Real Estate

Lawmakers, Economists Worry Home Price Growth Will ‘Choke Off’ Buyers

Economists told Politico the yearslong imbalance of demand and supply will come to a head this year as first-time buyers give up on homeownership.

Although we’re almost a decade removed from the Great Recession, the fears from that time still linger on in the minds of economists, housing experts and everyday Americans who remember the wave of foreclosures that ruined the financial futures of millions. Since then, people have been looking for the signs of another housing bubble — but lawmakers say something worse is coming down the pipeline.

Sen. Sherrod Brown

“The dream of homeownership is out of reach for so many working people,” Senate Banking Chair Sherrod Brown (D-Ohio) told Politico on Monday. “Rising home prices and flat wages means that many families, especially families of color, may never be able to afford their first home.”

After taking the helm of the U.S. Senate Committee on Banking, Housing, and Urban Affairs in February, Sen. Brown released an impassioned statement about his goals for the committee, which he said has “mostly looked out for Wall Street and the nation’s largest banks.”

Instead, Brown said, the committee must focus on their responsibility to provide equal housing opportunities.

“We know several things about housing: that without affordable homes in safe neighborhoods, people don’t live as long, their medical care is inadequate, their children attend struggling schools, they don’t have nearby grocery stores with nutritious food options,” Brown wrote. “In short, housing is the gateway to opportunity, and to building a middle-class life, and too many Americans are locked out of it.”

“This committee will focus on housing, perhaps more than the Committee ever has, and I’m thrilled to work with my fellow Clevelander to do that,” he added in reference to the incoming U.S. Department of Housing and Urban Development Secretary Marcia Fudge. “Our financial system should be a public good; it already is for big banks. We should make it so for everybody else.”

Despite initial expectations, the housing market has thrived during the pandemic, with home prices and home sales bucking historical trends and staying robust well into the fall and winter months. According to the National Association of Realtors’ January market reports, existing-home and pending-home sales both grew by double-digits (23.7 percent vs 13 percent) as home prices grew 14 percent year-over-year and supply dropped to 1.9 months.

Lawrence Yun

In a video explainer, NAR Chief Economist Lawrence Yun said January’s market trends revealed “worrying signs” for first-time homebuyers who were being locked out of the housing market due to rising home prices and bidding wars that led to record levels of homes being sold above asking price.

Yun expounded on his fears in the Politico article, with him saying current home price trends will “choke off first-time buyers,” which are primarily millennials, minorities or lower-income Americans.

“One wonders what is the end game, how does this play out given the heated market conditions of too many buyers, multiple offers?” he said. “As prices simply outpace people’s income by a large margin, people won’t qualify to get a mortgage.”

Yun said the trend of historically low-interest rates are coming to a close, as evidenced by 30-year, fixed mortgage rates finally surpassing 3 percent for the first time since July 2020. Yun and Mortgage Bankers Association Chief Economist Mike Fratantoni said first-time buyers are already struggling to meet banks’ tightened standards and the road to homeownership won’t get any easier as rates creep back up.

Mike Frantantoni

“Right now I wouldn’t describe it as a bubble, but that doesn’t make it less concerning,” Fratantoni told Politico. “With home prices rising at 3 times the rate of income growth, that means we’re going to outrun the buyers out there.”

Frantantoni said there’s not much time before first-time buyers’ purchasing hopes are dashed, with him predicting “we could continue at this rate for a couple of quarters before we sort of hit that wall.”

Beyond rising home prices and bidding wars, experts said first-time buyers are facing competition from buyers with deep pockets who are moving to affordable secondary markets thanks to the rise of remote working. Previous reports revealed rising prices and competition are pushing millennials to give up on homeownership or adopt risky homebuying methods, such as buying a home sight-unseen, to get their foot in the door.

Daryl Fairweather

Daryl Fairweather

“I think we’ve only seen the tip of the iceberg when it comes to migration,” Redfin Chief Economist Daryl Fairweather said of the opportunities and challenges of migration trends during the pandemic. “There are going to be more people who want to move once they get more clarity on what post-pandemic life will look like.”

The Biden Administration is working feverishly to solve the affordability crisis and improve homeownership rates among millennials, minorities and lower-income communities, with the president pitching ambitious housing policies that include $15,000 first-time homebuyer tax credits, a $640B budget over the next 10 years to dramatically increase the nation’s housing supply, and extending eviction and foreclosure protections.

“We will work to restore power to the Consumer Financial Protection Bureau, to fight for every American who does not have a corporate lobbyist,” Brown said. “Americans have had enough of the nation’s largest banks setting the agenda for this committee, and drowning out the voices of workers and their families.”

“We will work for everyone.”

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