Should Government Encourage Homeownership?
I realize asking this question on a real estate blog is a bit like asking RBA parents whether it’s advisable to raise school taxes. All I can say is Not my fault, USAToday brought it up.
Feds rethink policies that encourage home ownership
By Paul Wiseman, USA TODAY
Just how much should Uncle Sam do to help Americans buy their own homes?
For 70 years — and for the last 15 in particular — the answer has been: Whatever it takes.
Now, policymakers are pausing to reconsider. In the next few months, they’ll weigh whether there can be too much of a good thing when it comes to helping families finance the American Dream.
The rethink could mean a shake-up for a mortgage market addicted to government subsidies.
"This process of figuring out the government’s role is going to involve some hard choices," says Alyssa Katz, author of Our Lot: How Real Estate Came to Own Us. "The moment you start changing the nature of what is guaranteed by the government, what is subsidized, you start to change the alignment of winners and losers. … We took for granted that anyone could get a mortgage."
This is not only a long piece for USAToday, it actually runs longer than most of my Sunday essays here on burbed. There’s a lot in this article, and most of you will probably TL;DR the thing. So here are the major ideas. (I realize that my trying to shorten a teal deer essay is going to be about as effective as asking Steven Slater to give a rousing pep talk about the joys of being a flight attendant.)
- Previous policies led US to massively overinvest in housing
- Treasury Secretary Geithner said reforms must make mortgage credit widely available, promote affordable housing for buyers and renters alike, protect consumers from predatory lending, promote financial stability.
- Government sponsored enterprises such as Fannie and Freddie are providing funding for 90% of all mortgages now, unlike in 2005 where plenty of private lending.
- Fannie and Freddie privatized profits and socialized losses to taxpayers. Next incarnation won’t do so.
- If they are taken away, there goes a homebuyers’ subsidy as mortgages will be more expensive. Upper middle class homeowners vote.
- 30 year fixed mortgages encouraged by Fannie and Freddie but bad bet for banks. If rates are low they are poor return, if rates are high, borrowers refinance when rates go down again. Contrast with the pre-WW2 model: 50% down, 5 year mortgage, balloon payment.
- Government may switch to subsidizing apartments for renters instead of lower-rate mortgages
Until now $230 billion spent on homeowner subsidies (including $80 billion mortgage interest deduction) versus $60 billion for renter programs. Renters need the help more, 45% of them spend more than 30% of income on their rent, which is definition of affordable housing. Furthermore 71% of bottom third income renters spend over half income on rent.- Richard Florida notes policies encouraging suburban homebuying no longer benefit economy as it did after WW2. Money spent on furnishing a home no longer supports American industry as appliances, furniture mostly made elsewhere.
- More homeowners mean fewer people moving where the jobs are. Moving rate was 20% in 1985 but down to 11% in 2008. Florida found high-homeownership cities lag in job creation. (I hope this sounds familiar, as I’ve already written about his observations on this very topic.)
- Florida thinks the Ideal homeownership rate to aim for should be 55%. Current rate is 66.9%, projected to fall to 62% by 2012, a rate last seen in 1960.
I’m sure there’s more to say, so why don’t you say it in the comments. Is it time for homeowners to pull their own wait and stop sucking the government teat? Are Angry Renters angry for a damned good reason? Are there just some people who shouldn’t be homeowners even if they can fog a mirror?
August 15th, 2010 at 9:30 am
TL;DR
Where’s burbed? I need some snark, not some novel.
August 15th, 2010 at 9:53 am
Sunday is usually our day for thoughtful reflection, Alex. What is the future of the housing market? What is the government getting out of encouraging home ownership? We’re not in the post-war 50′s anymore where a family was thrilled to have three small bedrooms, one bath, one income and a steady job with a pension.
There is so much uncertainty built into today’s living situation. Will I still have a job in 2 years? Will my income be steady enough to afford a fixed payment? Will I still be married or will I be paying/living off of alimony? I know fewer and fewer people in their 20′s who are willing to commit to marriage, let alone a mortgage. The government could coax them along but is that a good thing? Are most people really in a position where buying a house makes sense? Do most people, outside of a few well-educated areas, understand anything about economics or finance? When I stop to really think about the future of home ownership I can only be pessimistic.
