Tag Archives: homeownership

Financial problems at the FHA: homeownership for many vs. the private sector

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The Federal Housing Administration may be helping the lower ends of the housing market but it is also running into some financial difficulties:

The House Financial Services Committee heard testimony from Housing and Urban Development Secretary Julian Castro on Feb. 11 and the Housing and Insurance Subcommittee heard from several witnesses on Feb. 26…

Historically, the FHA has controlled about 10 to 20 percent of the mortgage market. But after Congress increased the size of mortgages the agency could insure from $360,000 to $625,000, the FHA controlled about 60 percent of the low down-payment mortgage market from 2008 to 2010. That means the income eligible for FHA mortgage insurance went from the national average of about $64,000 to $110,000. Put another way, more than twice as many people can get FHA insurance than they could before the limit was raised.

At the same time that eligibility has exploded, FHA has faced serious solvency problems, culminating in a $1.7 billion bailout from the U.S. Treasury at the end of 2013. The Congressional Budget Office estimated that FHA insurance cost taxpayers $15 billion from 2009 to 2012. Nonetheless, the agency’s website falsely claims it “is the only government agency that operates entirely from its self-generated income and costs the taxpayers nothing.”

Even with all of the taxpayer money that has been thrown at the agency, the FHA is seriously undercapitalized. The law says FHA needs to keep 2 percent cash on hand, which would be about $18 to $20 billion, but as of the beginning of 2015, it had only less than half of 1 percent, or $4.7 billion.

This piece was written by an activist against government waste yet it highlights the contrast of priorities: homeownership for many versus letting the market sort this out. Americans, including politicians and presidents, have pushed homeownership for decades. We assume this is a positive outcome as people will take better care of their property if they own as well as enjoy the status and privacy of their own home. Yet, if homeownership were entirely left to the private sector, the lower end of the housing market may not do very well. Even with the efforts of the FHA in recent years, we can see some of this in action: luxury building is booming in places like New York and Miami as cheaper and smaller homes don’t generate as much profit. In the recent past, the private sector resorted to tricks to help lower-income borrowers but we saw how those subprime loans worked out for everyone.

In other words, if Americans want homeownership as a social good available to many, it still needs to be worked out how this can be done effectively.

You’ve been warned (again): McMansions are back!

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Newer American homes are bigger than ever:

New American homes were bigger than ever last year, according to data from the U.S. Census Bureau. After a few years of shrinkage in the aftermath of the Great Recession, the median square footage of newly-built homes last year tipped the scales at over 2,400 square feet. That’s nearly 1,000 square feet larger than the median home built in 1992. The death of the McMansion has been greatly exaggerated…

There are any number of explanations for this trend. Young first-time buyers, who are less inclined to buy big suburban houses, are largely sitting out of the market. Credit requirements are still much tighter than they were before the housing collapse, so much of the activity in the housing market is from wealthier families looking to trade up — and they’re looking for bigger and better.

Another, possibly overlooked contributor? Politics. A 2012 paper by Stanford political scientist Adam Bonica found that builders and construction firms were among the most politically conservative businesses in America, judged by their owners and employees’ contributions to political parties. And a Pew Research Center study last year found that conservatives overwhelmingly prefer communities where “the houses are larger and farther apart, but schools, stores and restaurants are several miles away.”

I don’t know how much of this is just political. To suggest so means that both sides can claim the other is trying to push a particular agenda: conservatives argue liberals are trying to force everyone into big cities and liberals can argue developers are politically connected people who only want to serve the wealthy. Either cities or McMansions become the big enemy. I would instead privilege two factors. First, an economic situation where many Americans don’t have the money to purchase a home (the homeownership rate is down overall) as well as a housing market that is primarily catering to wealthier buyers (there are more profits to be made in more expensive homes). Second, there is an American ideology that privileges individualism and private space, values that aren’t exclusively conservative or necessarily related to the exurbs. For example, the suburbs are not full of McMansions; suburbs range from inner-ring suburbs to exurbs with a wide range of housing and populations.

Loss of housing wealth hits black suburbanites hard

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The housing and economic crisis of the last decade has hit black suburbanites particular hard:

But today, the nation’s highest-income majority-black county stands out for a different reason — its residents have lost far more wealth than families in neighboring, majority-white suburbs. And while every one of these surrounding counties is enjoying a strong rebound in housing prices and their economies, Prince George’s is lagging far behind, and local economists say a full recovery appears unlikely anytime soon…

The recession and tepid recovery have erased two decades of African American wealth gains. Nationally, the net worth of the typical African American family declined by one-third between 2010 and 2013, according to a Washington Post analysis of the Federal Reserve’s Survey of Consumer Finances, a drop far greater than that of whites or Hispanics…

Not only is African American wealth down, but the chances of a quick comeback seem bleak. Just over a decade ago, homeownership — the single biggest engine of wealth creation for most Americans — reached a historic high for African Americans, nearly 50?percent. Now the black homeownership rate has dipped under 43?percent, and the homeownership gap separating blacks and whites is at levels not seen in a century, according to Boston University researcher Robert A. Margo…

Many researchers say the biggest portion of the wealth gap results from the strikingly different experiences blacks and whites typically have with homeownership. Most whites live in largely white neighborhoods, where homes often prove to be a better investment because people of all races want to live there. Predominantly black communities tend to attract a narrower group of mainly black buyers, dampening demand and prices, they say…

Scholars who have studied this dynamic and real estate professionals who have lived it say the price differences go beyond those that might be dictated by the perceived quality of schools, or the public and commercial investment made in particular neighborhoods. The big difference maker, they say, is race.

