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Dear President-Elect Trump:
With the election in the rearview, you are no doubt architecting the particulars for your second administration. One of the many matters of importance to Americans is your strategy for housing.
As the rest of the country waits, debates, and predicts an economic recession, the United States housing market has been languishing in a historic one for nearly 3 years. Economists and market participants love airplane analogies (soft landing, no landing) so I’ll dust off my epaulets and declare the state of housing a “crash landing.”
In 1995, the United States population hovered at 261 million. Today, it is 345 million. Though we have experienced 32% population growth, existing home sales will close this year at 1995 levels, per Fannie Mae’s latest forecast. Where are my parachute pants?
As an owner of a mortgage company and a 20-year housing veteran, I can tell you there is no shortage of people who want to buy just as there is no shortage of builders who want to build. But existing home sales are, in a word, abysmal. I haven’t seen a losing streak this bad since my New Year’s resolutions. In fact, since January of 2022, we have not witnessed one month of data to show existing home sales are not declining.
Not. One. Month. That’s almost impossible.
Why?
Super simple: Affordability.
The Atlanta Fed’s Homeownership Affordability index ticks in at 71, well beneath the level needed for a median-income family to afford a median-priced home. In fact, the income needed for annual homeownership cost to equal no more than 30 percent of annual income is $120,000. Actual median income in the U.S. is about $85K.
The candidate who opposed you in the election set her housing policy upon free money for first time homebuyers. I was openly critical of that plan as it would worsen affordability and increase the federal deficit. It sounded appealing, but as my wife says when we review the dessert menu, it would have been “empty calories.”
As I understand your plan, relaxed/common sense zoning changes and the release of federal lands will help spur homebuilding. Respectfully, while I agree with the need for improvement in these areas, this strategy is akin to swallowing an aspirin in 2027 for a migraine you have today. These are long plays focused in one area and insufficient to tackle the full breadth of the crisis facing the United States housing market.
Additionally, a central tenet of your election platform promised the deportation of illegal immigrants. Per a 2024 study by Immigration Impact, nearly 1.6 million undocumented immigrants work in construction. Could new home construction wane as you fulfill this campaign pledge? As I’m sure you recall, President George W. Bush deported 2 million illegal immigrants during his tenure. Housing starts plummeted to the lowest levels in 50 years in April of 2009 and the cost to build soared. To be fair, President Barack Obama continued the trend. And housing starts didn’t return to 2001 levels until 2022. A lost 20 years.
I’m not making a political statement on the rightness or wrongness of your approach. My priority is housing. Simply put, I don’t see how these policies are going to address the elephant in the room. See what I did there?
Because I know you believe yourself to be an outsider, bringing fresh perspectives and effective plans, allow me to cut to the chase.
I do my best thinking at the bar at Rathbun’s Steak. As legendary bartender, Irv, pours my Manhattan on a king cube and informs me of the specials (Spinalis!), let’s dive into Three Ways to Save Housing in America. All three will have an immediate, positive impact on affordability and will not add a penny to our federal deficit.
- Temporary reduction of capital gains tax for sale of investment properties.
Some stats:
As recently as 2023, it is estimated that investors accounted for 27% of all single-family home purchases, up from the high teens in 2019.
Contrary to popular opinion, most rental properties are not owned by hedge funds, but rather small and medium-sized landlords or “mom-and-pop” investors. According to Bankrate, there are 20+ million residential investment properties in the United States, with 14.3 million owned by individual investors. That is a lot of front doors.
What if, for a window of time, the United States reduced the capital gains tax on the sale of investment properties by half? If one would normally pay 20% based upon their tax bracket, they will pay 10% instead. Per the IRS, the largest bucket of filers pay a cap gains tax at 15%. Under this plan, that would drop to 7.5%. This could be a huge win-win-win (country, seller, buyer).
The country will realize tax revenue they would not otherwise receive at a time of desperate need. Our tax revenue only covers 72% of our congressional spending. Some quick back-of-the-napkin math on potential tax revenue from this idea.
- The average home sales price in 2019 was $258,000. Today, it is $404,500, per the National Association of REALTORS. That’s an average gain of $146,500. Assume only 10% of the twenty million investment property owners elect to sell to take advantage of your newly proposed tax break incentive on investment props. That is two million properties at an average cap gains rate of 7.5%. $2 million x $146,500 x 7.5% = ~$22 billion. $22 billion in tax revenue could fund the FBI for an entire year…or NASA…or the Department of Commerce…or HUD.
Meanwhile, the seller saves a huge chunk on this highly appreciated asset. And increased inventory at lower price points promotes a balanced market with price stability for the buyer.
