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The use of state housing finance agency down payment assistance programs is part of the solution to address the growing affordable housing gap, a Fitch Ratings report said.
The dearth of homes aimed at first-time buyers and the loss of rental units, particularly in the public sector, drives the gap.
Add in wage stagnation, changes in regulations and the increase of corporate ownership of housing, which taking in combination creates a supply deficit. In turn that leads to rising home prices and lower affordability.
“State Housing Finance Agencies continue deleveraging existing bond programs, strengthening their financial positions and making them more prepared for increased bond issuance,” the report noted.
Household formation outpaced the completion of newly constructed properties. For every 10 new households formed, only seven homes were built during the period between 2010 and 2016, Fitch said.
Many of those new households will use Federal Housing Administration-insured loans to buy a home, with some of that provided through SHFAs.
SHFAs recognize that providing down payment assistance programs are important to originating mortgages to help address the gap, Fitch said. Those organizations use bonds to fund the DPA programs to make the SHFA loans more attractive to potential homebuyers.
However, the Trump administration — while starting a council dedicated to reducing regulatory barriers to affordable housing — looks to restrict the use of DPA programs at the same time.
“SHFA’s single-family mortgage programs are anticipated to become gradually competitive as mortgage rates continue to rise,” the Fitch report said.
Yet, the average share of SHFA loans with a down payment over 20% was almost 33%, while the share with a 3.5% or lower down payment was nearly 30%.
But making more mortgages available to first-time buyers only addresses part of the affordability problem.
“In areas with stronger housing markets, regulatory barriers — including zoning, limitations on density, height, parking, lengthy permitting and approval processes, along with ‘not in my backyard’ (or NIMBY) sentiment among residents — exacerbate the affordability issue,” Fitch said in a press release accompanying the report.
The National Association of Home Builders estimates government regulations account for approximately 25% of the price of a home, with approximately 15% from land use regulations and 10% linked to regulations that apply after a builder has acquired land, Fitch said.
Meanwhile, home price appreciation averaged between 5% and 6% per year since 2012, but wages only grew by 3% per year.
“Wage growth for the affordable housing population has been lower than for the broader population. The Center on Budget and Policy Priorities estimates that median rents increased 11% from 2001 to 2017 while median renter household income failed to keep pace, falling 1% over the same period,” Fitch said.
At the same time, the reduction in the number of public housing units contributes to the affordability problem as those residents get displaced. Fitch cited figures from the Council of Large Public Housing Authorities that state 95% of public housing units are over 30 years old. Those properties need proper funding to maintain livable conditions.
Between 1990 and 2010, over 300,000 of public housing units were lost, according to Department of Housing and Urban Development statistics cited by Fitch.
The single-family rental business, particularly those properties owned by real estate investment trusts, is another negative factor for affordable housing. “A recent study from the Department of Public Administration noted that only 1.14% of SFR REIT properties meet the needs of the affordable population, renting to tenants receiving rent subsidies under the federal housing choice voucher,” the Fitch report said.
“While research on SFR REITs is ongoing, Fitch believes the number of homes under control by SFR REITs is likely to climb based on increasing single-family homes built for rent.”