American had an affordable housing crisis…. Before the pandemic, of America’s nearly 43 million renters, about 20.8 million—almost half—were “cost-burdened,” meaning more than 30% of their income went to housing costs, according to the Joint Center for Housing Studies of Harvard University.
The Affordability Factor
Housing forecasts are a popular subject for economists to tackle, but virtually every forecast has two dark shadows—what economists call downside risks—inventory and affordability. The two are essentially linked.
The affordability of homeownership is a constant, although it ebbs and flows with the economy and the real estate cycle. It doesn’t just reflect the current prices of available homes; interest rates are almost more important, and an area’s prevailing income plays a role as well.
Affordability is usually self-correcting. If prices reach unsustainability, buyers lack the income and/or savings to qualify for a mortgage or pull out of the market if they determine the sacrifice is just too much. Then, demand deflates, price gains stabilize, slow, or even turn negative.
Rates Were Key
After the Great Recession of 2008, even as prices were rising nationally in the 6 to 7% range, low interest rates held monthly payments to sustainable levels. Some of the localities with the highest annual gains were those hardest hit by the housing crisis. They were, in effect, merely clawing their way back to prior price levels.
Then rates started to rise. They had flirted with crossing the 4% line occasionally but by early 2018 they stepped firmly across it and kept going, peaking at nearly 5% in mid-November. This had an outsized impact on affordability. The nation’s median home price gained about 4% year-over-year in December of 2018 while rate increases pushed the average mortgage payment up 12.1%.
Moving ahead, The National Association of Homebuilders (NAHB) said its Housing Opportunity Index (the percentage of homes sold that were affordable to median income earners) fell to 59.6% in the second quarter of 2020, down from 61.3% in the first quarter of 2020.
As rates fell in the first quarter of 2020, home price increases ended 16 months of deceleration and then picked up speed. Demand for homes increased but inventories did not, remaining at historic lows for existing homes.
Available homes were in the lowest price tier were in much smaller supply than more expensive ones in many locations. Consequently, these prices have grown at a much higher rate. The aggregate appreciation in the bottom tier during the recovery is 80% compared to about 50% at the high end.
In some areas, the port of entry for first time homebuyers is challenging just as the largest generation of Americans have aged into their prime homebuying years. Adding to the problem, the National Association of Realtors (NAR) found a direct link between affordability and the labor market.
The situation was being called an affordability crisis. Most experts agree that interest rates will stay low through the end of 2021, but the major issues remain; the lack of housing, especially at entry level, access to that housing, and most importantly, the effects of the pandemic on the economy. The future of the economy is beyond our scope, but supply and access issues are being addressed on many levels.
At the Access End
Some organizations are trying to find ways to ease buyers into their first homes. One creative approach is shared equity homeownership. A nonprofit or local housing authority provides a subsidy (to the buyer or a developer) to lower a housing unit price. In return, the buyer agrees to share any price gains at resale with the subsidizer, helping preserve affordability for subsequent homebuyers.
But clearly the more critical problem is on the supply side. NAHB has a ready list of reasons why new home construction is still below pre-recession levels and far below what is needed to meet growing demand and to replace homes that are inevitably lost from the housing stock. Their reasons include a shortage of skilled labor and buildable lots, lack of construction financing, zoning and environmental restrictions, and risk aversion left over from the housing crisis. Many of those reasons are intensified when builders try to build lower priced homes.
Builders are Cracking the Code
Builders are, however, beginning to navigate around these hurdles while still squeezing out a reasonable per unit profit. They are saving by limiting the choice of floor plans and narrowing interior choices such as countertops and carpeting. This allows bulk ordering and minimizes changes that delay construction.
They are also building smaller. Census Bureau data shows that the average size of new homes has declined from around 2,700 square feet (sf) in 2016 to 2,464 sf today. Further, builders are reducing the numbers of both bedrooms and full baths, with three bedrooms (at 45%) and two baths (64%) dominating new home construction.
Starter homes can go up more quickly than high end ones. One builder says his entry level homes take as little as three months compared with six months or longer for pricier units. He profits from volume rather than price.
According to Paul Davidson, writing in USA Today, big builders are catching on to the trend as well. Altura Homes says half of its 2019 production was units costing under $300K, almost double that in the previous six years. For D.R. Horton, that share was 68%, and Lennar produced 16% more homes in 2019 but its average sale price fell 7% year-over-year.
Of course, the definition of “entry level” differs by locality, (Toll Brother’s division focusing on the sector is aiming to keep prices under $500K) but the trend to smaller and leaner is definitely out there. Building them could be even faster and cheaper if, as John Walsh, suggests in Urban Wire, 21st Century homebuilders would stop relying on 20th Century construction processes.
Americans have apparently embraced Alexa and her ilk. A recent survey found that 54% of U.S. homes have at least one smart-home device. Smart speakers and security systems lead the product list at 28%, followed by smart thermostats at 21%. Users say the main reasons for opting in are ease of use, convenience, and that they feel more secure.
