ONE night last spring, David Hall returned home to his
studio apartment outside Boston to learn that his monthly rent had spiked from
$725 to $995.
It would be much cheaper for the maintenance manager to buy
a nearby starter house than to stay put. But his mortgage broker told him that
while his credit score was good, it was not high enough to meet banks' tough
standards, he said.
"I know if I walk into a bank, they are just going to
laugh at me," Hall says. "So I'm stuck."
He is not alone.
Five years after the housing bubble burst, the United States
is in the midst of a housing affordability crisis. Home prices have fallen a
third from their peaks, but many Americans cannot benefit because they cannot
get a mortgage.
With credit tight, many consumers have no choice but to
rent. Others who can afford to buy are also renting, because they view real
estate as a lousy investment.
With this increased demand, rents in some cities have jumped
by double-digit percentage rates.
In the 12 months ended in May, rents rose 14% in San
Francisco and 11% in San Jose, California, according to real estate data
Last year in Minneapolis, they spiked 11%t even as home
values sank 8%.
People with lower incomes have long struggled to find
affordable housing, but many in the middle class are now hurting, too.
Most personal finance experts recommend allocating no more
than 30% of family income to housing, but nearly 40% of Americans are paying
more than a third, according to the US Census Bureau's American Community
In New York City, one-third of households are spending more
than half their pay on rent.
"We have falling incomes, rising rents and nothing but
substantial upward pressure on those rents," says Chris Herbert, director
of Harvard University's Joint Centre for Housing Studies.
"And nothing in the cards suggests it will turn around
Today's housing market is a buyer's paradise.
It is now cheaper to buy a home than it is to rent in
virtually every major city in the United States, according to John Burns Real
But for many in the renter class, buying even a modest home
is impossible because financing is so hard to secure.
Lending for home purchases hit a 12-year low of $404bn last
year, down from $1.4 trillion in 2006, according to trade publication Inside
Mortgage Finance. That means mortgage credit is tighter than it was even before
the housing boom.
This year, lending is expected to drop even more, according
to Inside Mortgage Finance.
A recent Morgan Stanley research report states that the
average credit score is 762 for a consumer securing a mortgage backed by
government-sponsored enterprises like Fannie Mae. But 65% of Americans have
scores below 750.
In other words, a disproportionate number of mortgages are
going to people with unusually good credit. A perfect score is 850, and anything
below 660 is considered subprime.
"Basically, access to credit for borrowers with less
than spotless credit is severely limited,"” the Morgan Stanley report
states. "“A good chunk" of US households are "cut off from
mortgage credit on this count alone".
For people who can get mortgages, rates are at their lowest
levels in several generations. Add that to the cheap home prices, and houses
are at their most affordable since at least 1970, when the National Association
of Realtors began tracking this metric.
Normally, high affordability translates into higher sales.
And the housing market is showing some signs of recovery - the S&P/Case
Shiller index of home prices had its third consecutive monthly gain in April.
Last week, the NAR said pending home sales had matched a
two-year high in May.
But any recovery has been tepid. The NAR said existing home
sales had declined 1.5% to a seasonally adjusted annual rate of 4.55 million in
May from 4.62 million in April.
That is 34.2% above the July 2010 bottom of 3.39 million,
but far short of the 5.5 million pace that the NAR considers healthy.
"Home sales have just barely picked up from their
cyclical lows, and that's because there are still constraints to
borrowing," said Moody's Analytics economist Celia Chen.
Part of the lender pullback has to do with the stringent
regulations Washington put in place after the housing crash, says Michael
Fratantoni, vice-president of the Mortgage Bankers Association.
These rules put more of the losses from bad mortgages onto
lenders, instead of investors or government-sponsored enterprises.
Then there is the climate of unstable home prices and a
shaky labor market: "There's a risk that even a borrower with moderately
good credit may fall behind," Fratantoni says.
Consumers who cannot buy must rent, and that is where many
Americans are feeling the pressure. A rent index from Zillow shows
year-over-year gains for 70% of the US metropolitan areas, while its home value
index rose in only 7.3%.
Only a few years ago, landlords in cities like San Francisco
and New York were tossing in a month or two of free rent, sometimes with
parking, to lure tenants into signing leases.
Today, applicants are showing up at apartment viewings with
copies of their unblemished credit reports and letters of recommendation from
bosses and prominent friends, in the hopes of snatching up a place to rent.
Equity Residential, one of the biggest apartment owners in
the United States, has more renters with high credit scores than ever,
vice-president of operations David Santee said on an April conference call with
Demand for apartments is also higher because many potential
buyers in their 20s and 30s want to stay flexible - home ownership is not as
attractive as it was to earlier generations.
Still, plenty of people would prefer entry into the
Last spring Rosemary Wynder, a physician order specialist,
found her rent shooting up. She decided to buy a house.
But a bank glitch in February had caused one late car loan
payment, dinging her credit score. The Utica, New York, resident has been
unable to straighten out the mistake, and five banks have rejected her for a
"I've been crying," says Wynder. "I've been