Joel Griffith, Tribune press service
With so much attention focused on soaring gas and grocery prices, we can almost ignore the fact that we are also in the midst of an affordable housing crisis. The question is, why? Spanning the pandemic era from February 2020 to May 2022, house prices soared 43.5%. Over the past 12 months, house prices have risen 19.7%, while inflation-adjusted U.S. home prices are now 6.7% above record highs of the 2006 bubble.
House prices are increasing much more than the growth in family income. The median house price-to-income ratio now stands at over 8.1, well above the levels well below 5.0 recorded from 1980 to 2000. The mortgage repayment-to-income ratio reached 42% in May, tied with the highest level since the index’s inception in 2006. The mortgage payment on a median-priced home with a 20% down payment rose from less than $1,300 to more than $2,000 during last year alone, as interest rates and house prices jumped – a whopping 56% increase.
Median apartment rental costs, meanwhile, jumped 12% last year. Because leases are often renewed each year, data from the Bureau of Labor Statistics’ Consumer Price Index does not yet fully reflect this increase. Since March 2020, many cities have seen rent increases well over 30%. So what is to blame for this price spike? Politicians are the scapegoats for “institutional landlords” and other investors in rental properties. But the evidence does not confirm this. According to mortgage giant Freddie Mac, “the overall investor share of home sales stands at 27.6% in December 2021, which is only slightly higher than 26.7% in 2019.”
Large investors (more than 10 homes) account for only 6% of all home purchases. The proportion of home sales to investors is actually lower today than it was in 2006. CoreLogic reports that from 1999 to 2018, “mom and pop” investors actually accounted for a growing share of homes purchased compared to investors in capital investment. Although the share of sales to institutional investors (pension funds, insurance companies, banks) and iBuyers (large corporate buyers who remodel and flip often) has fallen from less than 2% in 2018 to 4% of home sales since 2021 – this is still only a small part of all rental homes purchased.
Institutional investors own just two in every 1,000 residential real estate properties (0.21%) and only 1% of all single-family rental units (SFRs) nationally. Over the past five years, the proportion of rental units in total housing has declined.
Far from leading the surge in house prices, institutional investors and retail investors are mitigating the shortage of affordable housing. And by often paying below list price — 29.4% less, according to a recent RealtyTrac report — institutional investors can actually offset home price appreciation. So who are the main culprits? Government mortgage subsidies, Federal Reserve and local regulations.
Government Sponsored Enterprises (GSEs) – namely Fannie Mae and Freddie Mac – continue to dominate the mortgage market. Investors who buy GSE bonds and mortgage-backed securities (MBS) ultimately provide funds for people to finance homes, and these bondholders and MBS investors have implicit government support. About 90% of GSE’s volume is currently spent on refinances, investor purchases, low loan-to-value loans and more expensive homes purchased by higher income earners. Government-subsidized GSEs allow borrowers to take out larger loans and stimulate housing demand, leading to higher housing prices and increased risk to taxpayers.
Since March 2020, the Federal Reserve has lowered mortgage interest rates and fueled rising housing costs by buying $1.3 trillion worth of MBS from Fannie Mae, Freddie Mac and Ginnie Mae. The $2.7 trillion the Federal Reserve now holds is nearly double March 2020 levels. The artificial increase in the amount of capital available to the residential mortgage market and the distortion in interest rates have exacerbated the affordability of houses.
At the local level, strict zoning restrictions, density limitations, and aggressive environmental regulations limit the supply of housing while increasing construction costs. Regulations often account for more than 30% of rental housing construction costs. Rent control makes the problem even worse by discouraging new construction, reducing the incentive for landlords to spend on maintenance and renovation, and reducing the future supply of housing. New construction over the past decade remains well below that of the decade before the previous housing price bubble, in part because of these restrictions.
Blaming real estate investors for the resulting misery can score political points. But demagoguery does nothing to mitigate it. Lawmakers can begin to restore this foundation of the American dream by removing federal subsidies from the housing market, limiting the power of the Federal Reserve to purchase unlimited amounts of mortgages, and removing artificial barriers to housing supply. erected by local leaders. It’s time to stop real estate prices from skyrocketing.