“After less than a decade as a commercial proposition, the smart home has already passed the tipping point,” said Bill Ablondi of Strategy Analytics. “The fact that a majority of people have bought into the smart home shows that there is no going back—the smart home has become the normal home.” Builder Pulse
New Construction Options
The vast majority of today’s homes are built entirely on-site. While Sears sold thousands of homebuilding kits between the two World Wars, off-site homes have never caught on in the U.S. Current building, Walsh says, is analogous to having Detroit ship new car parts to your drive way, dispatching workers there every day for weeks to assemble it.
Offsite or factory construction uses industrial-size machines to replicate home parts, cutting both time and labor costs, and allowing bulk purchase of materials. Quality control is improved, and weather delays reduced.
Factory built doesn’t necessary mean manufactured homes, those featureless boxes shipped on their own wheels and sold out of what look like used car lots. Prefabricated homes are assembled on site from factory-produced components such as flat panels (sections of a wall, roof, or floor) or modules (an entire section of a home, i.e. a kitchen or master suite.) While panels and modules are often shipped “bare,” some manufacturers install everything that can be safely transported—toilets, sinks, dishwashers, kitchen cabinets—saving more onsite time and labor. One prefab company compared its factory process with the on-site construction and found a threefold increase in labor productivity.
While there are still some design constraints, technology is maximizing customization and the industry claims that by combining modules and panels, up to 90% of individually designed homes can be completed off-site. Prefabs are also considered high quality; on average they use 25% more material than either site-built or manufactured homes.
Manufactured housing’s bad reputation, arising from cookie-cutter designs, poor data is fed through the bureau’s own algorithms.
And the algorithms are not fixed in time. Fair Isaac just announced its 10th edition and VantageScore rolled out its fourth last fall (more about these later) and previous versions are still in use. Mortgage lenders usually use FICO Score 2 and Score 5 although Score 4 predominates. Its Score 8, introduced in 2009, is FICO’s most popular model while Score 9 was a bit of a flop. If you pull a free score from an app like Credit Sesame, you are probably getting a VantageScore.
There are also variations within each edition; FICO says it has a total of 28 models, 19 in common use. Ten versions are used by credit card companies, nine by auto lenders, plus the three used by mortgage lenders. Whew!
Realtor.com has assembled a state-by-state list of the most popular home features buyers search for on its site. Some of the must-haves are unique; Oklahoma is the only state where a storm shelter ranks #1. New Yorkers want a balcony, and Californians are alone in pining for solar power. We’re not sure what a “casita” is, but New Mexicans want them.
Other features have more universal appeal. Thirteen states ranked accessory dwelling units or mother- in-law suites on top, and residents of nine were searching for single-floor living or at least a first floor master bedroom.
Evolving for Inclusion
Both FICO and VantageScore have recently sought to incorporate data from alternative sources in order to extend credit scores to the estimated 22% of adults who have none. Recent models include information on rent payments, cable, and cell phone bills.
VantageScore and FICO interpret their scores differently. Both scales run from 300 to 850 (although older Vantage- Score models scaled from 501 to 990) but FICO considers a score of 800 to 850 to be “excellent” while VantageScore extends that definition down to 750, eliminating the “very good” label which FICO puts on the 740 to 799 range. The “good” category, which contains about a fifth of FICO customers but only 13% of VantageScores, covers scores of 670-739 and 700-749, respectively. These deviations continue down the scale.
FAST AND AFFORDABLE
The world’s largest permitted 3D printed home has just rolled off the presses in Calverton, NY. It took eight days and $6,000 in materials for printer manufacturer SQ4D, Inc. to build the 1,900 sq. ft. house. The company’s industrial-grade home and building printer generated the home’s foundations, exterior and interior walls, interior conduits, and other features, about 41% of a home’s construction.
As few as three workers can perform the work compared to the estimated 20 manual labor positions used in traditional construction. The company expects to cut the 48 hours of actual printing time in half for future projects. Mary Salmonsen, Builder
If you are beginning to feel that your chances of getting a loan approved or receiving a low-interest rate are luck of the draw, relax. While you may see variations in your score, it is likely your lender will use a blended score from all three credit bureaus or an average of a FICO score and one from VantageScore.
As mentioned earlier, both Vantage- Score and FICO are in the process of introducing yet another scoring model. This shouldn’t be an immediate concern for consumers as lenders are usually slow to adopt new ones, if they do it at all. The process is expensive and time-consuming and new models may not retain features that matter to some lenders. Still, at some point, your credit will encounter one of these models.
That said, there are significant changes. Both new models are utilizing trended data. Rather than the snapshot approach in current use, these will look back as much as two years. Incorporating the amount of credit utilized over time may bode well for those who have been systematically paying down debt; it is less beneficial to those who have been running it up. It also means old late payments will have more impact on a score.
VantageScore 4 will place less emphasis on paid off tax liens, judgments and collection accounts: medical collections less than six months old will be ignored completely. FICO 10 will flag personal loans as they are considered to be riskier.
FICO says its new model could alter 110 million scores with 40 million dipping lower, an average of about 20 points. Those with low scores who continue to miss payments or incur more debt will see larger declines; high scores will probably move higher.
The advice about credit has not changed, however. As always, keep debt low, pay bills on time, check your score regularly. And please, call us if you have any questions.