Budding housing crisis must be nipped now

We are in the midst of a significant and growing housing crisis, in both rental and homeownership markets. Recent reports that both new and existing home sales were down, year over year, should be a clarion call to Congress and the administration to address the coming housing crisis now.

General Motors’ recent decision to close five plants and lay of thousands of white collar workers remind us that recoveries don’t last forever. This one may be over.

{mosads}New home sales were extremely disappointing and a sign that rising interest rates and high price points are having a clear impact. When you add the fact that existing home sales adjusted for population growth are 10 times worse than the already weak numbers in that category, it’s clear that the housing recovery has hit a wall.

Why? We lost a lot of homebuilders during the Great Recession who specialized in affordable housing production and because of local and federal regulatory barriers increasing fixed costs, there’s been a premium on building more expensive homes.

Other factors include higher interest rates making homes even less affordable and a lack of adequate equity to justify a move up. Home prices have recovered enough for most people not to be under water but not enough to make moving up to a new house economically viable.

Homeownership rates remain down, especially for millennials, who while they were late to home-buying, lead all other generations in a desire to be homeowners. Rents are unaffordable for half of all Americans.

A recent Zillow study found that just 42 percent of rental listings were within financial reach for median-income U.S. households — just 16 percent for median black family income and 27 percent for the median Latino household.

Evictions continue to plague low-income families and homelessness is on the rise for the first time in many years. In fact, in Seattle, the number of unsheltered homeless has doubled in four years. Most disturbing of all, the African-American homeownership rate is no higher today than it was 50 years ago, when the Fair Housing Act was passed.

The bottom line is that we are still paying for the housing crisis 10 years later, and the lack of a coherent national housing policy guarantees that we will continue to pay for it until we get our act together.

The National Housing Conference has been developing solutions for affordable housing since 1931, and we are long overdue for a bipartisan, broad-based national housing policy. We just held a major conference on the affordable housing crisis with 200 experts from across the country.

A few of the things that can be done now:

• Expand the affordable housing tax credit, which will increase production of affordable rental units for those making less than 80 percent of area median income.
• Repeal the state and local tax increases in the tax bill; while they were very effective in creating a blue wave in Orange County, Calif. and other areas, they have also increased the cost of buying a home as well.
• End the trade war that has driven up the cost of building homes.

President Trump needs to appoint a pro-housing expert at the Federal Home Financing Agency (FHFA), Fannie Mae and Freddie Mac’s regulator, when Mel Watt’s term is up in January.

We will work with whoever gets the job, but nothing would be worse for housing than having a conservative ideologue in the driver’s seat as we are heading into a housing recession.

There are plenty of great candidates on the Trump bench for this job, like Housing and Urban Development’s Adolfo Marzol and Michael Bright or Treasury’s Craig Phillips. They understand housing markets and are unlikely to pull the rug out from under the housing economy when it’s most vulnerable.

One thing that’s not a solution is pressuring the Fed to cut rates. There’s a lot of stimulus in the economy still and doubling down on that will only make the coming recession harder and longer. The reason the Fed has so much independence is to protect it from political interference.

We lock the pilot’s door for a reason. We depend on the Fed for a soft landing and smooth takeoff. That’s more important than ever right now.

As mortgage rates continue to rise, mortgage companies are seeing refinance business dry up. Some smaller mortgage banks are closing shop, some are selling, and mortgage banks of all sizes are laying off loan officers.

The temptation of some of them will be to replace the shrinking supply of mortgages for the purchase of a home and refinance loans with cash-out refinances.

During the run-up to the mortgage crisis, a historic amount of home equity was extracted from single-family homes through cash-out refinancing. This had a direct impact on the scale and pace of mortgage defaults, making the crisis much worse than it might have been.

{mossecondads}Cash-out refinancing jumped to 81 percent of the refinance market in the third quarter, according to Freddie Mac, the highest level since 2007 and more than double the share in 2016. Some experts have been sanguine about the increase.

While the actual dollar volume of equity cashed out through the conventional channel is still below levels seen in the run up to the crisis, lenders could change that through aggressive marketing tactics. That would be a huge mistake.

Restrictions on cash-out refinancing need not be a barrier to accessing the equity in one’s home for retirement, education or even health-care emergencies. Similar equity restrictions are already a common feature of retirement accounts.

Cash-out refinancing to cover home improvements should also be exempt from any additional restrictions, since the money is reinvested in the value of the home.

One thing is certain however, we need to avoid making the mistakes of the past if we are to avoid them in the future.

David Dworkin is the president and CEO of the National Housing Conference.