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The mainstream press has a lot to occupy itself with as we head into the summer of 2022. The war in Ukraine, inflation and interest rates, and the lingering pandemic jump to mind. Turning to our industry, the mainstream press is continually focused on “housing.” Housing starts, housing stock, housing inventory, luxury house prices, the list goes on and on. What is often forgotten, however, is that for borrowers, most of the focus is on homes, not houses. Purchasing some land and a home in which a couple could raise a family has been part of the American Dream for hundreds of years. Is it still valid? And given that June is National Homeownership Month, what should we be thinking about?
The dictionary defines the “American Dream” as the ideal by which equality of opportunity is available to any American, allowing the highest aspirations and goals to be achieved. The description of the ideal was coined by writer and historian James Truslow Adams in his book Epic of America, and it still rings true: “That dream of a land in which life should be better and richer and fuller for everyone, with opportunity for each according to ability or achievement.” It is not confined to a home, but that is the general assumption.
“Home ownership” is a lofty term. It is not hindered by mortgage rates, loan programs, or down payment amounts. Instead, it is influenced by where one’s heart is, where one’s extended family is, a job is, where friends are. Ask a group of people at a conference dinner table why they live where they live, and the answers might surprise you.
A common refrain, given the unforeseen price appreciation through 2020, 2021, and into 2022, and the rise in rates, is that affordability has taken a hit. It certainly has. Since the financial crisis, many people, especially young people, have been content to rent, saving money for their own home. In the last few years many people in their late 20s and 30s “took the plunge,” financing their home either through a lender, or with the help of their parents, often in a less expensive location. Those who didn’t, continue to rent and see those rents increase.
Rent prices are going up not only in city centers, but also across the nation. Being priced out of a community because you can’t afford to rent, let alone buy, is not only crushing emotionally but means that there are few long-term prospects for saving enough money to buy a home there. Lenders report that the rent increases are helping their loan officers reason with clients who are on the fence about buying a home. After all, having a fixed-rate mortgage means that there won’t be a landlord raising your rent every year.
Certainly, monthly cash flow matters in the decision to move from renting to owning, right? There are other reasons, of course. Living near one’s family, in the right school district, the desire for stability, and pride of ownership all matter. And financially there is appreciation to consider, as well as equity, forced savings, and tax benefits. Interest is still deductible for most mortgagors.
What’s stopping people from purchasing homes? Affordability has truly taken a hit. As noted above, interest rates have gone up, including mortgage rates, as have prices. Nearly every “price point” has seen double digit appreciation since the pandemic. Lenders report that some segment of the population who do not own their homes indicate they prefer to keep their money in cash as they are nervous about a possible recession in the future or believe that home prices will actually drop.
Financing a home, despite lenders attempting to “remove the friction” during the process, is not easy. Aside from the down payment, qualifying for a rate that makes monthly payments manageable, and then going through the mortgage origination process with all the documents and phone calls, is enough to scare off some potential qualified borrowers. Renting is easy, if something breaks the tenant calls either the property manager, the landlord, or the home warranty company and the problem is fixed.
But rent is going up, too. The Oakland, California City Council has given tenants of rent-controlled units some relief by capping rent increases — landlords can raise rents a maximum of 3 percent beginning July 1 instead of 6.7 percent which was allowed by the current ordinance. In Manhattan, a notably high-cost-of-living location, rents have increased 25 percent in one year, taking the typical monthly cost to a record $4,000. The same article reports that, in Brooklyn, the median rental price was $3,250 in May – up 18% from the previous year.
Lenders and vendors everywhere are rising to the challenges of higher rates and higher home prices forcing a drop in residential applications week after week. Lenders have gently shifted their collective focus away from strictly 30- or 15-year Freddie Mac, Fannie Mae, FHA, and VA products. Housing Finance Authority (aka, bond) programs have a renewed interest. Given the equity in homes, and the aging Baby Boomers, reverse mortgage divisions have sprung up. Non-Agency, most notably non-QM, offerings have grown, as have intermediate adjustable rate (3-1, 5-1, 7-1) and buydown programs.
The mortgage process is more complex than filling out a rental application. People, especially millennials, love convenience (e.g., delivery food apps, next-day delivery, free returns, etc.), and the mortgage process is not always convenient and is often filled with questions and delays. Lenders have continued to streamline the user experience, but the process of originating a mortgage requires certain documents and is subject to a whole host of rules and regulations that can bog down many borrowers. Though this would only seem a minor impediment to the American Dream of homeownership – if it really was someone’s dream.
The “American Dream” means different things to different people but built into the ideal is always the belief that anyone, regardless of where they were born or what class they were born into, can live in a society where upward mobility is possible and that a person can attain their own version of success through sacrifice, risk-taking, and hard work. This could mean finding a job, being accepted for who you are, or being given equal opportunity. Homeownership, and having a place you can call your own where you can rest your head every night knowing your hard work led to this, seems inextricably linked to the American Dream. The symbolism of owning a house will never be lost on the people in America, and this should not be forgotten by loan officers working with borrowers of all types.
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