The 2008 US housing market crash revealed flawed regulations and lending practices that led to disaster. Most of these flaws have since been addressed. Some responses to the crisis, however, remain incomplete, like reforming the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. Other responses have been too severe, contributing to new problems.

In the following conversation, research associate Karan Kaul discusses the state of the housing market and how new challenges have replaced the problems of 2008.

What is the biggest problem facing the housing market today?

The unfinished business of GSE reform gets a lot of attention, and it should, but other challenges also need attention. The most pressing issue facing the housing market today is that we are not building enough new homes.

The economy is getting better every day, and more young people are looking for homes to start their families. Well over 1 million new households are created every year, but we are only adding a net of about 800,000 units per year to house them.* This gap pushes house prices up, leading to many potential homebuyers being priced out of the market.

Most folks who can’t afford to buy a home become renters. Meanwhile, rents have increased significantly, which makes it more difficult for renters to save for a down payment.

How can we help more families access homeownership?

Access to mortgage credit remains too tight, making it too difficult for responsible borrowers to get loans. Before the housing crisis, lenders were making loans to people who couldn’t afford a mortgage. But now the pendulum has swung too far in the other direction. Mortgages today have default rates as low as you can possibly get.

More people could become homeowners, but many have irregular income streams, perhaps because they are self-employed or work in the gig economy. We need to find a way to help these people access responsible credit.

Lenders today are also very wary about lending to riskier borrowers. In the early 2000s, it was easier to get a mortgage, even if you lacked pristine credit. But today’s higher loan origination and servicing costs have dramatically shifted the profitability equation for lenders, making lending to these borrowers much more expensive.

Why have costs increased for lenders?

Originating a loan has become more time consuming because of the process of collecting volumes of information and documentation from borrowers and verifying everything to make sure the loan file is accurate. Lenders paid big fines for originating faulty loans during the bubble era. Now they are double- and triple-checking everything; hence higher costs.

Mortgage servicing has changed drastically as well, partly because of enhanced regulation, but also because the industry has changed from within. Servicing a mortgage was historically a back-office function. Once a loan was closed, a servicer for the most part processed payments, kept track of late fees, and did other such duties. 

But as the housing crisis unfolded, it became clear that servicers had to reach out to millions of struggling borrowers and understand their circumstances and why they may have fallen behind on payments. Did the borrower lose a job or have an unexpected medical expense? The servicer could then offer options to help borrowers deal with these different situations. This “high touch” servicing is very expensive and became much more common during the crisis.

To mitigate the high costs of origination and servicing, lenders are trying to avoid making loans with a higher likelihood of defaulting. If the loan defaults, the amount of money a lender has to spend on that loan is exorbitantly high.

How can we address these problems?

To boost housing supply, we should take a closer look at how land development and zoning regulations are disincentivizing new home construction. It can take years for builders to get permits, and the longer it takes to get a permit, the more expensive it becomes to build. Manufactured homes, for which production is expected to gradually increase, can also be a part of the solution.

To expand access to credit and encourage lenders to lend to more low- and moderate-income borrowers, we should address the rising cost of originating and servicing loans, perhaps through technological advancement. Fintech [financial technology] innovation could play a major role here. We can also help create more certainty for lenders. Other strategies, like boosting small-dollar mortgages, have great potential to help expand homeownership to those with less-than-perfect credit.