As we begin the New Year, affordability remains one of the biggest challenges facing the mortgage industry and the broader housing market. It continues to shape conversations among lenders, policymakers, and consumers alike.
Affordability is not a ratio problem
Ask most people what’s wrong with housing affordability, and the answer comes quickly: prices are too high. The diagnosis is simple, clean and accurate, and fits well with the headlines and political talking points. But it is also incomplete, and increasingly, misleading.
To understand why, it helps to start with something personal. The first house I bought was in 1989. It cost $259,000. My mortgage rate was 10¾ percent. By today’s standards, that interest rate sounds punitive. Yet the ratio of home price to income was reasonable, and the system around the job (supply, taxes, fees, and conflicts) was more forgiving than what buyers face today.
That comparison matters. Because if affordability was a matter of quality, today’s market should look a lot better than it does. Many borrowers are financing homes for less than half of what buyers were paying decades ago. However, affordability is very bad. That tells us that something important has changed.
The real problem is not the cost of money. It is the cost, and scarcity, of housing itself.
The offer is the first obligation
For years, debates over housing policy have revolved around a central issue: we don’t have enough homes. Space restrictions, municipal permit costs, and regulatory inconsistencies have pushed builders into a corner where the only economically viable projects are high-end housing. In many markets, especially in coastal states like California, it is almost impossible to make money to build entry-level or workforce housing.
The result is predictable. Builders are chasing seven price points. Inventory skews are expensive. And the gap between people’s income and housing costs continues to widen.
Federal policy ideas (ie, open up federal land, increase tax credits, subsidize housing/standard housing) are often floated as solutions. Others can help with the edges. But they don’t address the deep structural bottleneck created at the regional and local level, where zoning decisions and permits are made. Until supply constraints are sensibly relaxed, affordability will remain under pressure regardless of where prices go.
Tax code Acts against home ownership
Compounding the supply issue is a tax system that is inconsistent with the way real estate operates today. After the Global Financial Crisis, institutional money entered the single-family market and provided critical space under home prices. That intervention stabilized neighborhoods and balance sheets at a time when both were under severe pressure. Better to forget that now, but it was important.
The problem is that the tax code still benefits individuals. Investors can deduct interest, maintenance, insurance, and taxes in the same way that owner-occupiers cannot. Two neighbors who live in the same house can face very different after-tax economics depending on whether they own or rent the property.
Add to that the erosion of property tax deductions, rising insurance costs, and outdated capital gains limits on home sales, and it’s clear that affordability isn’t just about purchase prices. It’s about the ongoing costs of ownership, and how public policy increases or removes that burden.
Ignore tax policy, and you’re missing a major lever in the affordability equation.
What the mortgage industry can’t (and can’t) control
It’s tempting to treat affordability as someone else’s problem. Builders blame regulators. Lenders blame policy makers. Policymakers blame the markets. But that doesn’t absolve the mortgage industry of responsibility.
Mortgage companies take information from service providers. They work within the rules set by the FHA, VA, USDA, and the GSEs. They do not control local laws or tax codes. But they control how capital flows from investors to borrowers.
This is where real progress can happen.
At its core, affordability improves when debt origination costs decrease. If it costs $5,000 or more to get a loan before title and insurance, those costs eventually find their way into the borrower’s balance or payments. Reducing those costs, even without changing margins, directly benefits consumers.
Technology is a lever. But only if it is used honestly. Adding tools without removing friction or duplication does not reduce costs. Real performance requires structural change: less supply, faster decisions, and confidence in performance. If loans are paid off quickly, borrowers save interest. When lenders can commit to closing dates in advance, buyers can bid with confidence. That confidence has real economic benefits, especially in competitive buying markets.
Affordability is not just about cheap loans. It is about the most reliable.
Rethinking expense buckets
The mortgage industry boils down to a few major cost buckets: origination, title, valuation, and pricing fixed by the GSEs. Each deserves consideration.
In purchasing, title insurance and appraisals serve an important purpose. Preventing fraud and verifying the security issue. But in terms of finances, forcing borrowers to pay repeatedly for protections they have already purchased is difficult to justify. Pilots examining the subject and the withdrawal of the appraisal have shown that the risk can be managed without imposing unnecessary costs. The next step is to stop treating these programs like tests and start treating them like standards.
The same concept applies to price adjustments. Policies introduced during times of excess interest (such as certain adjustments to the lending rate) may not make sense in a market where financing activity is reduced and affordability is strained. If the goal is to help borrowers make lower payments, the program should not silently penalize them for doing so.
A simple VA system provides a blueprint: seasoning requirements, return tests, and reduced friction in exchange for less risk. There is no compelling reason that non-veteran borrowers should not benefit from the same framework.
When the industry lost its voice
One of the lingering effects of the financial crisis was the industry’s fear of representation. Reduced documentation, simplified procedures, or another way of underwriting (even when it makes sense), came to bear the risk of popularity. Regulators are tightening standards, and lenders are learning to absorb policy rather than shape it.
That warning is understandable. The industry did real damage to its credibility in the lead up to the GFC. But silence has a cost too. Without strong engagement, outdated laws persist long after their original accountability has faded.
Leadership today means re-entering the policy debate with humility, data, and concrete solutions; not deregulation for the sake of it, but modernization in line with the reality of danger.
The fee, not the price
Perhaps the most understated framework in today’s affordability debate is the obsession with prices. Borrowers do not live interest rates. They live monthly payments.
In markets like California, taxes, insurance, HOA fees, and utilities often cost more than the mortgage coupon. A narrow focus on equity obscures the real drivers of affordability and leads to blunt solutions that create new problems, such as locking millions of homeowners into subprime mortgages they can’t get off, stifling supply even more.
Affordability improves when the whole system works better: when supply increases, when transactions are less expensive, when policy is integrated, and when incentives are consistent with long-term stability rather than short-term visibility.
An integrated way forward
Housing policy works best when it is integrated and targeted, focusing on fundamentals such as supply, efficiency, and stability. That requires clarity of purpose. Are GSEs designed to increase profits, act as countervailing agents, or increase access to home ownership? Those goals don’t always align, and doing them the other way around leads to costs that don’t satisfy anyone.
The same is true of tax policy. Home ownership has long been associated with tax incentives. If policymakers want to reverse that relationship, they must do so deliberately and accept the affordability consequences. What doesn’t work is to ignore the issue completely.
The job of the mortgage industry is to act responsibly, communicate intelligently, and always reduce friction between borrowers and households. Done right, that benefits everyone: homeowners, lenders, investors, and the broader economy.
Accessibility isn’t the only thing you’re attracted to. It’s a system you tune into.
David Spector is the Chairman and CEO of Pennymac.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners. To contact the editor responsible for this piece: [email protected].