Someone please convince me that we really do have a well educated and responsible population out there who can make enough money to afford the price of a house and still live with some small sense of economic security.
August 15th, 2010 at 10:21 am
Clearly none of this is applicable to the RBA.
“Previous policies led US to massively overinvest in housing”
Is it possible to overinvest in RBA housing? Not possible.
“Treasury Secretary Geithner said reforms must make mortgage credit widely available, promote affordable housing for buyers and renters alike, protect consumers from predatory lending, promote financial stability.”
Does the RBA want more transient guests moving in? No. The RBA needs to be less affordable, as it should be with prices going up. Those who cannot afford RBA should consider East Bay, and those who cannot afford East Bay should consider a flyover state.
“Government sponsored enterprises such as Fannie and Freddie are providing funding for 90% of all mortgages now, unlike in 2005 where plenty of private lending.”
We all know it’s always raining private money in the RBA, even if Real Estater’s last message was about raining government money. Either way, it’s always raining money in the RBA.
“Fannie and Freddie privatized profits and socialized losses to taxpayers. Next incarnation won’t do so.”
Losses in the RBA? Not possible.
I’m sure this is enough to demonstrate how none of this is applicable to the RBA.
Don’t forget to vote today!
http://www.zillow.com/homes/for_sale/San-Francisco-CA/#poll
August 15th, 2010 at 10:35 am
>>Will I still have a job in 2 years?
You will be picking jobs in 2 years. It’s important to see the big picture. A lot of money has been earmarked already, and that money has nowhere to go but here. In addition, there’s the effect of baby boomers retiring over the next 5 years. This trend is guaranteed just as it’s guaranteed every year you’re getting older.
>>Will my income be steady enough to afford a fixed payment?
I’m on my 4th refinance, and every time the “fixed payment” gets lower and lower. The house I bought is more affordable than ever.
>>Will I still be married or will I be paying/living off of alimony?
In the Bay Area 2 income families are the norm. There won’t be much of an alimony issue if both parties have been working.
Have I solved all of your concerns, Maryjane? The only problem I can’t help you with is if your husband splits. From statistics/big picture perspective, it won’t be very easily to find another husband when a woman reaches 40, but it helps to be in San Jose.
August 15th, 2010 at 10:46 am
If real estate is a good investment, why must it be subsidized?
August 15th, 2010 at 11:05 am
Yesterday I spent some time doing my most favorite thing – checking out the housing prices in areas where friends and family live and engaging in schadenfreude. Yes, the RBA IS different and I don’t want to live anywhere else. It’s going to be more stable overall but not immune to the overall decline.
Most Americans are living paycheck to paycheck. In the RBA the paycheck tends to be bigger but much more of it gets spent on housing. When I talk to people in the RBA who have graduated from professional school or college within the last 10 years not one feels capable of buying a house that measures up to his expectations. They all would rather rent a nicer place in a better area and spend the difference on travel. Not one feels like buying more house than they need so they can spend six hours a night sleeping there while they work their 80 hour weeks.
August 15th, 2010 at 11:22 am
Real Estater – Believe it or not I do worry about you. You’re so certain what you ‘know’ but there seems to be so little reflection, knowledge or understanding behind it. You’ve picked a small point in time and turned it into something akin to a religious obsession. I hope things work out for you but it might be a good thing if you read a little more history and thought an original thought now and then.
August 15th, 2010 at 11:31 am
Richard Florida wants you to move to urban bohemia and rent.
August 15th, 2010 at 11:47 am
“You’ve picked a small point in time and turned it into something akin to a religious obsession.”
Unfortunately we live in a society that, instead of pyramids, worships housing as if it’s a religion.
Real Estater is a good member of the “Church of Real Estate.”
August 15th, 2010 at 12:12 pm
One thing most people don’t do is call their home owners insurance company and get the premium lowered. When the house price goes down, you don’t have to pay so much insurance. The insurance company doesn’t automatically lower your premium when prices fall.
Call your insurance company and save some money today!
August 15th, 2010 at 12:29 pm
You’re so certain what you ‘know’ but there seems to be so little reflection, knowledge or understanding behind it.
——
The whole problem with the world is that fools and fanatics are always so certain of themselves, but wiser people so full of doubts.
