As rising home prices continue to undermine the American Dream of homeownership for hard-working Americans, Congress is considering a bipartisan bill modeled after the successful VA home loan program, to help first responders and teachers buy a home. However, as long as there is a housing shortage, first-time homebuyer assistance programs, such as the Homes for Every Local Protector, Educator, and Responder (HELPER) Act of 2023 are part of the problem, not the solution.
The HELPER Act, with over 100 cosponsors in the House and Senate, aims to exempt potential buyers from putting any money down or purchasing mortgage insurance, which is typically required for homebuyers putting less than 20% on a down payment. In addition, the bill allows for up to 6% of seller assistance for closing costs and higher loan limits than with a conventional FHA loan.
Unfortunately, Congress and other supporters have misdiagnosed the underlying problem: Access to financing is not the issue plaguing prospective teachers, law enforcement, and other first responders — it is the lack of housing supply. The HELPER Act thus treats the symptom, not the disease.
While proponents of the act claim that up to 6 million Americans would qualify for the benefit, the more pressing question is where the required homes would come from. Studies have estimated that the country as a whole has a shortage of around 3.8 million to 6.5 million homes. Houses listed for sale are currently down around 40% from pre-pandemic levels.
Furthermore, Economics 101 tells us that adding demand without a commensurate increase in supply will result in higher prices. The HELPER Act will not be an exception and the act’s supporters only need to look at two recent policy examples that show the inflationary impact of demand-enhancing policies during a supply shortage.
In 2015, the Federal Housing Administration (FHA) cut its mortgage insurance premium (MIP), which expanded buying power during a supply shortage. In a prior blog post, we described the benefits promised by the FHA and the actual outcomes of this MIP cut:
At the time , FHA predicted that this [MIP] cut would lead to 250,000 new first-time buyers over the next three years and save each FHA buyer $900 annually. Instead, we found that home prices rose about 2.5 ppts. faster in FHA neighborhoods and only about 17,000 new first-time buyers were brought into the market, far short of FHA’s prediction.
This outcome was entirely predictable. In 2015, the country was already two and a half years into a seller’s market — generally defined as a market with less than a six-month supply of homes for sale at the current selling pace. When the inventory of homes for sale is tight, credit easing cannot bring in many new buyers since there are already too many buyers chasing too few homes. However credit easing will cause the surplus of buyers to use their newly minted buying power to bid up the price of houses. This is simple economics.
Instead of helping first-time buyers, the beneficiaries of FHA’s 2015 MIP cut were existing homeowners, who profited from higher asset prices, and realtors, who received an estimated windfall of around $2.8 billion due to increased commissions. While FHA’s loan volume did increase substantially in the first year after the 2015 premium cut, this was largely due to FHA poaching borrowers from sister federal agencies such as Fannie and Freddie, not from a large influx of new first-time buyers.
In addition, during the pandemic, the Federal Reserve through its zero interest rate policy (ZIRP) and quantitative easing (QE) temporarily pushed mortgage rates below 3%. During this period of tight housing supply, the accommodative credit was quickly capitalized into home prices, which soared 34% in just two years.
Instead of more demand boosters, a far better solution would be to help moderate-income borrowers and neighborhoods reliably grow wealth. Sen. Mark Warner’s (D-VA) Low-Income First Time Homebuyers (LIFT) Act provides a constructive path forward and deserves bipartisan support.
Unlike the HELPER Act, the LIFT Act would not stimulate greater demand as the Treasury would keep buying power constant by subsidizing the interest rate and origination fees associated with a 20-year mortgage so that the monthly payment would be in line with a 30-year FHA mortgage. The program should be narrowly targeted to first-time, first-generation homebuyers making 80 percent of their area median income or less.
Today, housing is as unaffordable as it has ever been. According to the Harvard Joint Center for Housing Studies, it takes 5.6 times the median income to purchase the median priced home in 2022. This is up from 3.1 times in 1990. The main culprit of this rising unaffordability is government policies that limit the ability to build more housing. In particular, zoning policies limit most residential land to single-family districts, environmental regulations drive up the cost of building housing or exclude large swath of buildable land, while Not-In-My-Backyard (NIMBY) groups have largely replaced property rights with community-based decision-making.
Fortunately, things are changing: Some states — including California, Washington, Oregon, Maine, Vermont, and Montana — and some localities — including Austin, Minneapolis, and Charlotte — have already passed reforms scaling back regulations and most importantly, legalizing light-touch density (LTD), which permits incremental increases to allowable density, in single-family detached zones. Many more jurisdictions are considering similar reforms.
Implementing by-right LTD across the county could add an estimated 900,000 additional housing units annually (depending on the maximum allowed density) for the next 30 to 40 years. This moderate density increase would expand the construction of more naturally affordable and inclusionary housing, thereby keeping home prices more aligned with incomes and keeping housing displacement pressures low.
Building more housing will take time, but state and local actions that free the market from regulations will eventually enable more Americans to access the American Dream of homeownership. Demand-enhancing policies such as the HELPER Act may be well intended, but as long as a severe housing shortage persists, they will only make matters worse.