Homewise CEO talks homeownership affordability

Below is the transcription of the interview. These transcriptions, powered by Speechpad, have been lightly edited and may contain small errors from reproduction:

HousingWire: Hello HousingWire listeners. Today I’m joined by Mike Loftin, who is the CEO of Homewise and visiting fellow at the Urban Institute’s Housing Finance Policy Center. Today Mike will be speaking to us about his recent HFPC brief titled “Home Ownership is Affordable Housing.” Mike, thank you for joining us today.

Mike Loftin: Thank you.

HousingWire: So before we jump in, can you tell our listeners a little bit about yourself and Homewise?

Mike Loftin: Yeah. I’ve been doing this kind of work for quite awhile. I grew up in Albuquerque. I moved to Chicago, was a community organizer and I ended up working on housing issues in the Pilsen neighborhood, 18th Street area where homes were affordable but it was a largely Mexican immigrant community and people really needed help in accessing them. And then I moved back to New Mexico almost 30 years ago, back to High Cloud Santa Fe and then began this 29-year journey to figure out how to help first-time homebuyers in a place where wages are low but housing costs are really high. You know, people who wanted to own their own home could no longer, didn’t think they could afford to. Our median price of a home in Santa Fe is over $500 and something.

So now Homewise works in Albuquerque where home prices, again, are lower but people still need help accessing these more affordable homes. As you know, qualifying for a mortgage even when homes are affordable can be a big barrier to being able to buy.

HousingWire: All right. Well, I’d like to get started by discussing your recent brief where you examine data on affordability for the typical homeowner versus the typical renter across income level and race and ethnicity. Your brief claims home ownership tends to be more affordable than renting so why do you believe this is and what data supports this?

Mike Loftin: Well, the data definitely supports this. If you look at all homeowners in America and all renters, homeowners pay 10 percentage points less of their income on housing than the renters. So one reason people may think that’s true is, well, homeowners tend to have higher incomes so that would make sense. But if you control for that and you look at low-income households, so you look at households that earn less than $50,000 a year, which is considered low-income, renters pay about 34% of their income on housing while owners pay only 24%. So it’s like a third less, what owners pay versus renters. And then if you look at buying from Hispanic homeowners, they also pay less than black and Hispanic renters but also black and Hispanic homeowners pay less than white renters do. So even with all the inequality and equity problems in America, the homeowner does better.

You know, another way to look at this is, you know, many people in housing are familiar with the concept of housing cost burden. So the cost burden means you pay more than 30% of your income on housing expenses. Seventy-five of families that have less than $50,000 a year income, 75% of the renters are cost burdened. Less than 50% of homeowners are. It’s true across the board.

Now, one thing that the research is very interesting for me was looking at…we talk about cost burden a lot but we don’t talk about who is not cost burdened. And so I looked at like, well, who pays less than 20% of their income on housing expenses? And for low-income homeowners, 31% of them pay less than 20% of their income on housing. You know, that’s pretty cool because that means your housing expense is low, helps you get ahead. But if you look at renters, only 7% of renters pay less than 20% of their income on housing. So I think homeownership is just a very overlooked way to address our affordable housing problem in America.

HousingWire: That’s interesting. Well, as we continue to see an incredibly competitive housing market over the last year coupled with rising home buyer demand and declining supply, experts say these factors are contributing to a worsening affordability crisis. So how should the industry address these concerns?

Mike Loftin: Well first, I think there’s ways but I think one thing to keep in mind before we get into that is that there is still a lot of weaker housing markets where it’s affordable to buy a home, even though home prices are going up and you’ve really seen it a lot in this last year. But if you really look at the majority of the country, homeownership is still pretty affordable. So according to Adam, that does a lot of data analysis, it’s cheaper to buy a home than to rent in two-thirds of American counties. So we need to pay attention to the rest of this country.

Not everybody lives on the coasts where home prices are higher. Not everyone lives in places like Santa Fe where home prices are high. So we need to keep this in mind that for many people the issue is not that homeownership is too expensive. The issue is access. They can’t qualify for a mortgage. They don’t have money for a down payment. There’s other barriers that get in the way of them taking advantage of something that’s already affordable.