- Bertrand Russell
August 15th, 2010 at 12:36 pm
In the Bay Area 2 income families are the norm. There won’t be much of an alimony issue if both parties have been working.
—–
That’s just immigrant families. Traditional people, especially native Californian like insecure Real Estater, certainly does fall into that category.
August 15th, 2010 at 12:44 pm
I’m on my 4th refinance, and every time the “fixed payment” gets lower and lower. The house I bought is more affordable than ever.
It’s good to be mortgage-slave for few more extra years. Hey, it’s affordable after all.
——
August 15th, 2010 at 12:52 pm
You will be picking jobs in 2 years. It’s important to see the big picture.
—–
The article says:
Yes, I can see the big picture. A few more BART operators and security guards will reduce double-digit unemployment. Wait, you have to wait atleast 10 years for that.
August 15th, 2010 at 1:04 pm
ou will be picking jobs in 2 years. It’s important to see the big picture. A lot of money has been earmarked already, and that money has nowhere to go but here.
—–
Real Estater of 2010 sounds more like this Jacksonville (Florida) Realtor of 2008. Jacksonville
RealtorReal Estater said in 2008: “Jobs are going up here in Jacksonville. All kind of opportunities…..In next four years we are going to have the biggest port in east coast.”.What’s the difference between these two guys? Our RBA Real Estater is just two year slower.
August 15th, 2010 at 1:47 pm
So who can afford to buy in the RBA? Doctors, lawyers, MBAs, engineers – people with training and professional degrees. We also have older people who were lucky enough to get stock options, huge bonuses or who had their start-ups bought out. There really isn’t all that much in between.
The people who made their money in the 80′s and 90′s are ready to downsize and move out of California to a place where they can hold onto more of the wealth they’ve stockpiled. The younger people would buy but they’re not going to devote every waking moment to their careers just so the nanny can spend her days at home in their lovely house taking care of the kids they never get to see. Nor are they inclined to spend most of their sizable income on something that looks like the starter home Mommy and Daddy have spent so many years thanking god they moved out of just in time to be on the right side of the bubble.
People will jump into the market when they’re reasonably certain they’ll be able to survive at least for a while on one salary and when they see a chance that their house will appreciate in a reasonable amount of time. Until then they can rent something nice, enjoy a decent lifestyle, still put some money in the bank and have the flexibility to relocate if they need to. It’s hard to argue with them since the downside of waiting only seems to be lower prices.
August 15th, 2010 at 2:01 pm
DINKs living in the RBA and we can’t buy – trying to pull together a 150K downpayment is simply beyond our means, what with living expenses, retirement savings, and student loans.
Renting doesn’t suck but the choice of available rental housing sure does. We’re sick to death of having to choose between places that haven’t been updated since the 1980s, sketchy locations, paper-thin walls and poor quality construction in newer units, and/or rents that are so high they might as well be a mortgage payment.
August 15th, 2010 at 2:09 pm
#17 – so what are you going to do? At least renting a POS is better than buying a POS, especially if prices are coming down.
August 15th, 2010 at 2:22 pm
>>#17 – so what are you going to do? At least renting a POS is better than buying a POS, especially if prices are coming down.
He doesn’t need to take any action. He’s already bought his POS.
August 15th, 2010 at 2:27 pm
maryjane says,
>>So who can afford to buy in the RBA? Doctors, lawyers, MBAs, engineers – people with training and professional degrees.
Your field of vision is too narrow. There are many other types of people with the means, such as successful business owners, bankers, VCs, people with director or higher positions in tens of thousands of companies, people who got inheritance these few years without having to pay much tax, people who work for Apple, etc.
August 15th, 2010 at 2:29 pm
#19:
>>DINKs living in the RBA and we can’t buy – trying to pull together a 150K downpayment is simply beyond our means, what with living expenses, retirement savings, and student loans.
Real estater:
>>He doesn’t need to take any action. He’s already bought his POS.
Huh?
August 15th, 2010 at 3:12 pm
Real estater:
>>He doesn’t need to take any action. He’s already bought his POS.
Huh?
—–
Well, that’s just Real Estater’s logic (nothing new, nothing unusual) – if it is a cat, it must a homeowner (like DreamT).
