by Phil Hall

On Feb. 24, Dr. Anthony B. Sanders, Distinguished Professor of Real Estate Finance at George Mason University in Fairfax, Va., used his Confounded Interest blog to point out a disturbing data trend that clouded the economic numbers at the tail-end of 2014.

“The good news … if you already own a home … is that the Case-Shiller home price index for December grew at a rate of 4.46 percent year-over-year,” Dr. Sanders wrote. “That is awesome, considering the inflation rate in the U.S. is only 0.8 percent. And wage growth is around two percent. So if you already own your home, you are on easy street. If not, you are on rental street.”

Earlier in the month, Dr. Sanders focused on affordability in regard to central bank policies.

“Housing is getting unaffordable again, in part thanks to the Federal Reserve’s quantitative easing programs,” he stated in a Feb. 9 blog. “House prices are rising, while real median household income fell/stagnated. Homeownership and mortgage purchase applications keep falling despite low mortgage rates and massive Fed intervention. Even the 64 percent homeownership [rate] is misleading. Rentership is on the rise in big cities, even in cities where homeowners are the majority.”

At first, this might seem confusing. On the surface, it seems that the economic picture is encouraging a greater degree of housing affordability.

“Home values are up, interest rates are still down and employment is getting back,” observed Mat Ishbia, president and CEO of Troy, Mich.-based United Wholesale Mortgage (UWM). “I don’t think it is relatively harder [to find an affordable house] in today’s market than it was three years ago or it was seven years ago.”

But while the bigger picture may seem serene, the situation becomes more complicated when one goes into specific markets–even the supposedly healthier ones.

“Our market is one of the better markets in the nation,” said Fred Law, broker/owner at Law Real Estate, based in the Salt Lake City suburb of Draper, Utah. “We didn’t have the major downturn here. We have an excellent workforce and good economy.”

Yet Law pointed out that while his market looks solid on the surface, there are fissures within that create grief.

“Our average home price has been around $235,000 to $240,000,” Law continued. “But many buyers cannot afford to pay that anymore. And rental values are rising here because a lot of people cannot qualify or get a loan.”

Rising rents are the proverbial fuel to the flames, according to Stan Humphries, chief economist at Zillow.

“Rental affordability never looked worse in this country,” Humphries said. “I categorize it as a crisis in housing–probably because more than one-third of us are renters. The lack of affordable options means less discretionary income for other things. It becomes hard for renters to save for a down payment for homeownership later.”

And that brings about another problem: Saving for a downpayment. From initial appearances, this should not seem to be a problem. In fact, U.S. Department of Commerce data showed that the total amount of bank account-based consumer saving equaled the total amount of consumer spending in 2014, at $11.9 trillion each.

“As far as the convergence in the amount of bank savings with consumer savings – this is a first time event,” said Dr. Dan Geller, developer of the Money Anxiety Index. “It never happened before. This shows a proportional decline in spending and the proportional increase in savings.”

But Dr. Geller quickly pointed out that the seemingly simple act of saving money is complicated by several factors.

“The jobs coming online right now are paying less than the jobs we lost during the recession,” Dr. Geller continued. “That’s an issue. These new employees have low earnings, and that affects mortgages. And the cost of education translates into young people starting their financial life with a burden that would have otherwise been directed to mortgages.”

Phil Bracken, chairman and founder of America’s Homeowner Alliance and a former executive vice president at Wells Fargo, agreed that the challenge for savings is acute when it comes to homeownership.

“The average firefighter with average debts who wants to buy an average house would have to save 22 years for a 10 percent downpayment,” Bracken said. “A middle school teacher would have to save 18 years, and a nurse 15 years.”

But Bracken also stressed that the question of affordability in housing points to an even bigger problem.

“The economy is leading housing out of the recession, as opposed to the other way around,” Bracken said, adding that the current situation will create more problems in the near future unless there is a significant change. “Between 2012 and 2015, there will be approximately 17 million new households founded, and about 74 percent of those will consist of people of color. But they have no generational wealth, no large holdings of stocks and bonds or savings. The group is most in need of accessible and affordable policies.”

Even the financial institutions that are celebrated for going the extra mile on customer service are hampered when it comes to offering residential mortgages. Bob Dorsa, president of the American Credit Union Mortgage Association (ACUMA), pointed out that while credit unions are eager to work with borrowers seeking an affordable home, the two segments that are most at risk of being shut out of the housing affordability equation–Millennials and the nation’s immigrant population–are the two groups that are not active within the credit union movement.

“The credit unions have to reach out to both of these demographic groups,” Dorsa complained. “The average age of credit union member is mid-50s. It is a matter of repositioning and restructuring the credit union membership base. But the question is how do we go out and reach those groups?”

But more pressing to the wider financial services world is the question of the regulatory burden placed on lenders in the aftermath of the 2008 crash.

“It is more difficult to qualify borrowers,” said Ron Haynie, executive vice president of mortgage services at the Independent Community Bankers Association (ICBA). “Many of our bankers said there are loans they made years ago that they are not comfortable making now. They are concerned they could end up with a problem down the road. The business is so regulated that there seems to be zero tolerance for any kind of error on a mortgage. There is no way they’re making those loans–or, if they do, they’ll be very, very selective.”

And this raises a crucial point regarding affordability–lenders that are eager to work with borrowers, but are apprehensive to move forward aggressively due to established and perceived repercussions from regulators. John Councilman, CMC, CRMS, president of NAMB–The Association of Mortgage Professionals and president of Fort Myers, Fla.-based AMC Mortgage Corporation, stated that regulations that were designed to protect consumers had an unintended effect of keeping them out of the home loan process.

