Rising mortgage rates on top of sky-high prices are making it harder for Americans to afford a new home. Now the Biden Administration may make matters worse by cutting government mortgage insurance premiums.
Housing prices have surged nearly 40% nationwide since January 2020 and are up 16% in a year. The Federal Reserve is mainly responsible since it kept interest rates near-zero for too long while amassing an enormous portfolio of mortgage-backed securities. This pushed the average 30-year fixed mortgage rates below 3%.
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Cheap credit predictably stoked demand, but supply hasn’t kept pace. Prices have shot up in particular in such metro areas as Austin, Phoenix and Tampa, where many workers relocated during the pandemic. The cost-of-living arbitrage from moving gave them more cash to buy bigger, nicer homes.
The Fed’s housing support has been a boon for current home owners. Many have been able to refinance mortgages and slash their monthly payments by hundreds of dollars. Ninety-eight percent of homes with conventional 30-year mortgages have rates lower than 5%. But the losers are low- and middle-income Americans who don’t own homes and now can’t afford to buy them as the Fed finally raises rates. The 30-year fixed mortgage is now hovering at 5.1% to 5.3%, the highest since the summer of 2009.
This has the Administration looking for ways to offset rising mortgage rates. One idea from the housing lobby is to cut Federal Housing Administration premiums. The FHA insures mortgages for buyers with low credit scores and down payments as low as 3.5%. Home-buyers pay a 1.75% fee up front on a 30-year loan and then an annual premium of 0.8% to 1.05%, depending on the size of the loan and down payment.
The housing lobby says the FHA is well-capitalized and delinquencies are close to pre-pandemic levels. That may be true—for now. But a recession is possible in the next year or two. Homeowners aren’t over-leveraged as they were during the pre-pandemic housing bubble, but Ed Pinto of the American Enterprise Institute (AEI) notes that highly levered FHA loans are a weak spot.
Many FHA homeowners could probably avoid foreclosure by selling their homes if they can’t make payments. But this would put downward pressure on housing prices in lower-income neighborhoods, which could then result in more foreclosures. Cutting FHA premiums would increase the risk for taxpayers who would have to cover mortgage losses if the agency can’t.
The idea is also likely to boomerang. An AEI study found that a 50 basis-point cut in FHA’s annual premiums in 2015 had the effect of reducing monthly payments by the same amount as a three-quarter percentage point drop in the mortgage rate. This increased the purchasing power of FHA buyers but also increased prices in neighborhoods with more FHA loans.
The beneficiaries—no surprise—were existing homeowners and Realtors who made larger commissions on higher prices. Mortgage lenders are pushing an FHA premium cut because they want to keep the housing boom going no matter the risks. The Biden Administration will be fooling itself and the public if it thinks it can help home buyers by making FHA loans riskier.