Mortgages May Become Too Onerous

For those determined and financial able, wonderful homes are available at prices considered a steal just a few years ago.   A lively housing market has traditionally helped pull our economy out of the recession ditch.  What this market lacks are able consumers with dreams of a first-time or move-up home.

Although the latest recession was atypically harsh, there are signs of life in the housing sector.  Foreclosures dropped by half from 2010 to 2012, and housing starts almost doubled in 2013.  In the summer of 2013, home prices were up 10% year over year.  

There are plenty of resale and new homes and more will flood the market as prices rise.  Many home owners are stuck in homes with mortgages that exceed the home’s value.  They will list their homes when prices let them break even or recoup some of the equity they remember.  This supply pressure will dampen price increases, benefiting buyers.

Personal income is growing at 2.8%.  But mortgage rates have risen about 30%, (3.46% in Sept 2012 versus 4.49% in Sept 2013).  A 10% hike in home prices and 30% mortgage rate increase hits buyers with a 33% increase in the cost of carrying a new home.  That’s enough to shock consumers into sprinting after their new home rather than calmly considering their options.

If price and rates don’t spark buyers into action, new mortgage origination rules might.  Beginning in 2014, borrowers cannot have a debt-to-income ratio above 43%, regardless of how much their bank likes them.  Complete income, debt, and asset documentation must to be provided, unlike in the permissive times earlier.  These rules are likely hardest on the self-employed who often have erratic income.  Under today’s rules, 11% to 34% of borrower applications are being rejected.  Under the new, more stringent rules, rejections should increase unless fewer unqualified borrowers apply.    

Old rules or new, many young families lack the income needed to make a home purchase.  The 25 to 34-year old stratum provides the traditional first time or move-up homebuyers, but today in this group, only 75% are employed and many work in low paying jobs.  This thins the ranks of consumers willing and able to participate in the housing market.

Nothing painful is complete without taxes.  When Congress and the White House tire of the arrogant tantrums they call press conferences, they will again consider personal income tax reform and within that, exemptions such as mortgage interest.  Home buyers who worked hard to find the right home, and who showed long term discipline in their household finances will become the victims.  If the mortgage interest deduction is eliminated, home owners will face a tax typically 25% to 39.5% on mortgage interest they pay, and probably more when states follow the federal bad example.   

Those considering the purchase of a home are tugged in opposing directions.  There are great homes, but there are escalating prices, higher mortgage interest rates, a tougher debt-income ratio, and the possibly of an outrageous tax on their new home mortgage.  Deterrents may force the well qualified to reconsider the appeal of owning a home of their own.  That’s a step in the wrong direction for our nation.

Alan Daley is a retired businessman who lives in Florida and who writes for The American Consumer Institute Center for Citizen Research

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