Housing Affordability Crisis 2022?

In the past few years, the term 'Housing Affordability’ has been commonly used, to sum up the problem of housing difficulty across the globe. Affordable housing stock has been gradually declining for the middle and lower-class people in various countries like India, the USA, Australia, Britain, etc. Even in this pandemic, the housing market has slowed down. Nevertheless, buying a house has not become affordable.

But how exactly did this problem start? Let's try to understand.

A Trip to The Past

In the 1950s, people started moving out of the cities and looking for homes in the suburbs for the first time since the industrial revolution. Housing was quite affordable in those days, even after high interest rates as the household incomes had increased quite impressively. During 1950–65, inflation was never a concern. Although the 30-year mortgages had interest rates between 4.5–5.5% which is approximately the same as today or even higher, housing affordability was way more than it is today. As it was easier to buy a house, thus more and more people were buying it. Commute was made easy between the city and suburbs due to the presence of at least one vehicle in every household. This resulted in an increase in demand for houses in the suburbs.

According to the standard mortgage rules, people must not spend more than 30% of their income on mortgages, insurance, and property taxes. But even till the 1970s, these three stated were usually less than 30% of the total revenue. It was because more and more houses were built, which was more than the demand. Till this time, nobody saw it as an asset. But the whole perspective changed by 1980s.

Road To Damascus

This time, the boom spread like wildfires in many nations, primarily English-speaking countries like the USA, UK, and Australia. People once again started to move near the cities. This was because of the severe recession in the early 1980s, which made everybody face situations like significant growth in the service sector and increased consumer expenditure. Furthermore, it resulted in tragic outcomes like large-scale default, collapsing financial institutions, the forceful intervention of the governments and regulatory institutions, etc. The greediness of developers brought us to our present-day situation.

The same type of situation rose in 2008 so let us now move forward to 2008 to understand what happened then.

The Darkest Hours in the Tale of Housing

2008 was the year of the infamous Subprime Mortgage crisis, more commonly known as the great recession. Ben Bernanke, formal chair of the United States federal reserve, said that it could have been as severe as the 1930s great depression having catastrophic repercussions.

So, let us understand what circumstances led to this global financial disaster.

What happened?

In the 2000s, investors worldwide started investing in the housing market in the form of mortgage-backed securities(MBS), which were essentially a bunch of mortgages bundled together and sold by the banks. At the same time, Credit rating agencies gave many of these MBS AAA ratings, the highest possible rating implying the creditworthiness of these securities. This led to an increase in demand for these securities, and to try and keep up with this demand, banks started to give loans to people with poor credit history, called subprime mortgages.

In desperation, certain agencies even started using predatory lending practices wherein they gave loans without verifying the person's credit history, with payments that they could afford initially but began to get out of hand quickly. Traders also started selling CDOs(collateralized debt obligations), which are complex financial products containing various assets and loans. In this case, they were composed of hazardous loans. As a result of these new relaxed lending requirements, the house prices grew higher, which ultimately made these MBS and CDOs look like a good investment, right?

Actually, NO.

All this resulted in the creation of a housing bubble, meaning people couldn't keep up with the mortgage payments for their costly houses. As borrowers started defaulting, i.e., not making the payments on time, more and more houses returned to the market for sale. Eventually, the bubble burst as supply increased and housing demand fell, so the prices started to decrease. Some people even had mortgages worth more than their house's actual value and began to default on their payments. As this happened, the big financial institutions stopped buying subprime mortgages, and as a result, subprime lenders were left with default loans. Several significant lenders declared bankruptcy by the end of 2007.

Initially, financial insurance corporations like AIG had sold what are called CDS(credit default swaps), which was essentially an unregulated form of insurance against mortgage-backed securities, which meant that in case the borrower defaulted, AIG would give the lender the entire amount back. But since these default swaps weren't regulated and the number of defaults started to rise, they didn't have the money to pay back the lenders. Not only this, these CDSs were turned into other forms of securities, which essentially allowed traders to bet whether the value of these MBS would rise or fall.

