Will the White House's new plan alleviate housing affordability?

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Last week, the White House announced new “actions” aimed at improving housing affordability and increasing homeownership for more Americans.

The actions include: 1. Allowing prospective mortgage borrowers “to use a portion of the actual or prospective rental income from an Accessory Dwelling Unit (ADU) to be added to the borrower’s effective income for purposes of qualifying for an FHA-insured mortgage.” 2. The USDA will award $9 million in loans to nine Native American Community Development Institutions. 3. FHA will consider “potential policy changes that could increase the funds available to borrowers to make renovations and repairs.” 4. The Consumer Financial Protection Bureau will work on reforming “existing rules to help homeowners when they have trouble making their mortgage payments.” 5. The VA Servicing Purchase (VASP) program “will help Veteran borrowers who are behind on their mortgage loan who do not qualify for traditional home retention options.” 6. In coming months, the White House says USDA “will launch a pilot to test alternative eligibility criteria related to community representation for Community Land Trust Organizations through its Section 502 Direct Home Loan Program.

Here's the essential question: Can these proposed "actions" actually increase housing supply, following one of the lowest 10-year periods for construction, and help alleviate housing affordability, currently at its worst levels since the early 1980s? Or are these "actions", from a macro view, merely a big nothing burger?

To better understand if these actions from the White House will actually help to increase housing supply, ResiClub reached out to housing economist Kevin Erdmann.

Erdmann, the author of "Shut Out: How A Housing Shortage Caused the Great Recession and Crippled Our Economy" and "Building from the Ground Up: Reclaiming the American Housing Boom," believes the U.S. has been underbuilding for decades and faces a significant lack of adequate housing supply. He also writes a newsletter called the Erdmann Housing Tracker.

Here is a transcript of Erdmann's thoughts on the "actions" announced by the White House:

Erdmann: The White House announced more new programs this week to improve access to housing. There are currently two pillars of American housing dysfunction. Local land use regulations mostly obstruct multi-unit construction. The federal government can only address that problem indirectly. Restrictions on mortgage access implemented in 2008 have, among other things, obstructed entry-level single-family housing construction. The scale of this shift is as massive as it is underappreciated. According to the New York Fed, in inflation-adjusted dollars, mortgage lending to borrowers with credit scores above 760 has continued apace at about $1 trillion annually, through boom and bust, with surprisingly little fluctuation, aside from the occasional refi boom. Lending to credit scores below 760 went from more than $3 trillion before 2007 to about $1 trillion since. This was not a correction from housing bubble excess. This was a change from long-standing lending norms, the scale of which cannot be overstated.

The new White House reforms come in four categories.

1. Subsidies like down payment assistance. These are the least useful, as they fall in the category of “obstruct supply and subsidize demand” that mostly just drives prices higher. Furthermore, it seems that the same ends can be achieved without public expense by simply allowing borrowers to use smaller down payments combined with limited forbearance in the few cases that don’t work out.

2. Direct investments in affordable housing. This sort of investment will always be necessary, and so I don’t oppose it. But, it is not a solution to our current problems. Solving our current housing supply problem is a precursor to making these investments economical and effective.

3. Forbearance programs to reduce foreclosures for families with temporary budget constraints. The experience of the Covid recession versus the Great Recession suggests that forbearance is vastly superior to harsh discipline as a macroeconomic tendency. The idea that mortgage access fuels housing inflation has been vastly overstated, and a number of inflexible and arbitrary demands on borrowers have become normalized in our lending systems that create unnecessary distress on individuals and the economy. However, I realize this is more of a Gestalt opinion than an undisputable reading of some particular evidence.

4. Programs meant to make mortgages more accessible, such as using rent payment history in credit applications and counting potential rental income on mortgages for back yard accessory units. These are generally great moves, but they are baby steps in a context where sub-760 credit score lending is down 75%. I appreciate the sentiment and the direction, and I appreciate that doing the right thing would be extremely unpopular. The federal mortgage agencies had a pretty good idea of how to find qualified borrowers before the Great Recession. We threw the baby out with the bath water in 2008 and unlearned all the ways that the agencies had been making mortgages more accessible. Carving out a bunch of new options and programs to re-establish mortgage access is like filling in the Grand Canyon with a spade. To make these programs work, and to keep them from being regressive, the agencies need to re-establish lending to sub-760 credit scores, in the way that they had been doing for years before the 2000s housing bubble.

What’s coming this week in housing.

Tuesday: Both PulteGroup (a homebuilder ranked No. 259 on the Fortune 500) and NVR (a homebuilder ranked No. 376 on the Fortune 500) report earnings.

Wednesday: New home sales/permits, and Fed Chair Jerome Powell speaks at the 2023 Moynihan Lecture in Social Science and Public Policy in Washington, D.C.

Thursday: Q3 GDP + residential fixed investment. Invitation Homes, which owns 82,837 U.S. single-family rentals, reports earnings.

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