Chairman Brown and Ranking Member Toomey, and distinguished Members of the Committee, thank you for the opportunity to testify today.
Executive Summary:
The housing market is changing and the real culprit is amassive house price boom fueled by federal housing and monetary policies, whichis increasingly crowding out lower-income Americans out of the housing market.
Institutional landlords, particularly on the multifamilyside, are taking advantage of more liberal credit terms provided by Fannie Mae andFreddie Mac (the GSEs) than the private sector, which is a violation of theirCharters. They use their taxpayer guarantee and other advantages to greatlyexpand their business, while crowding out multifamily private investors. Since2014 outstanding multifamily mortgage debt has doubled, with the GSEsaccounting for most of the growth. At the same time they tout that they aresupporting affordable rental housing, but in reality they create governmentprofit seeking.
The current single-family housing boom, which began in 2012,was entirely foreseeable and was noted by the AEI Housing Center beginning in2013. Since then, the housing market has been marked by too much demand chasingtoo little supply. Yet the policy response was to boost demand even more:Federal housing agencies have loosened underwriting and the Fed has pursuedmultiple rounds of quantitative easing, continuing even when the housing marketwas already appreciating over 10% per year. In 2021, home price gains were 16%,and in 2022 are expected to come in at around 12%, the third year of breakneckgrowth.
As a result, homeownership has gotten further out of reachfor many lower-income, minority Americans. Consider that since 2012, wages havegrown 40% but entry-level home prices have increased over 100%.
This out of control price spiral means increased competitionfor fewer and fewer affordable homes. Potential entry-level buyers areincreasingly pushed to the sidelines as they cannot compete with more deeppocketed individuals, who experience the same competition only higher up theprice spectrum.
This is creating knock-off effects for people downstream.Left unable to buy a home, they remain in the rental pool, helping to drive uprents, which are now increasing at 12% nationwide. Many who cannot afford theserent hikes will be pushed into homelessness.
If that were not enough, inflation is now running at 7%. AGallup survey from last month finds “49% of Americans saying rising prices havecaused hardship for their family… Lower-income Americans are suffering the mostfrom inflation. Two-thirds of U.S. adults with an annual household income ofless than $40,000 say they have experienced hardship, with 20% describing it assevere.”[1]
Inflation is a regressive tax and getting by – not tomention building savings to buy a home – is becoming increasingly difficult.Thus, misguided policies have severely hamstrung lower-income Americans, inparticular minorities, which severely lag White Americans in homeownership andintergenerational wealth. If they can no longer reach the first rung of thehousing ladder, how will they ever catch up?
The solutions are straightforward. First and foremost, weneed more supply. However, federal mandates are not the answer. Zoning and landuse policies are fundamentally a state and local issue and should be addressedat those levels. We are already seeing promise across the country, even inCalifornia, where the legislature has recently passed laws, which couldmeaningfully encourage new construction activity.
At the same time, demand boosters have shown to becounterproductive. The Fed has belatedly realized that it needs to tighten themonetary spigot. But its policies have already done a lot of damage and theywill continue to haunt lower income Americans in the form of higher homeprices, inflation, and rents.
The signals from federal agencies and regulators are lessthan encouraging. Rather than shrinking the government’s footprint and reducingrisk, Fannie Mae is again increasing its share of risk layered loans, where onerisky loan product feature is layered on top to ultimately make a very riskyloan. More could be in store: FHFA recently made policy changes that increasesGSE competition with the private sector and will lead to greater risk-layering.The GSE affordable housing goals may be increased and other policies are beingdiscussed. The FHA is also considering changes that will increase itscompetition with the GSEs, which does not bode well.
Equally worrisome are increases to the GSEs appraisal waiverpractices, particularly purchase loans. In the past, human appraisals onpurchase loans have successfully alerted lower-income and minority borrowerswhen they were overpaying. An appraisal waiver may simply confirm thenegotiated sale price, while the competition between Fannie and Freddie formarket share may create a race to the bottom on standards – not to mention thatthese processes can be gamed, which was commonplace with respect to the GSEs automatedunderwriting systems in the lead up to the Financial Crisis.
The compounding effect of these changes will mean lessresiliency for borrowers and neighborhoods, many of which are lower-income andminority, to withstand an economic stress event. With many economic dangersfrom rising interest rates, inflation, and sky-high home prices, lurking,regulators should do more to protect borrowers and taxpayers, rather thanlowering lending standard. We have seen this movie before and we know how itends. It should not be allowed to happen again.
Footnotes
[1] https://news.gallup.com/poll/389129/americans-expect-inflation-persist-next-six-months.aspx
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