August 15th, 2010 at 3:14 pm
‘Your field of vision is too narrow. There are many other types of people with the means, such as successful business owners, bankers, VCs, people with director or higher positions in tens of thousands of companies, people who got inheritance these few years without having to pay much tax, people who work for Apple, etc.’
You do realize that this is a finite group of people, don’t you? And the RBA is even now a pretty big place.
Yes, there are a lot of successful people but according to the foreclosure listings not as many as there used to be. Same number of houses, though.
August 15th, 2010 at 5:26 pm
Pralay’s right – cats make great homeowners
Reading marijane’s overly gloomy thoughts, I suspect that renters by choice are a rather more pessimistic bunch than aspiring homeowners. Unfortunately, once you get used to painting your future a certain color, it tends to stick and become self-fulfilling prophecy.
The fixation on specific pockets of housing in the bay area one cannot afford screams of idleness and immaturity. The future is today – settle down and build a family, a community, a life. The folks who keep houses selling within a week even in the midst of a recession are not waiting and while they’re making financial sacrifices some Americans aren’t willing to make, they have their life in order and in control much more than you speculate.
August 15th, 2010 at 8:42 pm
maryjane says,
>>Huh?
You don’t know that DreamT is a home owner?
August 15th, 2010 at 9:02 pm
#25: #24 and #17 are two different cats. Only one cat owns a home.
#24: I very much enjoy the contributions of #18 and hope that poster continues to share her thoughts here.
#1: why not read that novel while waiting for your sandwich order to get filled?
August 15th, 2010 at 9:04 pm
> You don’t know that DreamT is a home owner?
Or so he says. DreamT is a figment of someone’s imagination. A dream, a ghost maybe, a persona only Michael Bolton could transcend.
August 15th, 2010 at 9:20 pm
Note before you buy it’s about “getting the mortgage interest income tax deduction.”
Once you own, it’s about “getting the lowest interest rate possible.”
August 15th, 2010 at 10:26 pm
You don’t know that DreamT is a home owner?
—-
LOL! I gave a clue in #22. Still Real Estater did not get it. This is why people think Real Estater is as “concrete as a sidewalk”. Or may be it’s just another symptom of Dunning-Kruger effect.
August 15th, 2010 at 10:31 pm
#24 and #17 are two different cats. Only one cat owns a home.
—-
Real Estater got confused because both cats look same. That’s not his fault. He is Palo Alto expert, not a cat expert.
August 17th, 2010 at 5:28 pm
Reading marijane’s overly gloomy thoughts, I suspect that renters by choice are a rather more pessimistic bunch than aspiring homeowners. Unfortunately, once you get used to painting your future a certain color, it tends to stick and become self-fulfilling prophecy.
Gloomy? Actually I thought MJ’s comments are perhaps a little closer to the actual truth of the situation in the BA which is that there are few choices even if you make a more than reasonable income. A reality check these days shows that a halfway decent house in even a remotely decent area is still half a million dollars. Enough said. A house in an equally nice area in just about anywhere in the country can be had for 50% or less and give you the same if not easier ability to start a family- if you choose- build community ties and so on.
For example, I was visiting Colorado this last week. I have to say that in my opinion CO has Cali beat as far as natural scenic beauty. The beer and food were suburb and to date its the only state I’ve visited that has more healthy people than California. Everyone was on a bike, hiking, or running. But the best part is that its actually affordable there. So not only can you live with natural wonders in your backyard, but actually live without a monstrous mortgage. I think MJ might be onto something.
August 17th, 2010 at 5:39 pm
The beer and food were suburb
I would hope so! That’s why this site is called burbed, no?
August 17th, 2010 at 5:42 pm
suburb=superb. Sorry, I’m in a hurry.
August 17th, 2010 at 5:43 pm
Not criticizing, I thought it was a great typo. Roll with it.
August 17th, 2010 at 5:52 pm
bob, thanks for posting. Of course the bay area is expensive. But you still can sustain a quasi-single-earner lifestyle with family+kid and no commute to speak of while living in its midst and yes owning a decent house. marijane’s dual income + 80 hour week condition + 6h night sleep to afford a decent home in the bay area does not reflect the reality, so I call it gloomy. The real problem, and marijane stated it clearly in #6, is that many younger people’s expectations are through the roof, because their neighbors are wealthy or older or both, and they feel entitled to getting there quickly and without too much effort.
