Faculty Q & A

We asked Matthew Chambers why it’s becoming more difficult to attain the dream of homeownership.

Matthew Chambers, chair and associate professor of economics in the College of Business and Economics, is a recipient of the college’s Outstanding Teaching, Research, and Service awards.

His areas of expertise include macroeconomics, risk and insurance, computational economics, and housing.

Since joining the Department of Economics faculty in 2003, his work has been published in several top journals, including the International Economic Review and the Journal of Monetary Economics, and has been supported by organizations including the National Bureau of Economic Research (NBER) and the National Science Foundation (NSF).

What evidence do you have for a housing crisis? |
Homeownership in the U.S. went from 45 to 65 percent after World War II. It got as high as 70 percent but has slipped to around 63. There are lots of reasons why it’s more difficult to buy a first home nowadays, beginning with the fact that it’s a seller’s market and prices are now nearly as high as they were before the Great Recession. It’s a tight market—and a very seasonal market.

Why has it become so difficult to find an affordable home? |
Homeowners aren’t selling, for one thing. There’s construction going on, but these new homes often exceed the price point for first-time buyers. Builders make more profit on the expensive properties; there’s not much incentive to build “starter” homes. Maryland is a coastal state, so land costs are also a significant factor. In the greater Baltimore area, most of the affordable land is to the north in places like Harford County or across the Pennsylvania line. This problem is further complicated by the fact that prices, including home prices, are rising faster than income.

What about retirees hoping to downsize? |
They’re being squeezed, too. They can’t always find buyers who can meet their asking price. They face competition from younger buyers for smaller homes in the areas where they want to live. Then comes the classic phrase “location, location, location.” Older adults aren’t buying urban condos in colder climates, so cities like Baltimore with a housing overcapacity aren’t an option for them.

Is it getting harder to qualify for a mortgage? |
The economy is doing well and interest rates are still historically low, although they’ll likely rise as the Federal Reserve targets higher interest rates in the near future. Younger buyers have student loan debt that now totals over $1 trillion nationally. That’s taken into consideration when they apply for mortgages, and it can hurt them.

I suspect the problem for most buyers is raising the 20 percent down payment for a conventional 30-year mortgage. For example, a median-range $240,000 house in Baltimore requires $48,000 down and a roughly $1,100 monthly mortgage payment. Given the current rents in the area, $1,100 per month is not an intimidating number in this example.

Are there programs that help first-time buyers? |
In Maryland one of the biggest tax benefits is the waiving of transfer taxes for first-time buyers. Maryland charges a transfer tax of 0.5 percent of the house price on real estate transactions that is typically split between the buyer and seller. If the buyer is a first-time buyer, their portion of the transfer tax may be waived. In addition, the Department of Housing and Community Development offers a menu of programs that can aid some first-time buyers. Some federal programs can help first-time buyers. Most of these programs are used to help buyers get over the hurdle of the 20 percent down payment. Buyers with lower credit scores can seek out a FHA-backed mortgage, which can be done with as little as a 3.5 percent down payment. Through their banks, buyers also may have the option of having their mortgage guaranteed through Fannie Mae or Freddie Mac and enter the mortgage market with as little as a 3 percent down payment. In these cases the buyer will be paying mortgage insurance until reaching a certain amount of equity in the house. There are also special programs through the VA and USDA that could help certain first-time buyers.

Any tips on how best to squirrel away that down payment? |
I’m all for teaching personal finance from an early age. I tell my students that they have to make tough calls about what they need vs. what they want. They also have to be realistic about what they can and can’t accomplish right out of college. It’s not easy, but it’s doable. If you have a decent salary and can save as little as $400 per month, that’s nearly $5,000 per year.

Should buyers consider relocating? |
Lots of people want to live on the East and West coasts, but that’s where housing is the most expensive. Those who are flexible may want to consider cities like Dallas or Atlanta where housing is more affordable. There are still affordable housing markets in this country—it becomes a matter of personal preference and things to consider when investigating job opportunities.

Is the American Dream of homeownership slipping away? |
The American Dream has been part of our psychology and political agenda for decades, but it may not be right for everybody. Everyone doesn’t need to own a home. I think some of the pessimism about being able to achieve homeownership may have to do with the current generation growing up in a more impatient world than their parents and grandparents.