One of the key messages voters sent on Election Day 2024 is they are fed up with high prices — and at the top of that list is the cost of owning a home.
For Americans, housing is their single biggest expense, and today, it is less affordable than at any time in the last 40 years. the beginning of 2020, the median cost of a home was around $280,000, today that number has risen above $400,000, a jump of 43%. That’s one of the reasons that some are arguing today that costs of running credit scores somehow plays a determinative role in driving prices up. But that’s a red herring—a way to distract policymakers from what’s really at fault.
According to the Joint Center for Housing Studies at Harvard University, there are three primary factors driving up home prices: 1) a lack of supply; 2) higher interest rates; and rising insurance premiums due to the increased risk of weather amid a changing climate.
While mortgage rates may decline marginally should the Federal Reserve continue to cut its target interest rate (although the interest on mortgages is more closely tied to the bond market than to the Federal Funds Rate), there will be tougher sledding on the other two fronts. The public arena will likely struggle both to address climate change and to rezone areas in the attempt to expedite house construction.
Because the solutions to the housing crisis are so elusive, some policy makers have tried to point the finger at credit score cost. But that’s absurd. The fees these agencies charge are miniscule compared to the total cost of closing fees.
An example of this misplaced focus is the hullabaloo around FICO ‘s recent announcement that it was raising its royalty to $4.95 for a FICO Score in the mortgage market. But even with that increase, the royalty collected by FICO in the mortgage industry is only about 15% of the cost of the tri-merge credit report and score bundle.
The cost of a credit report or score is even less relevant when looking at overall closing costs. The royalty FICO collects for the FICO Score is the lowest of all the inputs that contribute to total mortgage closing costs. Even after it’s new per-score royalty adjustment, FICO’s share of the total average closing cost (about $6,000) will remain two-tenths of one percent. It’s hard to argue that is a barrier to home ownership.
Furthermore, today’s data-driven credit models, FICO 10T and VantageScore 4.0, ( which are both in the process of being adopted for use by the GSEs) actually help to make homeownership more widely available. Why? Because these models make it easier and safer for lenders to extend credit, and new credit score innovations can actually expand consumer access to credit.
By shifting the focus to credit score prices, supporters of the status quo are helping policymakers to avoid making the necessary, but politically tough choices that would significantly reduce the cost of homeownership. Americans deserve something better. Enacting permitting reform, relaxing stringent, exclusionary, and discriminatory zoning laws, and halting the abuse of environmental rules for the purpose of delaying the building of moderate to low income housing should save homeowners thousands of dollars, not just a handful of pennies.
Note: I do not receive any direct financial compensation from the companies or organizations mentioned in this article.