Now, having said that, there are high cost markets where homes are expensive and so you do need supply-side strategies to increase the supply of affordable homes. You also need to figure out ways to help make the existing homes more affordable. So that could include down payment assistance that reduces the cost of buying. And we did this at Homewise all the time. Let’s help people who have low down payments buy a home without mortgage insurance because mortgage insurance just adds a huge cost to the financing. By getting rid of that, you make the housing more affordable.

HousingWire: Okay. Well, let’s pick back up on homebuilding. The latest report from the National Association of Home Builders and Wells Fargo Housing Opportunity Index indicates housing affordability weakened slightly during the first quarter of 2021. As construction costs and lumber prices soar and home prices continue to rise, in your point of view, how does steep competition financially impact the potential homebuyers?

Mike Loftin: Well, I mean it’s disturbing what’s going on with the rising prices in many markets, right? So now there’s big questions of, you know, a lot of this was related to COVID and as people bring homes back on the market, is the market going to get a little healthier? Because lots of homes got taken off the market during COVID and many of those are starting to come back on the market.

But I wouldn’t just, you know, say everything’s going to be okay because of that. I think we do need strategies, like I said before, to increase the supply of affordable housing. I think one thing that communities overlook too is inclusionary zoning, which in new developments, this works well in high-cost markets like Santa Fe, where a percentage of the homes need to be affordable. And so in Santa Fe, 20% of all new homes being built need to be affordable to working class people, and it’s mandated and it’s really helped a lot.

The other thing is I think we take a look at the cost of financing. As you know, mortgage rates are still really low. It’s a great deal. But there are hidden costs, hidden added costs oftentimes added to those who can least afford it. Because I don’t have much of a down payment, I need down payment assistance, I have to pay for mortgage insurance. If we eliminate that added cost, it makes the home more affordable.

Another is, and lots of housing finance agencies do this where they premium price the mortgage. So they raise the interest rate and then they use the profitability from that to fund down payment assistance. We’re working at cross purposes in this case, right? So we’re helping people solve the down payment problem but we’re making their mortgage payment higher. I think we need to get away from that and have a down payment assistance program for those people whose parents can’t play that role, get that down payment without having the premium price to their mortgage and make their home even more or less affordable.

HousingWire: It’s interesting. In your brief you mentioned we need more help for low-income families and racial and ethnic minorities so they can own more homes and you examined data from the 2019 American Community survey that breaks down the cost of owning versus renting. You indicate that home ownership is still more affordable than renting but with prices climbing in almost every metro each and every day, is this true for the majority of Americans?

Mike Loftin: You know, it’s not. I love this question because oftentimes…I was at a conference of, like, 30 housing experts looking at a…think tank that we’re doing housing affordability analysis in a report. And somebody showed a graph of here’s rising rents since the Great Recession and here’s rising home prices. So homeowners and renters are both being hurt by rising prices and I look at it and I go, “You know, that’s not true. That’s only half the story.” It’s true that the rising rents are affecting renters but it’s not true that rising home prices are affecting homeowners because no one buys their house every year. They don’t rebuy the house. So their costs are not going up. The only part of their costs that’s going up that’s subject to inflation is taxes and insurance. The principal and interest payments are the same, assuming you have a fixed rate mortgage, right? That’s a key part of why homeownership is more affordable than renting over time is because you’ve held constant the biggest part of their housing expense.

So on the other hand, there’s no such thing as a 30-year lease that holds your rent constant. A hundred percent of your rent is subject to inflation, and in fact it’s worse than that because since the Great Recession, rents have increased at twice the rate of overall inflation. So if we’re going to solve the affordable housing problem long term, getting people into homes, into housing that they own and a fixed rate mortgage, they may be stretching to buy that home at the beginning and paying a bigger percentage of their income on the housing payment. But because the majority of their housing payment is held constant, they get ahead over time. So I think we need to remember that right now. That said, buying a home now with home prices going up for the new homebuyer, it’s more expensive and so we definitely need interventions to help to make sure people have access to that.

