The lack of affordable housing for first-time homebuyers is one of Utah’s most pressing issues. Yet we know that high homeownership in a neighborhood leads to stronger, healthier, safer communities. This correlates with better mental health, reduced stress, stronger community ties, civic engagement and better long-term physical health.
Purchasing a home is one of the most essential steps toward long-term financial stability. It is not just a place to live. It is most people’s biggest investment. It gives significant financial security that renting cannot provide.
Our current problem stems from a combination of rising housing prices and higher mortgage interest rates. Our recent inflation has driven both up. Utah also has a shortage of homes, especially modest homes, which has also contributed to the price increases.
While we see various proposals and bills aimed at addressing both building more modest, affordable homes (increasing supply) and ways to help make them more affordable, such as $20,000 in downpayment assistance for qualified buyers, none seem to adequately address the other core issue and huge barrier — the need for a lower mortgage interest rate for these entry-level buyers. The interest rate has a big impact on affordability, almost as much as the price of the home itself.
As shown in the graph below, mortgage interest rates fluctuate with inflation. This graph also shows that the last time we experienced a rapid rise in both inflation and interest rates was in the 1970s and early 1980s.
In the 1970s, the Utah Legislature responded to a similar affordable housing crisis by creating a special loan program for first-time homebuyers. This program offered a loan with no down payment, closing cost assistance and, most importantly, a significantly lower mortgage interest rate.
We bought our first home through this program. The month we purchased our first home, the average mortgage rate was 8.92%. Utah’s program offered us a rate of 6.38%, a reduction of about 2.5%. Thanks to the efforts of the Utah Legislature back then, many first-time buyers could afford modest homes despite the rapid inflation and rising mortgage rates. This small boost in the early years made a giant difference over several decades.
I understand Utah could offer those lower rates through the sale of municipal bonds, which pay a lower interest rate but also have no income taxes on the interest earned. This was an enormous help to those who qualified for this assistance back then. Today, a reduction of 2.5% on the interest rate would save a first-time buyer about $600 a month on a very modest home with a mortgage of about $400,000.
Unfortunately, this effective strategy from the past is no longer an option due to the Tax Reform Act of 1986 and its restrictions on Private Activity Bonds (PABs). Federal regulations now have strict limits on the use of these bonds. This is primarily to ensure that tax-exempt bonds support public projects such as infrastructure projects and public schools.
In 1986, lawmakers lacked the data and research we now have on homeownership’s impact on saving lives, improving mental health, reducing crime and strengthening communities. Supporting first-time homebuyers in achieving homeownership is an investment in the public good. With this understanding, it is time to reconsider federal restrictions on tax-exempt municipal bonds for mortgage assistance and allow states greater flexibility in making homeownership more affordable.
We should actively urge our U.S. congressmen and senators to support necessary updates to the Tax Reform Act of 1986. We should also encourage our Utah legislators to use their voices to advocate for these federal changes to help expand access to affordable homeownership.
For many, offering a 4.5% to 5% rate could be the key to making homeownership possible. As we explore additional solutions, I hope we can expand the construction of modest, affordable homes to make homeownership more accessible.
