More barriers to home ownership

by Zain Jaffer

In a testimony before the US House Committee on Financial Services Subcommittee on Housing and Insurance last May 2023, National Association of Realtors (NAR) President Kenny Parcell said potential homebuyers face a lack of affordability and supply in the current market in pursuit of the American Dream.

There may be some exceptions in certain areas and situations. But in general, Parcell is correct. Our observations and that of others in the industry support what he sees. Recent data from the NAR said that existing-home sales dropped 3.4% in April 2023 to a seasonally adjusted annual rate of 4.28 million. Sales fell 23.2% from last year.

If there are houses for sale, they may not be sold anyway because home sellers have a target price in mind, and with a high mortgage rate for new houses, they are also hesitant to sell their current home, even if they really want to move out.

Plus the situation with the banks and the debt limit also dissuades many from proceeding with major asset sales or purchases. There are simply too many unknowns at the moment. Most people just want to sit tight, and just keep their money in short term treasuries that yield around 5% as of May 2023.

Parcell, a Utah based realtor said, "The average American homebuyer faces more barriers to achieving homeownership than ever before. Uncertainty in the U.S. economy, rising inflation, increasing mortgage rates, and lack of affordable inventory continue to devastate buyer confidence.”

Most real estate industry observers will agree. U.S. home mortgage applications have dropped to a 28-year-low as rates rose. "First-time homebuyers historically made up around 40% of the market, but that has dropped to 26%, the lowest on record," Parcell said. He added that “the best way to build wealth is through real estate."

“But the biggest impediment remains the lack of housing affordability and supply," Parcell testified. "Without addressing this issue, housing will remain out of reach for many.”

He added that possible solutions to supply include incentives to transfer commercial office buildings into residential units, mobilizing private funds to revitalize affordable homes, or incentivizing more owners to sell their homes by increasing the maximum amount of capital gains a homeowner can exclude on the sale of a principal residence."

You can’t really blame people for delaying their home purchase dreams. Those who are holding pre Fed hike long term mortgages are paying around 3% a year, while if you sign up now you’ll be paying around 7-8% per annum over the next few years. That’s more than double the previous rate.

Plus the banks are also picky with who they want to give loans to. The overnight Fed funds rate is too high, and many have depressed asset and stock prices. Most banks these days will want to ensure a very very low probability of default, especially with a potential recession being forecast by many economists.

Of course each geography and situation is different. For some, now may be the best time for them to buy a house especially if it might quickly disappear from the market. But for many, it is not.

Owning a home is part of the great American dream. The more we can do to make home ownership affordable, the better our country becomes. It’s not just about the homeowner or buyer. It’s also the business and employment it creates for banks, realtors, developers, contractors, suppliers, and others. Plus the value to your family is priceless. A home is where memories are made.

When we see that the number of home buyers has been cut in half, that is definitely a major source of concern. Owning a home for most people is their most valuable asset and source of net worth. It’s also a major American industry that indicates our national economic health.