“We’ve restricted the people who can actually get a loan, and that has a dampening effect,” Councilman said. “We don’t have any flexibility in the loans being offered. This makes it difficult for people have who attempt to qualify. And borrowers are afraid to go into the process because it is not a pleasant process to be in.”

In fairness, the federal government has not been completely indifferent to the situation. The government-sponsored enterprises are now enabling a 97 percent loan-to-value (LTV) threshold while the Federal Housing Administration (FHA) has lowered its mortgage insurance premium. But Matthew Ostrander, chairman and CEO of Parkside Lending LLC in San Francisco and a director of the California Mortgage Bankers Association (CMBA), observed that Washington has muscled out the private sector when it comes to offering new solutions to expand affordability in housing.

“It stymies innovation,” Ostrander complained. “We’re at an innovation standstill to have new products to help the buyer when Fannie, Freddie and the FHA control 95 percent of the market.”

But is there a total absence of solutions to the affordability puzzle? Brian Koss, executive vice president at Danvers, Mass.-based Mortgage Network, believed one possible approach involves micro-housing, both in the so-called “tiny house” movement of smaller private homes as well as the more compact apartments that becoming more common in urban settings.

“People are okay with less now,” Koss said. “They are willing to deal with 600- to 800-square-feet. Instead of trying to build big penthouse units for Euro-money, [builders] should build something smaller for people that can use them–after all, in view of the amount of time spent living outside of the house, many people just want a place to lay their head at night. That would give folks a better foot in the door.”

Jason Madiedo, president and chief executive officer of Las Vegas-based Venta Financial Group and president of the National Association of Hispanic Real Estate Professionals (NAHREP), suggested taking the current 97 percent LTV and pushing it even further.

“I think a 100 percent LTV mortgage would be helpful, if it is underwritten and documented properly and if it ensures that sustainable and responsible lending decisions are being made,” Madiedo said.

But Chris Sorensen, director of mergers and acquisitions at Corona, Calif.-based Paramount Residential Mortgage Group Inc. (PRMG), expressed concern that the mortgage industry is being forced to fix a problem that goes deeper than the origination process.

“It seems to me that we don’t have an affordability issue due to the mortgage industry,” Sorensen explained. “The mortgage industry should not seek to find a lower common denominator via less restrictive standards or more creative loan programs as this simply masks the underlying challenge we face today. The true challenge is getting a president and a pro-capitalist Congress to release the power of the American economic juggernaut, which has been stymied due to the social experimentation currently occurring. If we were to leave this to the mortgage industry, all it can do is work with Wall Street in an effort to come up with new and creative means to entice institutional investors and rating agencies to inhale ether and express how safe a mortgage-backed security is, based on borrowers who cannot afford their mortgage. And that is what ushered in the last economic crisis!”

But on the other hand, there is the point of view that affordability is not a national issue, but rather one that is distinctive to individual markets.

“I don’t know if the industry can do anything to make it easier to get into homes,” said Peter Doiron, senior vice president of residential lending at Thomaston Savings Bank in Thomaston, Conn. “Affordability issue varies by sections of the country. Our average loan size is about $170,000, and that’s pretty much affordable when you are looking at 20 percent down. We are not into real high-ticket areas, but we are trying to do deals in a variety of price ranges. We’re putting together a $70,000 loan on a HUD property that was foreclosed on–it’s not that bad of a piece of property.”

“You have some markets that are unchanged,” said Jeff Del Rey, director of strategic partnerships at Mission Viejo, Calif.-based PCV Murcor. “Pennsylvania, Boston, Cleveland–they are no better or worse than they were a couple of years ago. Even Michigan is still affordable, but it is seeing an uptick in value. And in Phoenix, people are going away from single-family house to condo and townhouses–that is roughly a $100,000 difference.”

Still, not everyone in the industry believed that affordability in housing is at or approaching a crisis level.

“Interest rates are as low as I’ve seen in my life,” said Paul Abbamonto, chief operating officer at Orange, Calif.-based LRES. “We can all guess that rates are going to increase, and that will change the formula of what’s affordable and what’s not. But for the last four to five years, there’s been the opportunity for people to get property at absolute bargain prices %u2026 I doubt we’ll see that kind of price drop ever again.”

Abbamonto added that he has brought his observations home to his family.

“We have four girls, and I tell them the same thing: Buy what you can today, because five years from now it will potentially be more difficult,” he said.

And taking optimism even further is the National Association of Home Builders (NAHB), which issued data on Feb. 19 that claimed 62.8 percent of new and existing homes sold in the fourth quarter of 2014 were affordable to families earning the U.S. median income of $63,900, up from 61.8 percent in the third quarter. The NAHB also stated that the national median home price declined from $220,800 in the third quarter to $215,000 in the fourth quarter while average mortgage interest rates decreased from 4.35 percent to 4.29 percent in the same period.

“This upturn in affordability for the final quarter of 2014 is a positive development and is in line with what we are hearing from builders in the field that more prospective buyers are starting to move forward in the marketplace,” said NAHB Chairman Tom Woods, a home builder from Blue Springs, Mo.

However, one prominent industry leader is not convinced that with the NAHB view that happy days are here again for affordability in housing.

“When anyone tells us housing is affordable, I say: If that’s the case, how come we have the worst mortgage demand ever with the lowest interest rates ever?” said Logan Mohtashami, an Irvine, Calif.-based senior loan manager at AMC Lending and a financial blogger at “In 2014, inventory was up and rates were down and we had negative demand. And if cash buyers weren’t 20 percent above their normal levels, 2013 and 2014 would have seen the lowest numbers after the Great Recession.”