Housing Affordability: U.S. Is the Envy Of the Developed World
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.