America's Housing Problem: Buying And Renting Are Both Unaffordable

In Q1, the average down payment on single family homes, condos, and townhomes fell to just 14.8% — the lowest level since Q1 2012. 

As discussed here on Sunday, this is the inevitable result of a move by FHFA to lower the minimum down payment on loans backed by Fannie and Freddie to 3% from 5%. This had the knock-on effect of prompting FHA to cut premiums in order to retain market share. The idea, of course, is to make the homeownership dream a reality for as many Americans as possible irrespective of whether or not they can actually afford their mortgage payments. After all, “it’s only right.” 

As it turns out, the FHFA’s best efforts at resurrecting the same type of underwriting standards which precipitated the housing bubble haven’t been enough to transform what has become a nation of renters back into a nation of owners. Leaving aside — for now anyway — the issue of whether the homeownership rates that persisted pre-crisis were realistic, the factors impeding new home buying in America will be familiar to those who frequent these pages: student debt and lackluster wage growth. Meanwhile, rising rents are squeezing renters, making it even more difficult to scrape together enough for a down payment. WSJ has more:

Last decade’s housing crisis has given way to a new one in which many families lack the incomes or savings needed to buy homes, creating a surge of renters and a shortage of affordable housing.


The U.S. homeownership rate is now below where it stood 20 years ago when President Bill Clinton launched a national campaign to encourage more Americans to buy homes. Conventional wisdom says the rate, now at 63.7%, is leveling off to where it was for decades before the housing-market peak.


But this is probably wrong, according to research from the Urban Institute, which predicts homeownership will continue to slip for at least the next 15 years.


Demographics tell the story. The Urban Institute researchers predict that more than 3 in 4 new households this decade, and 7 of 8 in the next, will be formed by minorities. These new households—nearly half of which will be Hispanic—have lower incomes, less wealth and lower homeownership rates than the U.S. average..


Fewer than half of new households formed this decade and next will actually own homes. By contrast, almost three-quarters of new households in the 1990s became homeowners. The downtrend would push the homeownership rate below 62% in 2020, and it would hold the rate near 61% in 2030, below the lowest level since records began in 1965.


The declines reflect a surge of new renter households, which is boosting rents. Together with tougher mortgage-qualification rules, this will leave households stuck between homes they can’t qualify to purchase and rentals they can’t afford, says Ron Terwilliger, who spent two decades running Trammell Crow Residential, one of the nation’s largest apartment developers..


A related concern is that qualified households will be unable to move from renting to owning as housing-cost burdens, slow wage growth and student debt make it harder to cobble together even a modest down payment.


“America is blissfully unaware of this,” says Lewis Ranieri, the financier who co-invented the mortgage-backed security, which allowed large numbers of baby boomers to become homeowners beginning in the 1980s. “We’re rapidly running to a crisis in less than 10 years.”


In other words, between Fannie, Freddie, the Fed, and Wall Street's securitization machine, the US created a bubble which drove the homeownership rate to levels not commensurate with economic realities (i.e. incomes, FICOs, etc). Invariably, the bubble burst, turning a nation of homeowners to a nation of renters and demand for rentals has naturally driven up rents.

Meanwhile, Fed policy has failed to boost aggregate demand and in turn, wage growth remains in the doldrums for the vast majority of workers...

...while new graduates are unable to buy homes because 1) the "strong" jobs market is a BLS fabrication, and 2) they are weighed down by record student debt...

...and homes purchased by flippers are increasingly being sold not to new occupants, but to landlords...

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What the above suggests is that for many Americans, buying is out of the question and renting is becoming increasingly unaffordable as the entire household formation "upside case" is now collapsing on itself, something we've discussed on a number of occasions. Recall the rise in "parental co-residence rates":

Note that this situation has the potential to become self-fullfilling. That is, as homeownership becomes increasingly unrealistic, demand for rentals will only increase, driving further increases in the cost of rental housing. The question then becomes this: what happens when a family that can't afford a down payment can no longer afford to pay the rent?