Although quickly rising mortgage rates are already appearing to cool overheated housing markets, they are putting the homeownership dreams of millions of Americans even further out of reach, researchers and housing industry experts said.
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The income needed to qualify for a home has skyrocketed: The mortgage, property tax and insurance payments for a median-priced home of $340,700 cost $700 more per month in April 2022 than they did a year before. And the annual income needed to qualify for such a home is $28,000 higher in April 2022 versus last year, according to Harvard's Joint Center for Housing Studies, which analyzed data from Freddie Mac and the National Association of Realtors.
This has priced out about 4 million renters over the past year alone, said Daniel T. McCue, senior research associate at the Joint Center for Housing Studies.
"If the door is closing on affordable home ownership, it would lock in some significant inequities in housing," he said Wednesday during a webcast panel discussion about the report.
A tale of two housing markets
Economic gains made before the pandemic; financial stimulus benefits and moratoriums on foreclosures and evictions during the pandemic; and a strong job market; helped to not only keep people in their homes but also allowed other Americans - especially older Millennials and people of color - to have the financial wherewithal to become homeowners.
But in March 2022, home prices rose 20.6% year-over-year - which was the largest jump in 30 years of record-keeping, according to Joint Center for Housing Studies tabulations of CoStar and CoreLogic Case-Shiller Home Price Indices data. Rents shot up as well, especially for single-family homes that served as remote office spaces for families during the pandemic.
That caught the eye of investment firms, which snapped up moderately priced homes in booming markets to then rent out or flip for a profit. Investor holdings accounted for nearly 30% of all homes sold during the first quarter of this year, Harvard's housing studies researchers noted, citing CoreLogic data.
New construction increased as well, but the majority of those new homes sold for more than $400,000, putting them out of reach for first-time home buyers, the researchers said.
The growth in homeownership, however, has not been enough to narrow the gap of longstanding, systemic racial disparities. In early 2022, homeownership rates for Black and Hispanic households were 45.3% and 49.1%, respectively. By comparison, White households had a home ownership rate of 77%, researchers wrote, citing US Census Housing Vacancy Survey data.
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The increase in home values and record-low interest rates during the heart of the pandemic further widened the already drastic wealth gap between homeowners and renters, as well as racial inequities, according to the study.
"Folks that are trying to buy their first homes, families that are trying to transition from out of rental [housing] into something more affordable ... the market right now is not working for that demographic," said Alanna McCargo, president of Ginnie Mae, the federally owned mortgage backer.
Adding increased concern, she said, are not only the rising rates of evictions and foreclosures after pandemic-related moratoriums were lifted, but also the impact of inflation.
"We have to be very intentional that we are not leaving people behind," McCargo said.
Massive supply-demand imbalance
Eviction and foreclosure moratoriums put in place during 2020 helped ease the financial strain on many households, but some haven't been able to dig out yet, according to the Harvard study.
About 10% of households were behind on their rent or mortgage payments during the period of December 2021 to April 2022. The share of renters behind on payments was 14.5% versus 6% for homeowners, researchers found.
"Households are going to be very precariously housed, and we may even see increased homelessness as a result of that, which is already increasing in many communities," said Sarah Saadian, senior vice president of public policy for the National Low Income Housing Coalition, adding that it's already at a "crisis point."
At the center of this is a massive supply-demand imbalance, said Ryan Marshall, president and chief executive officer of Atlanta-based homebuilder PulteGroup. Marshall noted higher construction costs, supply constraints and strict land-use policies have discouraged development.
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"Existing municipalities and existing residents do not want any new neighbors," he said. "They've got their slice of paradise, and they don't want any new friends, and it's the sad reality of the world that we live in today."
The Joint Center for Housing Studies researchers noted that one potential solution could come from the Biden Administration's Housing Supply Action Plan, which seeks to increase affordable housing options through the funding of state and local reforms, adding requirements for federally owned housing to go to owner-occupants, and helping the private sector address supply chain challenges. Another option, they noted, are state-based efforts such as density-promoting land use changes in states such as California and Oregon.
While the Federal Reserve seeks to soften demand for homes and curb inflation by raising rates, it can do very little to address ongoing constraints on the number of available homes for sale, Fed chairman Jerome Powell said Wednesday in testimony before the Senate Banking Committee. Still, he cautioned, rising mortgage rates could ultimately price people out of homeownership.
The Federal Reserve does not set the interest rates borrowers pay on mortgages directly, but its actions influence them. Mortgage rates tend to track 10-year US Treasury bonds. But mortgage rates are indirectly impacted by the Fed's actions on inflation. As investors see or anticipate rate hikes, they often sell government bonds, which sends yields higher and with it, mortgage rates.
Should monetary policy tighten and spur an economic downturn, that presents an even greater concern, Harvard researchers wrote.
"With so many households financially stressed by high housing costs, a serious downturn could transform the recent uptick in housing insecurity into a wave," they wrote.
CNN's Matt Egan and Anna Bahney contributed to this report.
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