The housing market is struggling, and it does not look as if it will be getting better any time soon. The few improvements that have been seen over the last couple years have been artificial boosts, inspired by temporary measures such as last year’s federal housing tax credit. Left again to its own devices, the market is floundering, suggesting that real improvements will require lasting legislative changes, rather than brief incentives that only serve to superficially caffeinate the market.
Unfortunately, the lasting changes made so far may not have the kind of impact we have been hoping for.
In an effort to limit government involvement in lending and to regulate risk taking in the loan industry, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act. Both the name of the bill and the underlying intention of this legislation sound positive. However, the measures being taken to reduce the risk of default will have massive repercussions. Down payments for the proposed Qualified Residential Mortgages are jumping from the current 3.5% to as much as a staggering 20% – payments that will only be affordable to people already in the more affluent community and therefore less likely to default on their payments. Non-QRM loans will have lower down payments but much higher interest rates.
What this means for the market is that, in the long run, home prices are likely to drop to accommodate what buyers can afford, meaning owners will make far less off the sale of their homes. This means equities will decrease as well.
Another change we must prepare for is that on October 1, government-backed loan limits will decrease from $729,750 to $625,500. According to the Washington Post, the government had temporarily raised the limit to lower borrowing costs, and this is a return to prior practice. Allowing the cap increase to expire is part of the effort to limit government involvement in the market and to “lure the private sector back to the lending arena.”
Unfortunately, the increased cap has not lasted long enough to see the market stabilize. Builders have been taking advantage of the higher limits and constructing more expensive houses. This will put added pressure on pricier areas, where owners are already having a hard time selling their homes.
With these two factors combined, it appears that both sides of the market will be negatively affected. Homeowners will be forced to sell for far less than they had hoped, or risk not being able to find a buyer at all. Most buyers will either have to save an average of nine to fourteen years to afford their down payments, or resort to suffering high interest rates on non-qualified loans.