The more entitled they feel, the more they whine.
August 17th, 2010 at 8:41 pm
DreamT is right about my being gloomy. RealEstater pointed out that my children may need to get an inheritance before they’ll be able to buy a house and as much as I would like to help them out I just may make them wait.
August 18th, 2010 at 6:06 pm
DreamT,
Yes we all know that the Bay Area is expensive. In fact it is world-renown as such. Anytime I visit another state and people ask me where I live the typical response I get is in the following order:
” Wow- its a nice area, we visited there X number of years ago”
and-
” I don’t understand how anyone can afford to live there”
But in regards to your two primary comments that it is doable to have a single income earner, kids, and a decent house in the Bay Area I simply don’t see how unless the parent who works makes some serious money. As I see it the typical starter home in the Bay Area seems to be hovering around $500,000. Assuming you cough up a $100,000 down payment your mortgage will still be around $2,300 not including taxes, repairs, or other house-related things. Realistically you’re looking at around $2,800-$3,000 a month for housing related expenses.
Assuming the single wage earner makes $100,000 automatically assume 32% of that income goes away in the form of taxes. Thus that leaves $68,000 in take-home pay. Subtract $36,000 worth of housing expenses from that and you still have $32,000. Thus close to 50% of the income for the couple in this example is going towards paying off the house alone. When you throw in gas, the general costs of raising children, insurance, food, perhaps the occasional new car that I see most cute young families driving and there’s not much leftover.
The above example is typical of what I find with those I know who have bought homes in the last 5 or 6 years here. In fact out of all the people I personally know who have bought houses only one can pay for the house easily. The rest are seriously struggling. One close friend of mine who bought 2 years ago runs his banking account dry every month and has asked if he could borrow a few bucks for lunch.
That isn’t to say that you are totally wrong and ways can’t be found to live as you state above. I imagine you’ve found a way to do so. But I’d be willing to wager most who have bought in the BA in the last 10 years or so devote enormous amounts of money and energy just to pay the mortgage and likely have little if any retirement savings as a result. Their house has in effect become their main source of retirement.
As far as young people asking for stars in the sky and demanding high standards due to supposed entitlement, well I’d say that if you look at what most younger people can actually afford in the Bay Area they are buying crappy little 2 bedroom shacks built in the 40′s with no updates. Bought from some old person who bought the thing for peanuts back when “normal” people could afford to buy here on a normal job. If anything younger people are having to set their expectations lower and lower as the general economy and the overall quality of life deteriorates over time.
I definitely have no grand allusions: I will probably never obtain the same quality of life my parents have. Many people my age feel the same way, that the America that existed for decades where you could keep the same job for 30 years, have a pension, an affordable home in a halfway decent neighborhood and not go broke if you had a health problem are long-gone. I think that’s what bothers me about the Bay Area more than anything.
I recall a saying years ago before I moved here that California was 10 years ahead of the rest of the country and what happened here first would ultimately happen nation-wide. Well in the case of today’s California there is no middle class, a deteriorating public school system, rotten public infrastructure, and no affordable housing. It has basically become what you might find in places like the UK or Brazil with a two-tier socioeconomic strata. Thus perhaps its only a matter of time before the rest of the country follows suit.
August 18th, 2010 at 7:06 pm
bob,
while your 32% figure for taxes is way off, you’re correct that there’s not much left over once all expenses are figured in and you’re right that (while this can be sustained year over year) this is not a realistic life plan for until retirement. That said, my example, while realistic, was still an extreme – most couples work two median-salary jobs, think $150k to $200k yearly. And if you’re a young home buyer living on a budget, you should know better than buying a brand new car if you cannot afford it;)
You’re also correct that we won’t obtain the same quality of life our parents have. It does not mean it will be worse. My parents have owned two acres of lush countryside with a brand new home and a spectacular garden since I was born, but we never went to restaurants or movies, had a black & white TV until ~ 1982, no internet until last year, and my mom would sew our own clothes growing up. Medicine was much less advanced then, and they’ve never flown a plane in their life, too old to do so now. Now would I love to own two acres? Absolutely. Would I trade my quality of life with theirs at my age? Absolutely not.
