About the author: Priscilla Almodovar is chief executive officer of Fannie Mae, and serves on its board of directors. She is a board member of Realty Income, a real estate investment trust.
A brightening economic outlook and the potential for mortgage-rate reductions have improved the prospects for the U.S. housing market in 2024. But the painful truth remains that many, especially first-time buyers, won’t be able to afford even modest homes thanks to a simple fact: We don’t have enough housing.
The near-term picture for housing is looking up. Inflation is down and many economists have backed away from recession predictions. (
Fannie Mae’s
economists forecast 1.1% growth in 2024.) Mortgage rates have already come down from their highs of nearly 8% and are expected to fall below 6% by year end. That will boost consumer and homebuilder optimism and possibly thaw home sales and mortgage activity. To be sure, there are ongoing risks to the economy, including a softening of the labor market, embers of inflation, and geopolitical uncertainty. But overall, housing may be starting to return to healthier conditions.
Still, affordability remains the persistent headwind. The median existing home costs nearly $400,000 today, a price that families earning the median household income of roughly $75,000 would struggle to afford. Overall, home prices shot up 7.1% last year. That follows a long period when housing prices rose faster than wages. From 2010 to 2022, home prices surged around 74% while incomes rose only about 54%. Many renters spend half their paychecks for their units, when over 30% is considered cost-burdened.
Falling mortgage rates will be welcome for many. But even 5% mortgage rates would swamp the 3% Covid-era rates and median 4% range since 2010, soaking up money that could be used for car payments or groceries.
Why are housing costs so inflated? It’s mostly Econ 101: High demand confronting low supply, thanks to our nation’s persistent underinvestment in housing relative to our population.
On the demand side, 65 million Gen Xers are now in their peak homebuying or refinancing years. Close behind are 72 million Millennials and 69 million members of Gen Z who are entering the housing market. Together, these newer generations surpass the 68 million Boomers. Despite these challenges, surveys show that new generations continue to cherish the chance to own a home. Reports of the death of the American dream of homeownership are greatly exaggerated.
Then look at housing supply. New home construction remains historically low. More than a decade of underbuilding followed the 2008 housing meltdown. Homebuilders cite the “five Ls” stifling construction—labor, lots, lending, lumber, and law. And many current homeowners are rate-locked in place with mortgage rates well below the current market, not wanting to sell their homes and trade low mortgage rates for higher ones. In total, Fannie Mae estimates that as a nation we are approximately four million housing units short given our current population.
Even as mortgage rates decline and potentially unleash new buying and selling, the persistent housing shortage threatens to forestall a return to a healthy housing market for all. Only building or preserving more homes will have a real effect on home prices and rents.
What can the housing sector do?
On the demand side, Fannie Mae and others are harnessing data-driven tech and AI to identify on-time rent payments and steady income from nontraditional jobs, helping more borrowers become eligible for affordable mortgages. More homebuyer education and special purpose credit programs are helping borrowers qualify for down payments as low as 3% and reducing closing costs and rent deposits. Plus, AI is being used to detect potential bias in appraisals, a persistent barrier for many.
Initiatives like these can make housing finance fairer for everyone. But growing the universe of creditworthy homebuyers could actually make affordability worse unless there is more supply.
Like many intractable problems, the solution demands new ideas and collaboration by everyone in the housing ecosphere. And while our supply problem is national, the solutions are likely to be local, as shown by a range of green shoots in communities across the country:
- States and municipalities facing a housing crisis and making affordable housing a top priority are teaming with investors, builders, and lenders to ease the way for more housing development.
- Local zoning reforms in the works are encouraging more housing density near transportation and job hubs, especially in urban and communities striving to be more walkable.
- Regulatory barriers—often outdated and with shades of redlining bias—are being removed, scaled back or streamlined to allow for more manufactured homes, accessory dwelling units on a homeowner’s property, and smaller homes.
- Calls are going out to expand and strengthen the federal low-income housing tax credits that are proven to attract more private investment and public-private-nonprofit partnerships to build more affordable housing.
- Converting vacant office buildings to housing is complicated but being explored by many cities.
The private, public, and nonprofit sectors all have a stake in a healthy housing market that serves all. It will take all of us pitching in to build the homes we need to normalize our housing market and extend the American Dream for new generations.
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