We could even go so far as to allow for a further reduction of up to 60% of the capital gains tax liability if the condition of the sold investment property is C3 or better, as determined by an appraiser. Well-conditioned inventory hitting the market will serve a greater immediate need.
This would be a temporary solution, from Q2 2025 to Q4 2026.
- The implementation of premium recapture.
Don’t fall asleep on me.
Currently, there is very little “yield” on mortgage rates. Yield allows lenders to absorb pricing penalties, offer lower closing costs and generally provide more favorable terms to a client.
The reason yield has left the building faster than Matt Lauer left The Today Show is because investors are worried about pre-payment speeds. Everyone who is buying a home now is just waiting to refi. And that has been the case since June of 2022. The United States prime mortgage offerings have no prepayment penalty to the consumer. They can pay the loan off the day after closing with no impact – to them. But the impact for the issuer of that mortgage is huge. Lenders make money over the long haul via interest. Duh. A loan that pays off early does not provide the expected return and everyone on the lending side loses. I know you are a businessman and you’re not in business to lose. Neither are lenders.
When lenders perceive an increased risk of early payoffs, they take yield off the table, pushing a borrower to have more “skin in the game” and mitigate prepayment speeds. This punishes all borrowers, not just the ones who plan to pay their mortgage in full within the first year. By that same token, the industry is worsening affordability for everyone because of the potential actions of a few.
For this reason, we should institute what I will call “Premium Recapture” and inform the consumer that, should their mortgage pay off within the first 12 months after closing, their payoff will be increased by the amount of yield needed to make the original investor whole.
From there, investors could relax, assured of avoiding such losses. Yield purse strings will loosen, allowing lenders to offer more competitive terms. Lenders don’t get kicked in the teeth with early payoffs and every single borrower realizes better pricing at their favorite mortgage lender window. This, again, improves affordability. There’s that word again.
- Simplify loan level price adjustments
What the hell is a loan level price adjustment? The regulator of Fannie Mae/Freddie Mac is an entity called the Federal Housing Finance Agency. It’s this entity that establishes, among other things, a chart of loan level price adjustments based upon the “risk” of a given loan. Some call it risk-based pricing, as if all pricing isn’t risk based.
In the 20 years I’ve been lending, these price adjustments have expanded, worsened, expanded more, and worsened more. They are cash cows for Fannie Mae and Freddie Mac.
In Q3 of 2024, Fannie Mae reported net income of $4 billion. Do not miss that. Net income, not gross. And it is billion, with a “b.” And it’s for the quarter. For an industry in a years-long recession.
Compare that number to prior quarters and years and it looks in line.
- Q3 YTD 2024: $12.85 billion (on pace for more than $17B)
- 2023: $17.4 billion
- 2022: $12.9 billion
So, what is the big deal? The big deal is the volume. Here are the volume figures that underpin those profitability numbers. This is funded mortgage volume for single and multi-family homes:
- 2024 YTD through Q3: $274 billion
- 2023: $369 billion
- 2022: $684 billion
More money, less volume. I want that job.
And this is not just Fannie Mae. Freddie Mac has its own numbers reflective of the same mathematical wizardry. Freddie posted $3.1 billion net profit in Q3 of this year, up 17% from Q3 of last year. I will ask this question: How do you make more money on less volume? It’s called margin and it’s not a substitute for butter.
We need a radical overhaul and simplification of the loan level pricing adjustments (LLPA) imposed upon borrowers. Here is an example:
A borrower putting down 20% with a credit score of 740 would currently have an LLPA of 0.875. Is a 740-credit score with 20% equity risky? Nope, but it is priced as such.
If that LLPA were removed, our borrower’s interest rate today shifts from 7.250% to 6.375%, lowering the monthly payment on a $400,000 loan by $232 per month or $2,785 per year.
Instant help for affordability. Lower rates. More transactions. More velocity of money. Which creates more tax revenue. Which helps our government and reduces our deficit. Which, in turn, lowers our interest rates further. A few less rubles for Fannie Mae, maybe. No doubt, they’ll make it up on volume. Just as my company has endeavored.
No lender in the United States has been able to operate with any kind of reasonable margin for almost 3 years. Yet, the GSEs have increased theirs to our country’s detriment.
To conclude, I know these next few months will be busier than a mosquito at a blood bank. But I implore you, do not neglect the largest asset class in the entire world: the United States housing market. Take it from an industry insider and Washington outsider: reestablishing affordability and resurrecting housing will require innovative and daring solutions. But imagine the legacy of a leader who has the vision and courage to do it?
Please follow my roadmap, then check out the spinalis at Rathbun’s, and let’s see what happens.
Mark Milam is the president and founder of Highland Mortgage.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
To contact the editor responsible for this piece: zeb@hwmedia.com.