Finally, it is silly to claim that California has no middle-class. What is the average Santa Clara household then (where I reside)? lower-class? upper-class? Come on. Everybody has a small 6k lot, a couple of cars or three, takes a vacation or two every year, lives a wholesome life and participates in the community – nobody’s parking a jet in their backyard or selling drugs on a corner. Boring is the definition of middle-class, and as such it won’t catch your attention, but it’s everywhere.
August 18th, 2010 at 9:04 pm
$100,000K income
$15,000 in 401k -> $85K taxable income
16% federal tax, about 9% state tax -> 25% tax
$63,750 left
$5,300 net a month
It would be quite easy to save 50% for downpayment: it would only take 4 years to come up with a reasonable downpayment (not a long time if you ask me).
After that, a $400K mortgage would cost about $2,000 a month (let’s ignore the interest deduction since there would also be the property tax to pay).
So, $5,300 net monthly and expense of $2,000 for the mortgage. Quite easy, without sacrificing retirement.
bob, if you’re as cheap as you claim to be, you’re either really doing a bad job with your money or you’re overly conservative.
August 18th, 2010 at 10:06 pm
I’d guess overly conservative.
I was more interested in this bit from DreamT:
…most couples work two median-salary jobs, think $150k to $200k yearly.
That’s a pretty lofty number. 2008 median household income in Santa Clara County was $88,525. Does that mean to get median income for homeowners, we have to double the income? Don’t know about you, but that’s kinda sad. In spite of whether it’s “bad” or not, I agree with you that buying a home isn’t as difficult as bob makes it sound.
August 18th, 2010 at 10:16 pm
…most couples work two median-salary jobs, think $150k to $200k yearly.
I interpreted it as “$150k to $200k each” (so $300k to $400k per household). Not shocking, really. I guess the average is so low because of those “old person who bought the thing for peanuts back when “normal” people could afford to buy here on a normal job“.
August 18th, 2010 at 10:22 pm
nomadic – my second point was: a couple with two people each earning the $80k median can comfortably afford a decent property around here. No doubling the income, just a household of two people at median income.
My first point was that it’s tangential but still possible to achieve this with only one salary, albeit a six-figure one (which I believe is the case for at least 1 in 5 bay area employee). However, not advisable to keep it going at that level for more than a few years.
August 18th, 2010 at 10:31 pm
I understood your point, DreamT. I was quoting the median household income, which is roughly half what you are quoting as median salary.
August 18th, 2010 at 10:39 pm
nomadic – Too many residents are retired or on a lower income sufficient to service what’s left of their mortgage, for the median household income to be of any relevance. The large majority of these people are not looking to buy a house anyway – they already have one, or have no interest in purchasing one here and now.
What matters is the required salary of a wannabe house buyer versus the median salary, and these are comfortably in line. So what’s left is a disconnect in expectations due to a misplaced sense of entitlement.
August 18th, 2010 at 10:54 pm
You guys are a bit too out of it–it being the RBA–expecting mortgage holders to have an income beyond housing price appreciation. That’s not RBA spirit.
August 18th, 2010 at 11:03 pm
I well remember when I used to work for a big Silicon Valley corp that used to put on all kinds of “helpful” seminars. One was “How to buy a home on a single income.” Now, this was in 1989 during a bubble.
The example the woman used was a salesman who earned $80K a year, and could qualify to buy some higher-end condo or lower-end townhouse. A real house was out of the question. Everyone turned on her for using someone with such an outrageously high salary, but she said, “Look, if you earn $40K, you can’t afford much of anything here. Just keep saving and look to getting married.”
Bear in mind the typical attendee was a single 20-to-30-something earning around $40K. So the example buyer made twice as much as any of us and still couldn’t afford an actual house.
At least one attendee bought an expensive car afterward, because he could afford the car.
Um, #37, you’re confusing “marginal tax rate” with “total percentage.” Nobody here is paying 32% of their total income in taxes. That’s what the last dollar is taxed at, not all the dollars.
The Brazilification of the US, though, is very real. The disparity between top and bottom income strata is as bad now as it was at the end of the 1920s.