America is facing yet another housing crisis. Unlike the Great Recession, this one was not brought about by abusive and predatory loans to borrowers—or by borrowers over-extending their credit. This one is a crisis of available housing supply: there aren’t enough affordable homes available for families and first-time homebuyers. Latinos and other hardworking American families are finding it difficult to buy a home as median home prices rise. They work hard every day—building a nest egg—making sacrifices and dedicating themselves toward achieving this goal. Then they begin their home search, which should be a time to look forward to building on their long-term investment and a stable home for their children. Instead, the search becomes stressful and sometimes discouraging when they realize few homes are available in an affordable price range.
The lack of affordable housing supply will inevitably defer homeownership for most of the country’s future households. The ability to purchase a home has been a central vehicle for all families to build wealth, and is even more important for communities of color. Homeownership is the ladder to the middle class for families earning a modest income and serves as a key source of financial stability and wealth for most families. This is especially true for Latino families, who carry two-thirds of their net wealth in their home equity.
A shortage of homes considered affordable for Latino homebuyers and other households earning a modest income (less than $100,000) is compounded because hundreds of smaller, older homes are being sold to investors—not to families who intend to occupy them. Many eager investors are buying these houses in cash and subsequently renting them out. Today, 17 million single-family residences are being rented, which is six million more than there were in 2007, before the crisis.
Aspiring homebuyers are being pushed out of the market by investors, in part, because properties owned by banks, Fannie Mae, Freddie Mac, and the Federal Housing Administration (FHA) (also known as “institutional sellers”), are being sold to the highest cash bidder. According to the 2017 National Association of Hispanic Real Estate Professionals State of Hispanic Ownership Report, institutional investor purchases of single family residential properties increased by 29% in 2016. These institutional sellers could sell these vacant, abandoned homes in affordable neighborhoods in ways that they are much more likely to be made available for rehab by mortgage-ready homebuyers. There are several effective ways to get that done.
The point is that in cities across the country, potential homebuyers are waiting in line to enter an open house, or seeing homes in affordable price ranges selling the same day they go on the market. The facts bear out this reality: the number of single-family homes for sale has declined for 21 consecutive months and will likely continue in this direction. In addition, the National Association of Homebuilders (NAHB) statistics show that there is an accumulated shortage of over 3.2 million houses. Furthermore, according to a review of census data by the National Association of Hispanic Real Estate Professionals, inventory in the bottom- and middle-value tiers in metropolitan areas shrank by more than 38% from 2010–2015, even as 4.5 million new households formed in that same time span.
But chances are, if you are buying or selling a house these days, you already knew the market was tight. The question is, “How did we get here?” Many factors have helped along the way: government policy has led to a number of market distortions that will require legislative and regulatory fixes.
Potential homebuyers, including Latinos who have lower levels of wealth, are competing with institutional investors on an unfair playing field: they need a mortgage and simply can’t put enough cash up front.
Other policies limit a potential homebuyer’s the ability to get a mortgage to buy a condominium also impede first-time homeownership. Condos are an affordable option for first-time homebuyers and many low to moderate income city dwellers. Fannie Mae and Freddie Mac, for example, require that a certain number of units in a condo building need to already be owned by owner-occupants before granting a mortgage to the next buyer. Talk about a chicken and egg issue–households that need financing will have difficulty purchasing these units and are forced to rent.
So, while some policies have been keeping Latinos and other first-time home buyers out of homes that are already built, other policies are making it harder to build homes within affordable price ranges. A couple of these factors include: regulatory cost associated with the construction of new home that have risen nearly 30% since 2011 and new capital requirements on banks have played a role in raising homebuilders’ financing costs to acquire land and build homes than before the crisis. During the housing crisis, regulators decided to increase the borrowing costs on homebuilders to cool down an overheated housing market.
Latinos and families of color will be a large portion of America’s future homebuyers and need access to a robust supply of affordable homes to achieve the dream of homeownership, and to ensure economic growth continues for communities across the country. We must start by recognizing that we are facing this crisis now—not in the future.
This article reflects the substantive input and co-authorship of Lautaro “Lot” Diaz, Vice President, Housing & Community Development, UnidosUS and Leo Pareja, President, National Association of Hispanic Real Estate Professionals.