Lenders: A Shortage of Supply Slowed 2018 Home Sales and Worsened Affordability

An insufficient supply of homes available for sale was the top reason for the slow growth in home sales last year, according to lenders surveyed as part of Fannie Mae's Mortgage Lender Sentiment Survey^® in the fourth quarter of 2018. The survey also found high home prices and an increase in mortgage rates to be notable factors behind the drop in sales activity.

Additionally, survey results indicated that lenders believe increasing the housing stock and offering consumer subsidies, such as a first-time homebuyer tax credit, could improve housing affordability for low- and moderate-income homebuyers.

The Mortgage Lender Sentiment Survey is a survey of senior mortgage executives conducted by Fannie Mae's Economic & Strategic Research Group. The quarterly survey seeks to gain a better understanding of the views of mortgage professionals about key issues in the housing industry. The latest iteration, conducted in November 2018, included additional questions that sought to understand lenders' views on improving housing affordability for low- and moderate-income homebuyers in the mortgage industry.

The study revealed the following key findings:

• Forty-eight percent of lenders surveyed said the tepid growth of home sales in 2018 was due to an insufficient inventory of homes available for sale. Twenty-four percent of respondents tied the weak sales to rising mortgage rates, and 20 percent said sales were weighed down by high home prices, which made it hard for prospective low- and moderate-income homeowners to find a home they can afford.
• By contrast, 1 percent of lenders attributed the weak sales in 2018 to tight credit and underwriting standards, and 2 percent tied the decline in home sales activity to a lack of mortgage products tailored to first-time or low- and moderate-income homebuyers.
• Growing the housing stock¹ was chosen by 45 percent of lenders as the most helpful idea to make housing more affordable for low- and moderate-income homebuyers. Offering consumer subsidies², as was done with the first-time homebuyer tax credit in 2008, was chosen by 18 percent of lenders as a solution to the shortage of affordable housing.
• By contrast, 11 percent of lenders responded that improving consumer readiness for homeownership would help make housing more affordable for low- and moderate-income homebuyers, and 10 percent selected offering a wider array of loan products. Other approaches, such as lowering the total cost of homeownership or offering education or job training to raise income levels, were each selected by 8 percent and 6 percent of lenders, respectively.
• When asked to evaluate the helpfulness of various loan programs to enhance housing affordability for low- and moderate-income homebuyers, lenders gave high ratings to low down payment mortgages (44%). Mortgage loans covering renovation costs (18%), loans for condominiums (17%), and loans for manufactured homes (17%) were also considered helpful by lenders. In contrast, loans for home construction (11%) and loans including energy-efficiency installation costs (5%) are seen as less helpful.

Echoing the views expressed in the Mortgage Lender Sentiment Survey, industry research and builder surveys also suggest that the inadequate supply of new homes is largely unrelated to primary or secondary mortgage market factors³.

In the face of the perceived impacts of non-mortgage supply constraints, it appears that further easing of consumer credit standards would be more likely to contribute to stronger home price appreciation than expanding sustainable homeownership.

Fannie Mae's own research indicates that an inadequate level of new housing construction relative to the pace of job growth and underlying demand has contributed to strong home price appreciation and ongoing affordability challenges for first-time and move-up homebuyers. Single-family (one-to-four units in structure) housing starts remain well below levels typically seen during expansions and, by our estimate, the annual pace should be about 200,000 units higher⁴.

To learn more, read our Fannie Mae Mortgage Lender Sentiment Survey Special Topic Report, "Increase Housing Supply to Improve Affordability."

Mark Palim
Vice President and Deputy Chief Economist
Economic and Strategic Research

January 30, 2019

¹ Examples of strategies for growing the housing stock include easing zoning regulations and density restrictions, modernizing building codes, and renovating existing housing stock.

² Examples of consumer subsidies include down payment assistance, assistance for closing costs, and first-time homebuyer tax credits.

³ NAHB (National Association of Home Builders) research has shown that labor, land, and regulations are the major concerns, not access to credit. Examples of research include "Construction Job Openings Decline in November" (Jan. 8, 2019), https://eyeonhousing.org/2019/01/construction-job-openings-decline-in-november/, "Problems with Lot Availability Remain Widespread" (Nov. 5, 2018), https://eyeonhousing.org/2018/11/problems-with-lot-availability-remain-widespread/, and "Regulation: 24.3 Percent of the Average New Home Price" (May 5, 2016), https://eyeonhousing.org/2016/05/regulation-24-3-percent-of-the-average-new-home-price/.

⁴ Since the end of the most recent recession, single-family housing starts have averaged only 647,000 on an annualized basis. This is in contrast to prior expansions since 1959 that have averaged 1.14 million single-family housing starts (seasonally adjusted annual rate). For our estimate of an annual deficit of roughly 200,000 single-family starts, underlying demand is the sum of our demographic projections of average annual household growth for the second half of this decade, demand for vacant units, and demand arising from the need to replace homes lost from the existing stock. Our household growth projections are disaggregated by structure type; vacant unit demand is estimated so as to keep total vacancy rates by structure type constant at current levels given projected household growth; and replacement demand is estimated by applying loss rates from the Census Bureau's most recent housing unit estimates to the current distribution of the housing stock by structure type, age, and Census Region.

The author thanks Steven Deggendorf, Rebecca Meeker, Pat Simmons, Doug Duncan, Nicole Kirkwood, Michael Lacour-Little, Michael Neal, Tom Seidenstein, and Li-Ning Huang for valuable contributions in the creation of this commentary and the design of the research. Of course, all errors and omissions remain the responsibility of the author.

Opinions, analyses, estimates, forecasts and other views reflected in this commentary should not be construed as indicating Fannie Mae's business prospects or expected results, are based on a number of assumptions, and are subject to change without notice. How this information affects Fannie Mae will depend on many factors. Changes in the assumptions or the information underlying these views could produce materially different results.