But I wrote this other piece on how America should consider creating a homeownership voucher just like we have rent vouchers. But it’s a one-time thing. On the housing choice voucher user, on average, gets about $60,000 of assistance, rent assistance. For $15,000, for a fourth of that cost, you could help a lot of people buy a home and as long as they’re successful in owning that home over time, you don’t have to keep writing checks. We could get ahead of the affordable housing crisis in America if we began to look towards homeownership as more of a solution. Not that we don’t need rent programs too. We do. I am not advocating that we do away with those. What I’m advocating is that we give homeownership its just due in serving and helping to solve the affordable housing problem.

HousingWire: Okay. Thanks for answering that. Well, I’d like to continue the discussion on increasing access to affordable homeownership for low-income families and minorities. We established homeownership tends to be more affordable than renting in many cases but what are some of the challenges or barriers low-income or minority homebuyers face in the housing market? And in your perspective, how do we address the issue in order to create more access to affordable homeownership?

Mike Loftin: Some of the barriers are…which we know, right, is like many people don’t have down payment. Their parents didn’t own a home, their grandparents didn’t own a home. In fact, for many households of color, you know, up until 1968 the federal government legally discriminated against people and 2% of FHA mortgages were made to black households. So, you know, if prior generations weren’t able to build wealth, it’s hard for the next generation to do it because they don’t get that help. So we need to step in as a country and say, “We’re going to help with that down payment problem.” So I think having…that’s what I like about this home ownership voucher idea is like, that’s something that will help people overcome that barrier.

There’s also barriers like people have poor credit or they have no credit or they have too much consumer debt. But there’s ways to solve that. No one was born with a bad credit score. You can earn a bad one, you can earn a good one. It’s not rocket science to help somebody improve that.

I think a huge barrier is many people don’t even think it’s a possibility to own their own home. They don’t have people in their family that own a home. So what I think we need is we need to really invest in an alternative homebuyer service delivery system that knows how to reach people who have been left behind, knows how to help them overcome the barriers that they face. The existing delivery system is not going to do it on its own.

I mean, we should not be looking to the same mortgage lenders who marketed highly profitable predatory loans in the black church to help us close the home ownership gap. We really need to have institutions and organizations focus on helping solve that problem. So there’s community development financial institutions that have that focus, community development credit unions, minority depository institutions. There’s folks out there that care about this. They just don’t have enough capacity to do the work that we need to do to get it to the scale to truly begin to close the homeownership gap. We need to start investing in how we’re going to reach people who’ve been left behind and not just assume the existing assistance is going to take care of it.

HousingWire: All right, Mike. Well, my last question for you today is in order to increase housing affordability, what do policy makers in the housing industry need to be keeping in mind?

Mike Loftin: Well, I think we need to, like I said, we need a down payment assistance program or a home ownership voucher that’s simple. We have down payment assistance programs in America. There’s over 2,500 of them. Across the country, some of them are funded by things like HUD’s home program. And if you look at the home rates that affect down payment assistance programs, it’s a train wreck and they’re very complicated. They’re very difficult to use. So as a result, the majority of state and local governments have gotten out of using home money for down payment assistance.

We need to fix those things and I’m hoping in the new administration, because I think they do care about this home ownership gap and the wealth gap in America, and they care about affordable housing. And as we’ve talked about, home ownership is a really powerful way to achieve housing affordability. We need to look at those existing programs and fix their flaws as well as bring new resources to the table because we can solve this problem. This is not a problem…this is not like figuring out how to get a person on Mars. This is something we know how to do. We need the political will.

HousingWire: Okay. Well, lastly before we go, is there anything else that you’d like to add today or anything else that our listeners should know?

Mike Loftin: You know, I would just say that what’s really good and encouraging is there’s a growing recognition that in order for America to help close its wealth gap, it needs to address its homeownership gap. What I’m hoping is that we also begin to see that if we’re going to address affordable housing prices, we also need to address the homeownership gap.

HousingWire: Mike, thank you for your time today. We appreciate it. And thank you for joining us on HousingWire Daily.

Mike Loftin: Thank you.