Status of Housing Sector; Policy Possibilities

Update 653 — Housing in the House
Status of Sector; Policy Possibilities?

Yesterday, the House Financial Services Committee held its sixth hearing this Congress on proposals to address chronic and current issues in the housing sector. This focus makes sense: spending on housing and related services represented 17.5 percent of GDP in 2020. Real estate constitutes a quarter of all household net worth. But many say the rent is too damn high, with prices plagued by lack of supply. 

Over the last two years, the housing sector has seen skyrocketing costs. The Fed has raised interest rates resulting in mortgage rate hikes in recent months. HFSC hearings have shed light on the critical housing issue; but insufficient consensus on solutions has been a bar to reform. After tackling big-ticket items like climate, healthcare, and infrastructure, Congress can now turn to housing reform — ironically, omitted from Dodd-Frank and, frankly, neglected ever since. 

The bipartisan will is there; is there a way? In today’s update we cover the ownership and rental market, and the opportunity for the 118th Congress to address housing.

Good weekends, all.



Ownership Market in Flux

After an intensely hot two years, the housing market is on a downward trajectory. The housing sector heavily appreciated throughout the pandemic as low mortgage rates induced higher demand. The higher demand mixed with relatively static supply drove housing prices through the roof. When the pandemic began in March 2020, the median sale price for housing was $301,993. By March 2021, that figure grew to $352,011, a blistering 16.6 percent increase over the year. Sale prices continued to rise over the next year and a half, but in its effort to combat rising costs for households, the Federal Reserve began aggressively raising interest rates. This led to the median sales price to peak at $430,837 in May 2022. Since then, the median sales price has fallen to ​​$397,862

US Median Residential Housing Sales Price

Source: Redfin

But despite the fall in prices, some of that cost shifted over to higher mortgage rates. Throughout the pandemic, 30-year fixed rate mortgages rates held close to 3 percent while 15-year fixed rate mortgages floated around 2.3 percent. But as the Federal Reserve began tightening financial conditions in the winter of 2021, mortgage rates began to climb. By early November 2022, 30-year fixed rate mortgages rates peaked at a stomach-churning 7.08 percent, and 15-year fixed rate mortgages rates rose to 6.38 percent. Fortunately, rates have started to fall with the 30-year fixed rate dropping over half a percentage point and the 15-year fixed rate down over three quarters of a percentage point. 

US Average Weekly Mortgage Rates

Source: FreddieMac

While the mixture of falling prices and rates could make ownership more affordable than a few months ago, the volatility makes it harder for prospective buyers to enter the market and prospective sellers to put their house up for sale. Home sales have plummeted over the year,  sharply decreasing by 28.8 percent. The reduction in sales represents the squeamishness of buyers and sellers which will only continue as volatility remains. 

US Annual Housing Inventory

Source: Congressional Research Service

Renters Catch A Break

Following a prolonged period of record-high prices and limited supply, the rental market is finally starting to see some relief as the sector enters into a period of rapid cool down. Although autumn historically proves to be a slower time of year for renters, apartment rents fell nearly 2.2 percent from this past September through the month of November. This is more than just a seasonal impact as apartment rents fell by only 1.3 percent during this time period before the pandemic. And this is certainly a welcome change from last year’s 2.7 percent increase in rent over the same three-month period. 

Many big cities have also observed a steady month-over-month decline in rent prices, with one-bedroom units falling approximately 0.8 percent and two-bedroom units falling around 0.7 percent in price. These numbers, while small in appearance, are meaningful in that these rents are falling for the first time in nearly two years. Even more welcoming news, wages are increasing faster than rents across a number of big metropolitan cities, easing up some financial burdens that may have previously plagued renters.

While there is some reason to celebrate, the fact of the matter still stands: the housing affordability crisis has long predated the pandemic and supply continues to fall short. To date, the United States is short approximately 3.8 million homes, a figure that has nearly doubled in the last decade. A lack of inventory, an increased presence of private equity, and a severe drop in the rate of construction have all contributed to this statistic, and there is seemingly no resolution in sight. Despite being a chronic issue, policy makers have a plethora of tools at their disposal to build a more resilient and equitable housing sector, one that can benefit both homeowners and renters equally. 

An Opportunity for the 118th Congress

While the housing sector has been mostly ignored by lawmakers for the last several years, yesterday’s hearing held in House Financial Services served as a positive preview as to what can be expected from the 118th Congress in terms of housing. The hearing focused largely on the urgent need for robust investments into the housing sector, specifically when it comes to correcting the affordability crisis and reining in inflation. Additionally, members pointed towards the Fed as the leading culprit for an exacerbated housing sector, asserting the six interest rate hikes of 2022 have not cured inflation, but instead have virtually locked first-time buyers out of the market and disincentivized construction due to high lending costs. 

Despite a blame game as to why and how we got to this point, the message was clear: both parties are interested in fixing this issue, and both parties want to make it a priority come the new year. It’s just a matter of how. 

In looking toward solutions, the Democrats of House Financial Services Committee went on to reference various pieces of legislation they had previously proposed that are geared towards addressing the affordability issue and public housing. Some of the key bills mentioned can be found below:

  • The “Build Back Better Act(Rep. Yarmuth)  – Allocated more than $150 billion in funding to expand access to affordable, accessible housing; help 294,000 households afford their rent; build, upgrade and retrofit over 1.8 million affordable housing units; and help close the racial wealth gap through national investments in homeownership for first-time buyers. 
  • The “Downpayment Toward Equity Act(Reps. Waters, Green, Garcia (TX), Pressley, Axne, García (IL) – Meant to provide financial assistance to first-generation homebuyers to put toward a downpayment on a home addressing multigenerational inequities in access to homeownership and to narrow and ultimately close the racial homeownership gap in the United States. 
  • The “Ending Homelessness Act(Rep. Torres) – Intended to expand the housing choice voucher program and provide $13.27 billion in new funding over five years to federal programs and initiatives to prevent homelessness. 

As we enter into the new Congress, we can expect the housing debate to continue well into the new year, but with new faces and new players involved, including Rep. Hakeem Jeffries of New York. Jeffries is set to lead the Democrats as Minority Leader in the House for at least the next two years and at the top of his legislative priorities lies housing. While Jeffries’ experience revolves predominantly around rehabilitating and improving public housing safety, he has publicly promoted the need for overall reform and has an opportunity to serve as the Democrats’ best vehicle for passing any comprehensive legislation, including the revival of the Build Back Better housing title. 

With the Republicans in agreement on the need to address the housing accessibility and affordability crisis, Democrats have a real opportunity to exploit Republicans’ slim majority to push housing to the top of the House’s legislative agenda and to make substantial progress within the sector. Congress has the opportunity to ensure families have access to quality housing and make robust and meaningful public investments in the housing supply to change the narrative of US housing at long last.