Continued stagnation within the U.S housing market has been cited as one of the key factors contributing to a still slow economic recovery. Meanwhile, forecasts for the remainder of the year indicate a rise in foreclosures and sluggish home sales remain. We take a look at some of the causes of the housing market's ongoing problems and discuss a few possible solutions.
Continued stagnation within the U.S housing market has been cited as one of the key factors contributing to a still slow economic recovery. Meanwhile, forecasts for the remainder of the year indicate a rise in foreclosures and sluggish home sales remain.
While its impact has been felt by nearly every American, few groups of the population have felt the negative effects of the current economy moreso than young college graduates. A combination of a depressed job market and a total student debt of more than $1 trillion has led to greater difficulties for young people when it comes to purchasing a home. This problem could worsen if the interest rate on federally-subsidized Stafford loans doubles on July 1, according to the findings of a local advocacy group.
According to data released this week by the Illinois Public Interest Group, 9 percent of those aged 29 to 34 qualified for a first-time mortgage between 2009 and 2011, a 47 percent decline in the number of those who qualified ten years ago.
As Illinois PIRG Field Director Celeste Meiffren explained, much of the problem stems from increased levels of student loan debt, which has forced many college graduates to wait longer to purchase a home — further shrinking an already small pool of potential first-time buyers.
“A smaller pool of first-time home buyers has an outsized impact,” Meiffren stated. “With no one to buy their condo or small home, current homeowners with growing families cannot move into something larger, thus impacting the entire market.”
As California Association of Realtors Senior Economist Selma Hepp concluded in a recent blog post, student loan debt is factored in when a mortgage lender calculates a person’s debt-to-income ratio. If the ratio is too high –traditionally more than 33 percent -then the chances of getting approved for a home loan is unlikely.
“While the average student debt [around $19,000] impacts mortgage payment by 2 percent, the larger debt has a 7 percent impact on the mortgage payment,” Hepp wrote. “In either case, student loan payments matter in evaluating the debt-to-income ratio for a potential new homebuyer.”
The issue over whether to allow the current student loan interest rate of 3.4 percent to climb to 6.8 percent by July 1 has created yet another fight between Washington lawmakers, with Republicans and Democrats unable to agree on how to fund the estimated $6 billion it would cost to keep the rate at its current level.
“In Illinois, individual borrowers would carry $1,061 more in loan debt if the rate hike occurs, totaling more than $287 million in additional debt burden,” Meiffren said. “The increased rate hike would impact more than 365,000 borrowers in Illinois.”
But the decline in younger homebuyers is only part of a larger set of problems facing the housing market. Foreclosure activity is once again on the rise in a number of states, including Illinois.
According to the home listing service RealtyTrac, Illinois saw a 28 percent increase in foreclosure filings from April to May, reaching more than 15,000 — a 56 percent increase compared to the same time last year.
Concerns over foreclosures have prompted some lawmakers to propose changes to the Federal Housing Finance Agency's Home Affordable Refinance Program, or HARP, in hopes of making it easier for homeowners to refinance their mortgages at lower interest rates.
“Right now, mortgage rates are below 4 percent, but nearly half of homeowners are stuck paying 5 percent or higher because they can’t refinance,” Meiffren stated. “That may benefit the Wall Street banks who hold mortgage-backed securities, but it makes no sense for homeowners to be stuck paying above-market rates at a time when housing debt is a drag on the economy.”
Under the proposed Responsible Homeowner Refinancing Act, homeowners who received their mortgage loan through Fannie Mae and Freddie Mac and are current with their payments would be eligible to refinance their interest rates.
Findings of a recently-released Illinois PIRG study suggest the measure, if enacted, could save more than 500,000 Illinois homeowners an average of $3,337 annually.
“Congress has a rare bipartisan opportunity to put more money in American’s pockets, strengthen the housing market, and boost the entire economy, “Meiffren said. “Members of Congress from both sides of the aisle should seize the opportunity to help ordinary families and reduce foreclosures.”
But according to Katie Buitrago, a Woodstock Institute policy and communications associate, although the measure could help in stabilizing the housing market, it still fails to address the ongoing problem for the estimated 11 million who find themselves “underwater”, owing more on their home than it is currently worth.
“It does not necessarily address bringing them back above water,” Buitrago said of the proposed bill. “It does not break down the amount of negative equity that they have, which is still a missing key to stabilizing the housing market.”
One possible solution, Buitrago said, would be to allow homeowners to refinance into shorter, 20 year-term loans as opposed to the traditional 30-year plans.
“It allows them to pay more of their principal faster,” Buitrago said. “There are estimates that people could become above water – to gain equity in their homes – within five years, and once people have positive equity in their homes it makes it a lot easier to sell their homes.”
Introduced last month, the bill is still being considered by the Senate Committee on Banking, Housing and Urban Affairs with a date for a vote having yet to be scheduled.