Why are there so many homebuying hardships? She knows
Ohio State Professor Stephanie Moulton answers alumni questions about why it can feel impossible to purchase a home these days.
In addition to teaching and researching, Professor Stephanie Moulton advises government and nonprofit groups on homeownership programs.
Homeownership is interwoven into the American dream. It’s how we build wealth. It’s a big way we build families and communities. And yet now, for many in the United States, it seems harder than ever to purchase a home. Ohio State’s Stephanie Moulton is a professor and associate dean for faculty and research at the John Glenn College of Public Affairs. She specializes in housing and consumer finance, with expertise in mortgages and access to homeownership. Recently, Moulton took questions from alumni about this critical topic.
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Why are we seeing so much home pricing inflation? — Steve Hetey ’66, ’69, ’74 MS
House prices are a function of supply and demand. When the supply of homes on the market slows down while demand remains strong, house prices increase. This is generally a good thing for existing homeowners who benefit from the increase in housing wealth as house prices go up, but it can make it difficult for new buyers to enter the market. There are several factors limiting the supply of homes for sale in the market right now, including limited construction of new homes (with high costs of housing construction) as well as low turnover of the existing housing stock.
People are holding on to their existing homes now, reducing the amount of inventory entering the market. One reason is many people locked in historically low interest rates on their mortgages in 2020 and 2021 through refinancing or purchasing a home. Mortgage interest rates fell to a record low of just under 3 percent in 2021. Nearly half of all mortgages active today were originated or refinanced in 2020 or 2021.
Today, mortgage interest rates are around 7 percent. While not high by historic standards, a 4 percentage point increase in interest rates on a 30-year mortgage results in a much bigger monthly payment. For example, the monthly payment on a $250,000 mortgage at 3 percent interest is just over $1,000 compared to a monthly payment of over $1,600 at 7 percent interest. This creates what we call “interest rate lock-in,” where people with mortgages at these low rates do not want to sell their homes and lose out on their low monthly housing payments.
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Are the current rates the ‘new normal’ and Gen X’ers like me have been spoiled by 2 and 3 percent rate opportunities? — Sarah Schoonover ’07 MBA
Interest rates on 30-year mortgages as low as 2 and 3 percent in 2021 were abnormally low. It is unlikely that rates will fall that low again in the foreseeable future. So, yes, we were a bit spoiled. Mortgage rates of around 7 percent are actually close to the historic average over the past 30 years—so our rates today aren’t abnormally high, historically speaking. Yet rates do move up and down, and it would not be unexpected for rates to drop by 1 or 2 percentage points over the next few years.
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Is homeownership for most Americans, especially single women, out of reach? — Lindsay Kidd ’06
This is an important question. Inequalities in who can access homeownership exacerbate inequalities in our country. Homeownership is not just about a place to live; it is the primary way most Americans build wealth, for better and worse. If particular groups of the population are unable to enter homeownership because of income, affordability or credit constraints, then that group is shut off from our primary wealth-building mechanism.
Right now, homeownership is unaffordable for many Americans because of high house prices and low inventory of homes for sale at lower price points in many housing markets across the United States. Typically, experts recommend homeowners spend no more than 28 percent of their gross monthly income on housing payments, and no more than 36 percent of gross monthly income on house payments plus all other financed monthly debt payments (such as automobile loans, student loans and credit cards) combined. Single households and those with only one wage earner may find it particularly difficult to afford a home right now. However, there are programs to help low- and moderate-income households access homeownership.
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Where should first-time homebuyers go to get educated on options, such as tax incentives, grants and the correct order of steps to qualify for a mortgage? — Monica Dornfeld ’87
There are a lot of resources to help first-time homebuyers and other homebuyers who may face constraints. A good first place to start is by contacting a U.S. Department of Housing and Urban Development (HUD)-approved housing counseling organization.
HUD’s website provides a look-up tool to find a housing counseling organization in your area. There is also an organization called Down Payment Resource that maintains a database of all down payment assistance programs across the U.S.
You might also check your state’s housing finance agency, as most state housing finance agencies offer affordable mortgage programs and down payment assistance for low- and moderate-income homeowners. In Ohio, you can check out the Ohio Housing Finance Agency’s homebuyer programs at myohiohome.org/homebuyerprogram.aspx.
