True, the lowest mortgage rates in more than 40 years have helped lift the homeownership rate to record highs and dampened some of the impact of blistering home price growth on housing affordability. Also true, the same slide in interest rates has led to a wave of refinancing that has pumped more than $200 billion back into the economy over the past two years alone. And true, heavy refinance activity and record levels of home building and remodeling have propped up the struggling economy. Seen from this perspective, housing had the best year on record in 2001 despite the recession, only to be topped again in 2002.
But dig deeper and it becomes apparent that many of the old housing problems persist while new ones are emerging. Some of the signs that housing problems are advancing rather than retreating have been more extensively covered in the press than others. As part of the coverage of the homeownership boom, the press has rightfully drawn attention to foreclosure rates, which stand at record highs; the glut of foreclosed homes on the market in some low-income communities; the growth in predatory lending; and mounting concerns that house price bubbles ripe for bursting have formed in some areas.
However, the corrosive effect of rising home prices and rents on housing affordability and homelessness has received less attention from the press. This is the housing story that is most worrisome, persistent and deserving of greater attention.
Although rising property values benefit existing homeowners, they make it harder for first-time buyers. Unless they can come up with the additional money to cover the higher down payment, they must take out larger loans. Even the decline in interest rates has not been sufficient to make up for the added costs of servicing a larger loan on a pricier home. Lower income borrowers are therefore putting less money down relative to the value of the homes they are buying and spending more to service their debt.
Complicating matters further, a growing share of low-income and particularly minority low-income borrowers are taking out loans that carry higher “subprime” interest rates. Indeed, while the subprime share of home purchase loans in 2001 was 3.8 percent in high-income predominately white areas, it was 7.5 percent in low-income predominantly white areas and 13.5 percent in low-income predominantly minority areas. And the subprime lending share of refinances and its concentration in lower income and minority communities was even greater.
With the combination of incomes of the bottom income quintile falling since the recession began and elevated home prices, property taxes, subprime mortgage shares and low down payment shares, it is no surprise that the number of homeowners spending more than half their income on housing was up significantly between 1997 and 2001. Nor is it a surprise that the largest increases in homeowners with severe cost burdens are among those in the bottom and lower-middle income quintiles. Yet, it is among these quintiles that subprime shares and shares of households living on fixed incomes are higher.
Meanwhile, the fact that rents nationally have reached record levels has largely escaped notice. Record high rents have meant that the number of renters with severe cost burdens has barely eased since 1997 despite unusually rapid income growth among renters, leading up to the 2001 recession, and the recent expansion of the number of households receiving federal housing subsidies. As the National Low Income Housing Coalition has documented, for many years there has not been a single county in the country where a minimum wage job is sufficient to rent even a modest one-bedroom apartment by federal standards. Indeed, it takes several times the minimum wage to afford a modest rental in many areas.
Rental housing has become so expensive that higher income renters are increasingly occupying homes that are most affordable to renters in the bottom income quintile. In 2001, there were 2 million fewer units affordable to renters with household incomes of $17,500 (the upper bound of the lowest income quintile) than there were renters with incomes at that level or lower. Of the 7.9 million housing units in this range, fully 2.7 million were occupied by higher income households.
Housing affordability problems remain widespread and persistent for two reasons. First, the economy generates millions of jobs that do not pay enough to cover escalating housing costs. Second, governments have elected to fill the gap between what households can reasonably afford and the actual costs of their housing for only a fraction of the neediest. Only about one-third of renter households in the bottom income quintile receive housing assistance, and an even smaller fraction of owner households in this income quintile do so. Yet households in the bottom income quintile make up the lion’s share of households with severe cost burdens and clearly have the least left over to meet other needs if forced to spend half their incomes on housing.
Long-term prospects for easing housing affordability problems, absent a significant increase in government assistance, are therefore grim. Even the longest period of economic growth on record that ended in 2001 and the lowest interest rates in a generation have been insufficient to reduce the total number of cost-burdened households.
Indeed, the incomes of the bottom income quintile, and even of the lower-middle and middle quintiles for that matter, have barely budged in inflation-adjusted terms over the last 25 years.
Home prices and rents, on the other hand, have grown ahead of general inflation. Making matters worse, the composition of homes for sale and rent on the market has been inexorably shifting towards more expensive homes. It has grown increasingly difficult for developers to get local communities to consent to smaller homes built at greater densities. As development spreads to the fringes of metropolitan areas, many communities that had no or limited zoning requirements are imposing large minimum lot-size requirements and minimum unit square footage requirements. Thus, the nation has been losing lower cost, smaller units on smaller lots and replacing them with higher cost, larger units on larger lots. Land costs have also increased because the supply of land in many markets is constrained by regulatory restrictions on development. Restrictive zoning and subdivision rules show few signs of abating, heralding a continuation of this trend.
The net result is that it is harder and harder to find affordable housing. Indeed, looking back to 1985, the growth in rents has outstripped income growth at all points in income and rent distributions. While business and building cycles may produce temporary deviations from the long-term trend, the loss of affordable housing continues.
We are facing a world in which housing problems are more likely to get worse, not better. Interest rates may fall yet further, but at some point they will rebound. Furthermore, as the baby boom reaches retirement, the number of households living on fixed incomes will increase. For many of them, even modest rent or property tax increases will spell significant reductions in housing affordability. And while greater efforts will be made to ensure that those who get subprime loans could not have qualified for prime loans, larger shares of borrowers who once would have qualified for a lower cost prime loan will be reclassified into “near prime” loans, boosting debt service costs relative to prime loans they would have gotten in the past. Finally, the supply of low-cost homes is likely to dwindle further.
The recession and weak recovery have taken an undeniable toll on many households, and the long-range outlook is for mounting housing affordability problems. The ill effects of these problems are coming to light. Unaffordable housing causes frequent and disruptive moves that reduce the educational attainment of children, lowers the chances of successfully making the transition from welfare to work and leads to homelessness and near homelessness for individuals and families whose primary problem is that they are working and poor.
We are a nation in which the rising tide has lifted some boats far more than others but has lifted housing costs for all. Even during the last decade when the nation prospered, incomes and wealth surged far more for those in the upper income quintiles than for those in the bottom quintiles. Home prices rose faster than incomes and, had it not been for overbuilding in the 1980s that held down rent increases for much of the 1990s, rents would likely have risen dramatically as well. Unless and until we confront these realities and work to address them, housing problems will be with us for a long time to come whether they are the subject of media attention or not.