Opinion: Restoring the American Dream: How 40- and 50-year mortgages could reignite homeownership

The American dream of homeownership is slipping away for many, as the gap between wages and home prices continues to widen. In the 1970s, home prices aligned more closely with income levels. Today, escalating real estate costs—particularly in high-cost areas—are pricing millions of Americans out of the housing market.

One potential solution? Extending the traditional 30-year mortgage to 40 or even 50 years. This could provide the financial flexibility needed to make homeownership achievable for those priced out of the current market.

California: A microcosm of the crisis

California illustrates the severity of the affordability crisis. As of May 2024, the median price of a single-family home in the state reached $904,210, while the median household income stands at $91,551 (California Association of Realtors, U.S. Census Bureau). To comfortably afford such a home, a household would need to earn $239,000 annually—more than 2.5 times the median income.

For families earning $91,551, a 30-year mortgage at 6% would require monthly payments exceeding $5,400, consuming more than 70% of their income. However, a 40-year mortgage could lower the payment to around $4,849, and a 50-year mortgage to $4,564—making homeownership significantly more affordable for middle-income families.

Why are home prices so high?

Several factors have driven home prices to unsustainable levels:

1. Low interest rates: A decade of historically low rates fueled demand and inflated prices.
2. Housing shortages: Limited supply, particularly in desirable areas, drives fierce competition and higher prices.
3. Demographic shifts: Millennials, now reaching prime home-buying age, have increased demand.
4. Rising construction costs: Supply chain issues and labor shortages have escalated building costs.
5. Investor activity: Institutional investors purchasing single-family homes for rentals have reduced inventory for individual buyers.
6. Urban exodus: Post-pandemic shifts to suburban and rural living have driven up prices in these areas.
7. Government policies: Programs like mortgage forbearance kept homes off the market, tightening supply (Urban Institute).

The case for 40- and 50-year mortgages

While the 30-year mortgage has been a U.S. standard, it no longer offers sufficient affordability for many. Extending terms to 40 or 50 years provides several advantages:

• Lower monthly payments: Longer terms reduce monthly payments. For instance, a 50-year mortgage on a $900,000 home could lower payments by $850 compared to a 30-year mortgage.
• Improved borrower qualifications: Lower payments make it easier for borrowers, especially in high-cost areas, to qualify for mortgages.
• Increased buying power: Reduced monthly payments allow buyers to afford homes they may have otherwise been priced out of.
• Flexible payment options: Features like “Pick-a-Pay” offer payment flexibility. Borrowers can pay more during high-income months to reduce interest and build equity faster.

Additionally, international examples show the effectiveness of longer mortgage terms. Countries like Japan and the UK have successfully implemented 40- and 50-year mortgages to address their own housing affordability challenges. In Japan, these longer-term loans help families secure homes in high-cost urban areas, while in the UK, 40-year mortgages have become a standard offering (OECD).

Addressing concerns about interest and equity growth

Critics argue that extended mortgage terms lead to higher interest payments and slower equity growth. While these concerns are valid, flexible payment options can mitigate the drawbacks. Borrowers can choose to pay more when possible, reducing the long-term cost of the loan. More importantly, the affordability of lower monthly payments can make the difference between owning a home and being stuck renting.

A modern solution for an evolving market

The American Dream of homeownership is at risk but adopting longer mortgage terms could restore that dream for millions of middle-class Americans. By extending mortgage terms and embracing flexible payment options, we can help ensure that homeownership remains achievable for future generations.

Darrin Seppinni is a mortgage professional, author and California Real Estate Broker.

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]

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