By KIMBERLEY HAAS
This Labor Day weekend, some workers are wondering what happened to the American Dream of earning enough from a nine-to-five job to buy their own home — with or without the white picket fence.
According to officials at the U.S. Census Bureau and the U.S. Department of Housing and Urban Development, the median sales price of a new home in July 2022 was $439,400.
The thumbnail measurement for home affordability is a house that costs roughly 2.6 years of your household income, or a 2.6 “price-to-income ratio.” Using the 2.6 price-to-income ratio, your household’s earners would need to bring in $169,000 a year to be able to afford a new home.
That is higher than most U.S. households, as the census bureau reports that between 2016 and 2020, the median household income was $64,994.
Let’s take a look back in time so we can understand today’s market.
From 1940 to 1960, homeownership rose over 18 percentage points, from 43.6 to 61.9 percent. That remarkable transformation was facilitated by higher incomes, a large percentage of households being in prime homebuying age groups, the FHA-led revolution in mortgage financing, the GI Bill of Rights, improved interurban transportation, and the development of large-scale housing subdivisions with affordable houses.
While all of those factors played an important role in making the United States a nation of homeowners, it is important to note a Department of Labor study (cited in the Housing and Home Finance Agency’s Housing Statistics Handbook of 1948) reported a 53.2-percent homeownership rate for 1945.
If that survey was correct, then approximately half of the change took place before many of these factors became fully effective and during a time when wartime needs virtually halted residential construction. Higher wartime incomes, the absence of many competing consumer goods, and rental housing shortages may explain the wave of homebuying.
Since 1960, homeownership has remained in the 61- to 65-percent range. After slow growth from 1960 to 1980, the rate fell to 63.9 percent in 1990. Part of the decline between the 1980 and 1990 censuses can be explained by the undercount adjustment, a first-ever adjustment by the Census Bureau.
Without that adjustment, the 1990 census would show a 64.2-percent homeownership rate.
An important factor in explaining the trend over this period was the virtual absence of growth in real family income. Between 1980 and 1992, median family income grew only 2.7 percent in real terms.
The American Dream vision of homeownership was born in the post-war years as World War II veterans returned home and, with the help of programs like the GI Bill of Rights, became owners rather than renters. According to the U.S. Department of Housing and Urban Development, between 1940 and 1960 the homeownership rate soared from 43.6 to 61.9 percent.
After that, the buying vs. renting rate slowed. Since 1960, the homeownership rate has largely remained in the 61- to 65-percent range. In 2004, it spiked to a record of 69 percent before falling during the Great Recession.
The rate nearly reached 67 percent in 2020, but due to the impacts of the COVID pandemic, fell an entire point in a single year.
So, what is the average person supposed to do in today’s market? Keep calm and remember that mortgage companies are finding new ways to make homeownership a possibility for those who still want to buy.
Mortgage companies are adjusting their strategies to make sure homes are accessible to those who are responsible enough to have them, but who may not fit into the traditional borrower profile.
Guild Mortgage has introduced Complete Rate, a program based on residual income analysis and rent payment history instead of a FICO score.
Those with no credit score or credit history can opt-in to the program for a free assessment. If the borrowers’ FormFree report shows consistent rent payment history and good residual income history, the borrowers may qualify to receive a lower interest rate, lower fees, or both, according to a press release.
Leaders at the company say the Consumer Financial Protection Bureau’s “Data Point: Credit Invisibles” report shows that 19 percent of adults do not have traditional credit scores. Eight percent have “thin” or “stale” files.
Another 11 percent of consumers are “credit invisible.”
This affects people of color. Blacks and Hispanics are more likely than people who are White or Asian to be credit invisible or to have unscored credit records.
About 15% of Black and Hispanic people are credit invisible (compared to 9% of White and Asian people), and an additional 13% of Black and 12% of Hispanic people have unscored records (compared to 7% of White people), according to the press release.
Guild’s Complete Rate program was created to help first-time homebuyers with no credit score and is available for FHA, USDA, and VA home loans.
David Battany, executive vice president of capital markets at Guild Mortgage, recently sat down with The Mortgage Note to talk about the Complete Rate program.
Battany explained that FormFree is furnishing them with a Residual Income Knowledge Index™, or RIKI™, to help them analyze borrowers who do not have a high FICO score.
“What that does, it gives us an alternative way to look at a borrower, who may not have a FICO score or does have a thin FICO score, another way to measure their expected ability to pay the loan and what their expected future credit risk might look like,” Battany said.
Battany said first-time homebuyers who don’t have a good credit score face unnecessary obstacles when obtaining a mortgage.
“FICO is a bit of a catch-22, which basically means you can be approved for good credit at a good price if you already had credit previously at a good price. So, it’s really hard for a person who is a first-time homebuyer just getting out of school to buy their first home because they don’t have a history,” Battany said.
Income isn’t the only issue. There is also a lack of available housing on the market, a shortage exacerbated by the supply chain issues that emerged during the COVID pandemic.
On May 16, White House officials said in a press release that President Joe Biden’s Housing Supply Action Plan would ease the burden of housing costs over time by boosting the supply of quality housing in every community.
“His plan includes legislative and administrative actions that will help close America’s housing supply shortfall in 5 years, starting with the creation and preservation of hundreds of thousands of affordable housing units in the next three years. When aligned with other policies to reduce housing costs and ensure affordability, such as rental assistance and downpayment assistance, closing the gap will mean more affordable rents and more attainable homeownership for Americans in every community. This is the most comprehensive of all government efforts to close the housing supply shortfall in history,” the press release stated.
Jeffrey Zabel, a professor of economics and director of the MS Program in Data Analytics at Tufts University, says it will take years before significant results will be seen.
Zabel noted that while the plan is comprehensive, it will take much longer to meet America’s housing shortage than the five years that the Biden team claims—particularly since many programs the administration is pushing must go through Congress.
Writer Chuck Green contributed to this article.
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Email story ideas to Editor Kimberley Haas: [email protected]