October 16th, 2018 9:19 AM by Richard Sardella MLO.100007700/NMLS 233568
The juxtaposition of affordable housing and job growth:
Things have changed in the housing landscape over the past few decades, but few of us stop to examine why.
Builders and developers simply no longer build enough units to meet demand and keep prices affordable for most Americans, according to Scott Cox in a series of articles in BUILDER Magazine. “The house price-to-median household income ratio in this country was 2.2:1 until the 1970s. Over time the average rose to 2.8:1,” says Cox. “We’re now at 3.4:1.” He goes on to say that in high growth areas the figures are much higher – as much as 10:1. Concerns include rising mortgage rates, making it more critical than ever that sufficient housing is built to keep supply and demand in balance.
So how did we get here? Cox cites a pattern developing across the country where job growth in large metro areas draw employees from other parts of the country. “Initially, the growth is cheered fairly universally. If the job growth is taking place after a down period, the newly employed are filling up vacant units and there are few objections.” Then traffic begins to increase, and growth benefits diminish except for those with their own homes and stable jobs. Nowadays when new apartment projects or townhouse developments are proposed near existing single-family neighborhoods, residents often protest against additional growth. Even when an older neighborhood gets a spark of gentrification, rents begin to rise to levels many find difficult to afford.
“Unfortunately, the protests do not focus on the root cause – job growth,” says Cox. “All of the attention is focused on limiting housing as if somehow that will eliminate the traffic and school problems (or the price pressure on existing neighborhoods). The equation is simple – jobs become available, people fill them and those people need a place to live.” He goes on to say that housing does not drive job growth – it responds to it. “Yet housing ends up in the crosshairs,” he says. Of course, no one will say they are anti-job growth. It’s chicken-and-the-egg kind of thing. Cox asks, however, “How can we have economic development groups and incentives for employers and be against new housing? The only way this makes sense is if your goal is to raise the price of your own home and exclude others from the housing market. Sadly, this is the motivation of many, hidden behind ‘maintaining our community’s character’ statements.”
It wasn’t long ago when growth changes were considered progress. Residents not only wanted, but expected their city to change over time. Cox says, “Infrastructure was built by government to facilitate growth, much of which happened by expanding the metropolitan regions. But then tax revolts and shifting budget priorities limited available revenues to governments, who then chose to allocate fewer funds to roads, sewers, water, etc. And environmentalists fought bitterly against the traditional suburban growth model. Growth became a dirty word, at least as it relates to residential development.”
Now we are evidently at the point where working people with decent jobs are spending 40%-50% of their incomes on housing, while young professionals in high-cost metros find it difficult to afford an apartment.
So what can be done? “While we cannot look into the heart of every homeowner who has protested against a new project in their city, we can say unequivocally that homeowners’ active stifling of housing growth is systematically denying the American dream to young people across the country,” says Cox, who goes on to say how it’s one of the single greatest contributors to the growing income inequality in this country.
The challenge to builders is to acknowledge their choices as well as the consequences of those choices. Little job growth causes little housing growth. Nothing about a neighborhood changes and young people move away since opportunities for them are not being created. Residents won’t have to worry about an apartment building being built down the street, either.
Then there is the scenario of good job growth with little housing growth — a path being followed by most high-growth areas. This snapshot encompasses a growing income inequality and polarization of the community. Homeowners prosper through rising prices, knowing the only way they can cash in on their equity is to sell and leave the area, and those seeking affordable housing are forced to seek it farther and away from their jobs.
The third scenario is, of course, good job growth along with good housing growth. This is where the character of the community evolves, young people thrive as they have both opportunities to build careers and find affordable housing, and in the process become attached to their community. While change may not always be comfortable for locals, earning a decent living while occupying a decent home seems to be a good trade for that discomfort. “Houses are where jobs go to sleep at night,” says Cox.
How Rates Move:
Conventional overnment (FHA and VA) lenders set their rates based on the pricing of Mortgageand G-Backed Securities (MBS) which are traded in real time, all day in the bond market. This means rates or loan fees (mortgage pricing) moves throughout the day, being affected by a variety of economic or political events. When MBS pricing goes up, mortgage rates or pricing generally goes down. When they fall, mortgage pricing goes up. Tracking these securities real-time is critical. For more information about the rate market, contact me directly. I’m among few mortgage professionals who have access to live trading screens during market hours.
Rates Currently Trending: Neutral
Mortgage rates are trending sideways this morning. Last week the MBS market improved by +9bps. This was not enough to move rates lower last week. There was moderate mortgage rate volatility last week.
This Week's Rate Forecast: Neutral
Three Things: These are the three areas that have the greatest ability to mortgage rates this week: 1) Across the Pond, 2) Trade War and 3) Domestic.
1) Across the Pond: Brexit is front and center as the EU announced Sunday that it would reject Great Britain's proposal and cancel their scheduled ruling/meeting for Monday but the EU/Brexit Summit will continue all week. We have important readings out of the worlds largest economies. China: GDP, CPI, PPI, Retail Sales. Japan: Industrial Production, Imports, and Exports, CPI. EU: CPI, Germany: Wholesale Prices. Itay's tiff with the EU over their budget will also continue to grab headlines.
2) Trade War: The White House is said to be considering another round of tariffs. China, which is biding its time for the U.S. midterm elections, is reevaluating that position as polling data suggests that Republicans may hold on to both houses.
3) Domestic: The biggest economic data point of the week is Monday's Retail Sales, but even this report which has historically carried a lot of weight is not likely to change rates. The bond market will focus on Wednesday's release of the Minutes from the last FOMC meeting where the increased rates were the biggest event of the week.
Housing: We have a lot of housing data this week. None of it will impact rates, but it will give us a good idea of how housing is doing. We get the NAHB Housing Market Index, New Housing Starts and Building Permits, Weekly Mortgage Applications and Existing Home Sales.
This Week's Potential Volatility: Average
Mortgage rates are likely to move sideways in the new tight trend for the week. The uncertainty in the market is focused on trade, Brexit and Italy. Of course, anything unexpected domestically or geopolitically could spike mortgage rate volatility.
If you are looking for the risks and benefits of locking your interest rate in today or floating your loan rate, contact your mortgage professional to discuss it with them.
Richard Sardella has been actively managing and providing services in the mortgage industry for over 27 years. Richard serves on the board of directors as President of Colorado Home Mortgages Inc.
All information furnished has been forwarded to you and is provided by thetbwsgroup only for informational purposes. Forecasting shall be considered as events which may be expected but not guaranteed. Neither the forwarding party and/or company nor thetbwsgroup assume any responsibility to any person who relies on information or forecasting contained in this report and disclaims all liability in respect to decisions or actions, or lack thereof based on any or all of the contents of this report.
MLO of record MLO.100007700 / NMLS#233568 / CHM NMLS#127716.