Policies aiding first-time buyers must change in hot market: Layton

The unusual rise in housing values has been a bright spot in the overall economic landscape during the pandemic, but it also presents a downside policymakers should consider, former Freddie Mac CEO Don Layton urged in a report Thursday.

“The monthly payment on the average potential purchase has increased rather than decreased: while the 100-basis-point drop in the interest rate on a mortgage would lead to a typical monthly payment declining by about 5%, this is more than offset by house prices going up by the FHFA-reported 10%,” Layton, a fellow at Harvard’s Joint Center for Housing Studies, said in a blog referencing the Federal Housing Finance Agency’s most recent year-over-year change in its monthly home price index.

While the monthly index is considered a rougher estimate of prices than some other measures, the more comprehensive and seasonally adjusted formula the FHFA uses to calculate annual loan limit changes also suggests prices rose at least 7% and outpaced rate-related savings last year.

That means that while Black Knight’s latest calculations show that current rates give 8.8 million existing homeowners the opportunity to potentially reduce financing costs by at least 0.75%, saving an average of $300 per month, new homebuyers face a higher affordability hurdle on a net basis.

“The rate reduction has enabled a record wave of refinancings to reduce mortgage interest costs and thus increase monthly discretionary household cash flow,” Layton wrote. “This helps the economy, as expected. Unfortunately, the dynamics are very different on the losing side, as prospective first-time homebuyers have seen their purchasing power decreased.”

Home prices are generally more likely to fall when unemployment increases. The increases seen this year, which have widely been attributed to a supply-demand imbalance, “could simply be a pandemic-period distortion that will disappear as COVID vaccines are broadly distributed,” he said.

However, if rising home prices and inventory shortages instead become “the new normal” for an extended period, the Biden administration — which has shown interest in doing more for first-time homebuyers — may need to rethink traditional strategies like lowering rates or increasing down-payment assistance, Layton suggested. Otherwise, these strategies could put more upward pressure on housing values by encouraging demand at a time when supply is short and set first-time buyers back further.

“Housing officials who take office after the inauguration should think carefully about this, as different and nontraditional programs may be required to minimize this unwanted outcome,” he said.