Lack of Affordable Housing Supply Keeps Driving Home Prices Up

Business Insider has an excellent article posted on Yahoo Finance about the current housing crisis that many local markets are facing – limited affordable housing supply.

The next housing crisis is here.

And this time the crisis is all about one thing: supply.

Following the mid-aughts housing bubble that saw homeowners across the country get themselves upside down in homes and mortgages they couldn’t ever afford to repay—a crisis that was as much about too much supply as it was about too much bad financing—the market has gone the complete other direction.

First-time homebuyers are crowded out, with Trulia’s chief economist Ralph McLaughlin writing Monday that the number of starter homes on the market has declined 43.6% in the past four years.

Homeowners who want to move from a starter home to something better can’t afford the next step. McLaughlin notes that the number of “trade-up” homes on the market is also down about 40% over the same period.

Meanwhile, mortgage lenders, despite record-low rates, are still reluctant to extend credit to less-than-superb borrowers.

And as investors look for places to earn whatever return on capital they can muster, the low end of the housing market has almost ceased to exist as the investor class has bought up homes with the plan to flip them.

On Monday, the latest report on existing-home sales showed the pace of sales in February fell 7.1% from January’s to an annualized rate of 5.08 million. Compared with last year, however, the pace of sales is still up 2.2%.

This report also showed that sales to individual investors—or buyers who intend to flip the home for a profit—accounted for 18% of existing homes sold in February, the highest share since April 2014. Almost two-thirds of these buyers paid cash.

This lack of affordable housing supply is not an accident. The Federal Reserve, US Treasury, and the biggest banks’ servicing units have done everything in their power to limit housing supply over the years in order to push home prices higher. From FASB 166 & 167 (suspension of mark-to-market accounting for mortgages held on the books of banks) to HAMP (loan modifications) that were designed to “Foam the runways for the banks” (translation: hold back foreclosures rather than dumping them onto the market in 2009-2012) rather than provide effective long-term modified loans to homeowners to Fannie Mae and Freddie Mac being government owned so they really aren’t in too big of a hurry to resolve their delinquent loans.

I have three friends in Portland who filed Chapter 7 bankruptcy in 2008, have not made a mortgage or property tax payment in eight years, and have been living in their house while their Fannie Mae loan continues to accrue default interest, force place insurance charges, and property tax bills. Thanks to government receivership and FASB 166 & 167, Fannie Mae has the luxury of pushing out the losses from my friends’ three homes as long as they want, keeping three highly desirable homes off the market, which creates less supply and keeps the upward pressure on prices. And, for the sake of my friends’ homes, Fannie Mae can eventually foreclose on the loans into a market that resembles the same price points of peak Housing Bubble 1.0 2006-20007 when my friends took out the loans in the first place.

All of the initiatives that began as a response to the financial crisis in 2008 are coming to maturity now as home prices in many locations have reached or even surpassed their previous peak.

Being involved in the mortgage business and having read nearly every book written about the housing crisis, I don’t see this trend shifting until the last of the Housing Bubble 1.0 loans have been liquidated and nearly all the future mortgage credit risk has been fully transferred from private industry onto Fannie Mae, Freddie Mac, FHA, and the VA. Essentially, the taxpayer, who will eventually suffer from the excesses of this cycle. Until that fully plays out, say by 2020, I believe we’ll see a continuation of all-cash buyers, hard money financed house flippers, or conventionally financed buyers using ultra-low mortgage rates that allow them to afford more house for less in monthly payments. This housing cycle probably has a few more years to run its course before we see downward pressure on home prices.