The big housing news of 2015 so far has been the Obama administration’s announcementthat the Federal Housing Administration (FHA) will reduce the annual premiums new borrowers pay for FHA-insured home mortgage loans by 50 basis points—a half percentage point. The administration says the move will help more than 2 million current FHA-insured homeowners save an average of $900 a year and enable 250,000 buyers to purchase their first home over the next three years.
The policy is part of President Obama’s broader agenda focused on middle-class families. Announcing the policy in a speech January 8, the president said the first home purchase by his grandfather as a returning World War II veteran was made possible by FHA insurance and proved to him that “America was a place if you worked hard, if you were responsible, it was rewarded.” Speaking the following week at the National Press Club, Julian Castro, U.S. secretary of housing and urban development, said, “It’s time to remove the stigma from promoting homeownership.”
Housing industry organizations and advocates generally applauded the administration’s action, concurring that it would expand the housing market, strengthen the economy, and assist first-time homebuyers in a fiscally responsible manner. Congressional Republicans and some industry analysts were sharply critical, asserting that reducing FHA premiums exposes the agency’s reserves to additional undue risks. Last year, those reserves required additional funding from Congress for the first time ever.
In an editorial, the Washington Post wrote, “Taxpayers might legitimately wonder . . . why it’s necessary to take on this additional risk so soon after the FHA’s bailout, before the capital cushion is even halfway rebuilt—and at a time when homebuyers are already enjoying record-low interest rates, plus a windfall from cheaper gasoline.”
The impacts of the policy will likely vary widely by location. RealtyTrac projected the average borrower savings in more than 1,100 counties and found a range from more of $4,000 in New York City and San Francisco to less than $200 in smaller cities in the Southeast.
Learn About TableauIn terms of industry impacts, history suggests that a larger market share for FHA lenders may put pressure on home mortgage loan providers that rely on private mortgage insurance. Smaller banks and nonbank lenders like Quicken Loans and loanDepot may be able to increase their share of the mortgage refinance market, according to the Wall Street Journal.
The administration has had much less to say about the rental housing market, even though a greater share of Americans are renting than at any time since 1995 and a wealth of analysis has shown that rental housing costs are an increasing challenge for middle-class families. One in four renters pays more than half of his or her income for rent, and neither the continuing recovery in apartment construction nor the availability, in some markets, of single-family rentals will come close to meeting the need.
The nation’s worsening rental housing needs are most acute for lower-income families, the vast majority of which receive no federal housing assistance of any kind.
The lack of attention to rental housing needs is not new. As Bloomberg Business Week observed after President Obama’s State of the Union address, “Presidents have long shown a policy—and rhetorical—preference for addressing homeownership in painting the American Dream for their audiences.”
That represents a longstanding missed opportunity for policy makers at all levels of government. Renters may make up half or more of new households over the next five to six years, with most of the growth driven by the two demographic trends shaping much of our society’s future—the rapid growth of older households and the broad racial/ethnic diversity of the millennial generation.
The federal government should be doing more to support the private sector’s ability to provide affordable rentals in communities of opportunity. Investing in proven programs such as housing choice vouchers and the low-income housing tax credit is an obvious step.
State and local governments can do more as well, by incentivizing mixed-use, mixed-income development and reducing regulatory barriers to balanced residential development, as recommended in a recent report by the ULI Terwilliger Center for Housing and Enterprise Community Partners.
A growing body of evidence shows that high-quality rental housing can contribute to better educational outcomes for children, improvements in family health, and more competitive local economies. Those gains are good for the real estate industry and society as a whole.
