BOK Financial’s Michael Merritt breaks down ROAD to Housing Act impact on homebuyers

Sarah Wolak: Many housing experts argue that the affordability crisis is ultimately a supply problem. Do you think that could be remedied by the ROAD to Housing Act, should it become law?

Michael Merritt: It’s important to really look at the full picture of housing affordability. I think most fixes for it have focused on the demand side, and that’s why we haven’t really seen huge gains. It’s got to be addressed on both the supply and demand side, and this is the great thing about what this this legislation can do.

It’s not perfect, but for the first time in a meaningful way, legislation really is looking at the supply side, and not just one part of the supply side. It’s looking at a variety of ways that you make that better.

This legislation, if it does get signed into law, really can start to help with affordability from that side. The interesting thing is that while there are some demand-side elements to it, it really kind of ignores the part that usually gets the focus. When you roll back right now, that’s probably the single biggest lever that’s impacting housing affordability — it’s that there are just not enough houses, and that’s really what’s driving prices up and putting affordable housing out of reach for huge parts of the population.

Wolak: How much hope is this housing package bringing to prospective homeowners? And realistically, post-passage, when do you think we would start to see its effects in real time?

Merritt: There is hope, especially in some markets that are impacted on different elements that this bill addresses. One of the biggest headline takeaways from this bill is the limit on institutional investors buying homes, which has gotten a lot of attention. But really, that is a pretty localized impact.

There are certain markets where that has driven prices up, but for the most part, that’s not a huge impact on overall housing. I think the pilots are what can really make a difference.

There are longer-term things where it gives a framework on zoning — which, in my opinion, is one of the most under-reviewed and under-talked about impacts on housing affordability. If you look at some of the most unaffordable housing areas in the country, it can be traced back to some very specific zoning frameworks that are used, so having a framework to impact that is a longer-term fix.

Some of the pilots on smaller-balance HUD loans, those are things that can be longer term, so I think the design was to give some immediate relief and then other things that are going to improve over decades. We didn’t get into the mess overnight, so it’s not like we can fix it overnight.

Wolak: You mentioned some provisions that are designed to curb the influence of large institutional investors, and you said that has more of a localized impact. How significant would these changes be on a localized level?

Merritt: In certain metro areas, you usually see the bigger impact from some of the institutional investors. You’re facing limited supply today, and you have people who can come in with cash offers. When they find neighborhoods where the economics make sense to invest, and maybe it’s a strong rental market, they can come in and push out your everyday homebuyer who has to get financing and probably has a hard cap on what they’re approved for.

A large institutional investor could come in and buy every house in a ZIP code with cash. So it puts pressure on homebuyers in some of those markets. They have to go right at the asking price or slightly above it to make sure they get those homes. It puts a lot of pressure on everyone in that area.

Again, that’s not something every market faces, but real estate is local. If you’re in one of those markets, that provision of the bill could give immediate relief and put those limits in place.

You can argue whether it went far enough. What is a large institutional investor? The initial bill had a lower number that would qualify. I think they landed on the right number, but there are still ways larger companies can get around that with different LLCs and things like that.

Wolak: What additional steps beyond this legislation do you think are needed to make homeownership more attainable?

Merritt: One is zoning. I’m not a proponent of federal intervention at the local level for the most part, but zoning is an area where they could have been a little firmer in setting limits and priorities.

Having a framework that can be applied across the country is a great first step, but it’s an area that needs more attention and more focus at the state level, where states adopt some of these same frameworks. That would create more consistent regulatory and efficiency standards and help balance what it costs to build in some states. You could have some relief there.

Housing is the bedrock of the American dream and the American economy. One of the things impacting affordability is the cost of capital. You’re looking at a 30-year loan at fairly low margins, so they could have explored ways to provide relief on the demand side because the cost of capital impacts rates. You could have some form of subsidy to help make that more affordable for Americans.

While there were some pilots targeted at some of the lowest-income borrowers, they didn’t really have a true low-income focus. I think that was another area where they could have added additional pilots.

When you do a pilot, it has to prove that it works, so you’re not signing up for something that’s going to be law for 50 years. You can say, “HUD, we want you to do this additional pilot. We’ve looked at lower-balance loans. Now we want to look at something else for lower-income borrowers.”

The opportunity to see data and results in different communities — and across different borrower groups — could have provided useful information about the next major piece of legislation that should be rolled out. So again, it’s a good start, but there were definitely opportunities where they could have gone further or thought more outside the box.