Squeezed Middle Class: Who Can Afford That?

How to help moderate-income homebuyers leap the growing affordability gap.

September 1, 2000

The country’s long run of economic growth has been the homeownership market’s best friend, but even a best friend can cause you trouble.

That’s certainly becoming the case for moderate-income homebuyers. Many have watched from the sidelines as low inventory, stock-rich high-tech professionals, an ever vigilant Federal Reserve, and growth-conscious state and local governments have combined to push modest-priced housing out of their reach.

“We’re in a fantastic market--the best it’s ever been--but for the buyer in the middle who wants to move up to the next rung of homeownership, things haven’t been as good as they could be,” says Jim Fite, president of Century 21 Judge Fite in Dallas.

The silver lining: Even in markets hardest hit by the affordability crunch, practitioners are finding ways to help squeezed buyers get into housing--and their success is making a difference in their practice.

“With the situation being what it is, we’ve had to get smarter at our business, which is beneficial for everyone,” says Julie Hummel, associate broker at Kentwood Co., Cherry Creek, Colo., a Denver suburb.

For many practitioners, getting smarter has primarily meant learning about public sources of money, such as low-interest first mortgage financing and downpayment assistance provided by state housing finance agencies. Knowing what funds are available, who’s providing the funds, and which buyers qualify for what financing can make the difference in a lot of cases, say practitioners.

Sorting out that information sounds as if it would involve learning a lot of rules about issues such as income qualification, but in fact it just means knowing whom to call, says Deborah Latham, president-elect of the Denver Board of REALTORS® and a senior sales associate at Distinctive Properties in Denver. “There are many lenders who just don’t deal with this type of financing, so you need to know which lenders do,” she says.

Frederick White, a broker at Century 21 Premier Realty, Cherry Hill, N.J., now gives his sales associates regular training sessions on what financing programs are available and which lenders know the programs well. “We don’t need to be experts,” he says, “but different programs have different restrictions on income, purchase price limits, or location, so we need to know what’s available.”

If you don’t know of lenders who offer affordable loan and downpayment assistance programs in your area, your first point of contact should be your state housing finance agency.

When you make the contact, you may be surprised to learn who’s eligible for these programs. Although many state housing agencies give preferences to lower-income households, such as those earning 60 percent to 80 percent of the area median income, a good portion of money is available for households that fit squarely into the moderate-income range (100 percent to 120 percent of the median). In Colorado that means households earning in the $50,000–$70,000 range; in parts of California, it means households earning up to $100,000. And as states grapple with increasing home prices, the trend line is moving toward higher-income households.

In Colorado the average income of the assisted homebuyer has been moving up steadily in the past few years, and last year it was about $35,000, says David Martinez, a spokesman for the Colorado Housing Finance Agency.

“There are a lot of people, especially young and single-parent households, with fairly well paying full-time jobs who just need additional help in this environment,” says Latham.

Homebuyers who tap assistance programs face drawbacks in tight markets. Program limits on purchase price or location decrease an already scant supply of housing to choose from. And processing that typically takes a week or two longer than conventional financing puts the buyer at a disadvantage in a multiple-bidding situation.

But those drawbacks give practitioners a chance to add value, says White. The key is knowing the right mortgage brokers, because they can turn around loan processing more quickly. Veteran practitioners will also stay cool even when the seller passes their buyer over for a conventionally financed buyer. “It’s not a certainty that the conventionally financed buyer is going to get the financing,” says White. “That’s where your experience comes in.”

Even the most experienced salesperson can’t solve the biggest drawback to assistance programs--the limited amount of funding. No matter how efficient the agencies are in slicing and dicing their assistance funds, demand far outstrips supply. What other financial advice can practitioners provide?

  • Make smaller downpayments. In many cases, buyers feel strongly that they must put 20 percent down, but taking the extra time to save that amount can cost them a lot of money because of rapid price appreciation. “In Denver a house might appreciate $20,000 in six months,” says Hummel. “I tell some clients to make a smaller downpayment, then petition the lender in a year to get the mortgage insurance premium removed.”
  • Solicit family support. Many young buyers are uncomfortable asking for help from their parents, but in high-cost markets, tapping this resource shouldn’t be seen as a badge of weakness. “I spend a lot of time talking to parents about helping their kids out,” says Hummel. “It’s just so much more difficult now to get into that first house.”
  • Get more appreciation on an existing home. Buyers who already own a house and are trying to trade up may be reluctant to spend scarce money on improvements. But redoing the bathroom or kitchen before selling could markedly increase sales proceeds, generating more money for a downpayment on their move-up house. “Anything you can do to squeeze new value from your old house helps,” says Hummel.

The bottom line: Practitioners are well positioned to help buyers, but they need to know what resources and solutions are out there to address the growing affordability problem.

“Who else is going to point buyers in the right direction?” asks Norm Stickler, a loan officer with Temple Mortgage, affordable-loan specialists in Denver.

If the salesperson doesn’t know programs exist, he says, buyers won’t know, either.

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