The Aftermath

All of these led to the creation of a complicated web of assets and liabilities, so when things started to go wrong, this entire system collapsed. Some major financial players like the Lehman Brothers had to declare bankruptcy. Others had to go through mergers or be bailed out by the government. So as expected, panic set in, the stock market crashed, and the US economy was in a disastrous recession. Eventually, the United States responded to the crisis by passing the American Recovery and Reinvestment Act of 2009, which used an expansionary monetary policy, facilitated bank bailouts and mergers, and worked towards stimulating economic growth. To prevent future financial fallouts, The Dodd-Frank Wall Street Reform and Consumer Protection Act was implemented, which targeted the sectors of the financial system that were believed to have caused the 2007–2008 financial crisis, including banks, mortgage lenders, and credit rating agencies and asked for increased transparency.

Steady Recovery

It took 3.5 years for the recovery to begin after the recession began. Many buyers who put money into homes in 2008, 2009, or 2010 saw their home prices decrease before the recovery began in 2011.

Home prices fully recovered by late 2012. Say, If someone purchased a house at the very apex of the recession in 2007 and held on to the property for five years, they made money after 2012.

COVID-19 hits

The housing crisis again became a massive problem in light of the pandemic. The housing market came to rest in March 2020, when much of the US shut down following the COVID-19 pandemic. The home sales ground to a halt. No one wanted to buy, sell or even enter a home, given all the uncertainties that COVID-19 brought. But a few months later, housing hit the gas pedal, and prices followed.

In the 2020 summer rebound, when many strict lockdown measures were withdrawn, many fresh-off-the-boat home buying patterns cropped up. People now started working remotely and purchasing houses farther away from some cities. However, the robust demand for housing came at a time when the supply of homes in the market was already low. The low mortgage rates, low supply, and high demand for housing boosted home prices. In addition to high prices, buyers in 2021 faced the worst supply situation. There were nearly half as many homes for sale at the end of February 2021 compared to the same time a year prior.

The current scenario

Low inventory, intense competition, and massive price appreciation have hit the buyers hard since 2020, but rapidly rising mortgage rates are making it even harder for people to purchase an affordable home. For many buyers, higher mortgage rates mean they can no longer afford homes in specific price ranges. The issue is that even modest single-family homes cost as much as lavish apartments did a few years ago, so buyers either wait for more inventory to come online or move to a more affordable area. And many more are hoping prices will drop — but that might not happen soon. In India, the housing shortage in urban areas is growing, and the situation is worsening for the poor.

Correcting The Loopholes

To deal with housing affordability, different measures were taken by the nations. Like in Berlin, the German government started upzoning single-family areas, which allowed to scale up the construction per area. It helped in promoting social inclusion. Also, Melbourne founded the Melbourne apartment project in 2018. This move was taken to uplift home ownership. Furthermore, a cheaper substitute in India was found: a combination of gypsum and glass fiber. It reduced the consumption of concrete and steel, so affordable houses are being built.

In Singapore, the policies they adopted allowed both rich and poor people the opportunity to have a direct stake in the country’s prosperity. Because of its “Home Ownership for the People Scheme,” they sold around 2000 two- and three-bedroom apartments to the lower middle income at affordable rates. These were given on a 99-year lease. Moreover, they also deployed the technique where they lowered the interest rates, and a compulsory pension scheme forced workers to save money that could be used as the down payment for a new home. Also, there are subsidized rents and grants for those who still can't afford them.

Where are we headed?

According to some economists, home prices might increase, but the choices will, too.

The Realtor.com inventory forecast made a sharp change from the beginning of the year to now, going from just a 0.3% hike in inventory to their current prediction of a 15% jump in the for-sale housing stock.

While housing costs remain high, the number of homes for sale is expected to grow. As more homeowners look to make adjustments to fit evolving personal needs and take advantage of suitable market conditions to access the equity they have likely accumulated, home shoppers will have more choices. However, speculating about the market is challenging because of its tendency to be inherently unpredictable.

Written By —

Kannan Rustagi — IIT Guwahati

Achyut Dhiman — IIT Guwahati

Pranjal Saxena — IIT Guwahati