State of Real Estate: Has Housing Really Recovered?

This post is part of a series in which LinkedIn Influencers analyze the state and future of their industry. Read all the posts here.

The country and real estate finance have come a long way since 2007. The US economy is growing overall, albeit slower than we might like. The national GDP is anticipated to grow at a pace of 2.5% for the next two years. Home values are increasing, foreclosures are at their lowest in years, and consumers believe now is a good time to buy a home. By most conventional standards, the housing market is in recovery. But I believe it’s time political and industry leaders look beyond housing recovery and create economic housing progress.

Rising mortgage rates and the implementation of Dodd-Frank regulatory rules have already begun to negatively affect the housing and mortgage markets. We are seeing the effects in declining home sales and a tight inventory of homes on the market. Mortgage application activity for home purchases is still around 17% lower than it was at the same time last year. Refinance application activity has been around 60% lower over the same time frame, indicating that the refinancing boom has run its course.

The delicate balancing act of consumer protections and access to affordable housing finance has always been at the heart of political and economic housing discussions, but striking the correct balance has never been more critical to the success of housing and economic recovery. Making real progress in the housing recovery will require three major improvements within the real estate finance system: easing access for first-time home-buyers, a transparent and consistent regulatory environment, and a competitive secondary mortgage market.

Today there are a number of factors keeping first-time buyers out of the housing market. As I noted earlier, purchase applications for mortgages have slipped nearly 17% compared to this time last year. Normally first-time buyers would step in to fill this void. However, since 2010, first-time buyers have only contributed to 30% of new applications; historically they have contributed 40%. One reason for this drop: many would-be first-time home-buyers are strapped with burdensome student debt. Student debt has tripled in the last decade and it is now damaging young peoples’ ability to borrow for a home. Now, under the new Qualified Mortgage rule, total monthly debt cannot exceed 43% of their monthly income. Without a significant down payment to lower monthly mortgage payments, they simply cannot bring their debt-to-income ratios within the required limits. Pushing these would-be buyers out of the home purchase marketplace also places a great deal of pressure on the rental market in urban areas by tipping the supply/demand balance and driving up rents. Absent a normalized flow of first-time buyers, the housing recovery will continue at a snail’s pace.

Next, we must have a transparent and consistent regulatory environment that protects consumers and avoids unintended consequences. For example, overlapping and conflicting loan servicing guidelines today require companies to juggle numerous, often duplicative requirements, each operating on a separate timeline. This misalignment causes confusion for borrowers and servicers alike and raises the cost of doing business, which increases the cost of getting a mortgage for potential home buyers. The industry needs alignment across federal government agencies, but also in conjunction with the states in order to keep serving potential and current borrowers in a timely and cost-effective manner. Clearly defined rules that work with each other will ensure that borrowers don’t caught in a web of regulatory red tape and impede the housing recovery.

Finally, a successful secondary mortgage market that produces a more stable and competitive system for all lenders, with greater protections for borrowers and taxpayers, will also contribute greatly to economic growth and stability. Fannie Mae and Freddie Mac (the GSEs) have been in conservatorship for more than five years. But conservatorship, by definition, is not a permanent state, and time is long past to make progress determining these entities’ future.

While there are some steps that can be taken without Congressional action (more on that in a minute), substantive, structural improvements to the current system require it. GSE reform bills that recognize the need to even the playing field for lenders of all sizes, reduce the government’s footprint, and encourage private capital to fully re-enter the housing market have been introduced in both the House and Senate.

While we continue working toward bipartisan solutions for the future end-state, we can begin transition without Congressional action and encourage the return of private capital through up-front risk sharing. Up-front risk sharing on GSE loans, coupled with corresponding guarantee fee discounts, would reduce taxpayers’ risk exposure without increasing costs to borrowers.

Throughout our nation’s history, Americans have been the innovators and drivers of our own success. Political and industry leaders must do more than just prevent another housing crisis. We must build a stronger, safer real estate finance system that works for the best interests of borrowers and allows for healthy private sector competition. We need a system that opens the door to affordable homes and thriving communities.