In this housing boom, mortgages are for losers

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Scarce supply and bidding wars have kept many entry level homebuyers out of the market for years. The government is trying to address this by ensuring a higher percentage of federal-backed mortgages go to low-income households, or for houses in communities with a large share of minorities.

Expanding mortgage availability is a worthwhile goal, but in a housing market now dominated by cash offers from big investors, it’s unlikely to move the needle. A more effective approach would start with the homestead exemption.

What the government is trying to do makes sense given the demographic changes in the market since the 2008 financial crisis. While housing has spent more than a decade recovering – and more recently, booming — the gains of that expansion haven’t been shared equally. Black and Latino homeownership rates have lagged.

Most mortgages are awarded to borrowers with the highest credit scores, so anyone with lower credit scores and incomes is at a disadvantage. Home-buying could be made more equitable if the government could expand mortgage access for quality borrowers who are getting squeezed by current underwriting standards.

The problem is that entry-level housing is the market segment with the least inventory, and where investors and cash buyers have been most active. Anyone in need of a mortgage to buy a home starts out at the back of the line.

After surveying various local housing markets, Rick Palacios Jr. at John Burns Real Estate Consulting noted on Twitter last week that in many markets buyers with federal loans have almost no chance of winning bidding wars given soaring prices and demand from cash buyers. Building more homes would help, but yield-starved investors could always gobble up any additional supply.

When crafting a strategy to boost entry-level homeownership, the Federal Housing Finance Agency needs to be taking the proliferation of cash buyers into account. The policy change that’s needed is something that makes ownership more attractive for individuals than for investors.

The mortgage interest deduction won’t do it. It’s a policy tool that’s not particularly relevant for the buyers and homes in question because interest rates are already so low, and because the selling price of affordable homes is generally below the threshold for mortgage interest deductions. Plus, it’s a policy tool that’s out of favor with legislators.

What might have more impact – albeit at the local government rather than the federal level – is the homestead exemption. The exemptions shield a certain amount of the assessed value of a house from property taxes, but only for those who own and occupy the home.

Local governments could increase the amount that’s covered by the homestead exemption, which would allow them to raise property tax rates without harming the homeowners. That would make owning these houses as investment properties less attractive, while giving would-be buyers less competition for the limited number of affordable units that come for sale.

There would be political blowback on this: it would probably mean higher property taxes for wealthy homeowners and local real estate investors would hate it. But to the extent politicians have an interest in entry-level homeownership, as opposed to letting investors gobble up that segment of the market, it’s a policy choice that could make a difference.

The reality for policymakers right now is that there’s going to be no simple solution to this problem. The shortage of affordable homes, cash-rich investors that have flocked to the asset class, and low interest rates that make fixed income investments unattractive, all make it harder for working class people to buy homes.

Expanding the availability of mortgages to low-income buyers might be a familiar policy tool, but it’s not likely to have much impact unless the supply problems and investor dynamics are addressed as well.

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners. Conor Sen is a Bloomberg Opinion columnist and the founder of Peachtree Creek Investments. He’s been a contributor to the Atlantic and Business Insider and resides in Atlanta.