see a serious legislative effort occurring until Q2 of 2025 at the earliest.”
Carroll also noted that clients of CoreLogic had expressed one other area of concern with the proposal: the need for federal guarantees for construction loan financing. And particularly, Carroll noted, “for single-family starter homes that too often lack adequate collateral, to help scale homeownership opportunity.”
A statement from the National Multifamily Housing Council (NMHC) also found elements both to praise and to critique in Biden’s SotU outline. In particular, the NMHC gave the thumbs up to Biden’s Housing Supply Action Plan, which, it said, “demonstrates a focus on increasing housing supply, including support for expansion of the Low-Income Housing Tax Credit and the newly announced additional Federal investments in increasing housing supply.”
However, the group expressed disappointment that Biden’s administration had “chosen to focus on creating a heightened regulatory regime that will reduce consumer choice by limiting fee for service arrangements.” It cited research co-conducted by the Hoyt Advisory Services and Eigen10 Advisors, LLC, which found that the United States will need to build 4.3 million more apartments by 2035 to keep up with rental housing demand projections. At the same time, “research conducted by the National Association of Home Builders (NAHB) and NMHC found that regulations imposed by all levels of government account for an average of 40.6% of multifamily development costs.”
Rood also noted that the administration’s “pilot to reduce the instances and expenses associated with some title insurance policies is evidence of their willingness to take on sacred cows to accomplish its goals of reducing costs to consumers.” However, he also cautions that a change to title insurance requirement “certainly will not make title insurance go away, as lenders are unlikely to take added rep/warranty risks lightly.”
Spotser also noted one other pain point that needs to be addressed: “Technically, to get an FHA loan with a 3.5% down payment, you need a 580 credit score,” she explained. “The average loan being issued for FHA is well above 680, which is a very different credit tier. So, we need to be able to figure out how to responsibly provide access within the full range of creditworthy borrowers.”
What Else Needs to be Done?
Rood also noted one area he would like to see the administration address is the current record-high costs to originate a mortgage. “When I was an officer at Fannie Mae in the 2000s, we had an initiative to reduce origination costs down to $2,000 from $2,500 at that time,” Rood recalled.
“Fast-forward 20 years, and the cost to originate is over $12,000! It takes fewer labor hours to assemble an F-150 than it does to originate and close a mortgage. The high costs and low volume mean that an originator is often losing money on nearly every loan they close in this market.”
Rood added that these high origination costs also put the notion of “junk fees” into a different perspective. “I can assure you the lenders need the money, and the fees are most certainly not ‘junk.’ A review of the cost-benefit analysis of rules and regulations put in place over the last 15 years at least will likely reveal some meaningful opportunities to lower costs for everyone.”
CoreLogic’s Carroll also targeted the origination costs as a particular pain point, noting that median closing costs for low-income homebuyers have increased from roughly $3,900 in 2018 to $5,100 in 2022, amounting to a 31% increase. “Because most closing costs, particularly those the consumer cannot shop for, tend to be fixed charges, they disproportionately affect low-to-moderate income and first-time homebuyers,” Carroll added.
“The biggest roadblock standing in the way of the Biden administration’s plans is Congress,” LendingTree’s Channel said. “To say that our current Congress is dysfunctional is like saying that the ocean has at least a gallon of water in it. It’s technically true, but massively understates how difficult it will be for the Biden administration to get many of its proposals enacted into law.” He remains skeptical that many of these proposals will get much traction so long as Congress remains so intensely divided along party lines.
Carroll noted that efforts to bring relief to the housing market needed to address both supply and demand angles.
“If the administration and Congress can pass legislation that significantly stimulates production of new single-family units, particularly at lower-priced tiers, we will see more renters convert into buyers. We also expect that many otherwise mortgage-ready renters will be down payment-burdened, making down payment assistance and closing cost reductions important components to converting renters to sustainable homeowners,” Carroll explained.
Channel told MortgagePoint that any large-scale changes in the housing market will more likely be a victory by inches, with progress made and then lost as both parties try to solve the same problems, but with very different views of how to find resolutions. Nor is partisan politics the only issue standing in the way of gaining momentum in solving the problems that continue to plague the housing market.
“Construction doesn’t happen overnight, and even with backing from the federal government, homebuilding is likely to face plenty of pushback from current homeowners who want to keep the values of their properties high,” Channel said. “Overly strict zoning laws that exist at the local level are a big reason why the U.S. doesn’t have enough homes to keep up with buyer demand, and, owing to that, action from the federal government isn’t enough to fix everything wrong with the nation’s housing market. We’ve got to advocate for change from the bottom as well as the top.”
Carroll echoed Channels’s comments, reminding that this is a long game, not a short one.
“The challenge with creating new homeowners is the dearth of single-family homes available for sale. The reality is that it’s hard for home builders to develop or renovate single-family homes for low-, moderate-, and middle-income families at price points that are affordable, marketable, and adequately profitable,” Carroll said. “However, there are practical policy interventions that have proven to help home builders and their investors crack this code while ensuring that the benefits of taxpayer investments exceed the costs. Various elements of the Biden administration proposal cover many of these policies directly via tax credits for home builders and their investors or indirectly via subsidies to municipalities that implement reforms such as less restrictive zoning regulations.”
Pinto is a strong and outspoken proponent of zoning reform as a solution to the inventory shortages—in particular, revising zoning at local levels to allow for more alternatives to single-family standalone homes, such as duplexes, “granny flats,” and other multifamily options.
“If you constrain the number of units that can get built through zoning and land use requirements,” Pinto said, “you can’t possibly generate the number of units needed to equal the additional jobs and households that you’re adding. It’s as simple as that.”
Pinto cites studies where zoning revisions have shown good results in markets such as Seattle, Philadelphia, and Houston. “You can add a tremendous amount of housing by replacing one unit with two,” Pinto said. “And it would be done by the private sector, without any subsidies. Just let the market do what the market does best, which is figure out the highest and best use of a valuable asset—in this case, a lot.”
As Pinto summarized in his op-ed, “The solution is for states and localities to free the market from unduly restrictive zoning and land use restrictions that constrain supply and drive up home prices. If more states implement light-touch density, which moderately increases density and makes such development by right, they will unleash a swarm of naturally affordable small-scale development.
Spotser acknowledges that Biden’s proposals will inherently incur a cost, but she argues that some things that require money are nevertheless worth it in the big picture. “The thing I would say to critics is to remind them that housing is about 30% of the GDP in the United States. And if the housing market is not functioning, you are talking about something that is 30% of the GDP of the=homeowners into that market, the ancillary effects on the nation’s economy are significant. Homeownership is not just about the person who buys the house; it’s also about the companies that service the house. It’s also all the products, it’s Lowes, it’s Home Depot, it’s all those other things that make up this ecosystem of homeownership in the United States.”
“If we do not have a healthy housing market,” she added, “we do not have a healthy economy.”