In other words, simply promoting homeownership – a key part of the ideal of the American Dream and also something taken as a sign that various groups have made it – is not the complete answer for thinking about equality among different groups. What homes people own and where they are located also matter. Decades of research in urban sociology and related areas shows that blacks and other minorities often don’t live in the same suburban settings as white suburbanites. Their homes tend to be located in poorer neighborhoods and neighborhoods that have higher non-white populations. This is due to a variety of reasons including long-term white wealth that gives whites better opportunities to move to wealthier and whiter places, zoning practices in wealthier communities that tend to limit cheaper or affordable housing (examples here and here), mobility patterns among whites that show they leave neighborhoods and communities as they become more non-white (the process of “white flight” continues in some suburban areas), and patterns of mortgage lending as well as renting that tend to take advantage of poorer and non-white residents. Tackling the issue of residential segregation still matters today even as more minorities and poor residents move to the suburbs.

 

Immigrants might save the American housing market?

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The real estate market may be sluggish but some data suggests immigrants offer hope with their desires to own homes:

But in some groups the dream, at least of homeownership, is alive and well. During the past two decades, immigrants have accounted for 27.5 percent of all household growth, according to the Harvard Joint Center for Housing Studies. When it comes to growth among younger generations, the foreign-born population is even more significant, accounting for nearly all the household growth for those under the age of 45.

Last year, immigrant households made up 11.2 percent of owner-occupied housing according to the JCHS—that’s up from only 6.8 percent in 1994…

The exact rate of homeownership varies among different immigrant groups, but overall the share of immigrants who own homes is growing. In 2000, the rate of homeownership among immigrants stood at 49.8 percent, according to a study by the Research Housing Institute of America. By 2010 the rate was 52.4 percent, and by 2020 that number will climb to about 55.7 percent, the study predicts. In the third quarter of 2014 the overall homeownership rate in the U.S. was 64.4 percent, according to the Census Bureau.

There are several reasons behind the growth rate in homeownership for immigrants, but part of the impetus may be that many immigrant populations are less cynical about the idea of homeownership than their American-born counterparts. “They view homeownership as a piece of the rock. It’s a benchmark of being settled,” says Dowell Myers, a professor at the Sol Price School of Public Policy at USC. “They view homeownership as the American Dream and they buy into that.”…

Even more compelling are the possibilities for homeownership among the children of immigrants. “When you look at the children of immigrants they actually exceed the native born on a lot of measures: on income, on education, on homeownership,” says Masnick.

Is there some irony here if it is conservative and older whites and immigrants who buy into the American Dream of owning a home the most? Of course, they may not be buying homes in the same places given ongoing patterns of residential segregation as well as different preferences of urban, suburban, and rural living.

Fortysomethings have more influence on sluggish housing than millennials

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While millennials currently have lower homeownership rates than in the early 2000s, Derek Thompson suggests fortysomethings are the bigger issue for the sluggish housing market:

The economy has a Gen-X problem. It’s a small cohort with a much-smaller-than-usual homeownership rate. And people wonder why the housing market is sluggish.

Update: Read Trulia’s Jed Kolko on why the middle-aged are the true lost generation of homeowners. In short: They bore the brunt of the foreclosure crisis:

In 2005, the year when the true homeownership rate peaked for most age groups, 25-to-29 year-olds were the age group for which homeownership was highest relative to the demographic baseline, followed by 30-to-34 year-olds. These were first-time home-buyers getting easy credit for overpriced homes; then, they bore the brunt of the foreclosure crisis, losing their homes and wrecking their credit history…

The millennial generation was still in their early 20s or younger in the mid-2000s–too young to have bought during the bubble and then to have suffered a foreclosure: Only the oldest among the 18-to-34 year-old group in 2013 would have been of home-buying age during the bubble.

Interesting data. Generation X had bought into the American Dream and the importance it places on owning a home but they were badly burned by the housing collapse. They were in the wrong place at the wrong time: eager to buy homes, able enough to overpay based on decent jobs, and particularly indebted when their housing values tanked.

There is another issue at play here: while millennials may not have been very involved in the economic crisis, they are the generation that could continue the homeownership ideal among Americans. If they choose otherwise – and perhaps they are watching those older than them – then there may not be much of an upward tick compared to Generation X.

Side note: a funny quote from earlier in the article.

It is a truth universally acknowledged that a journalist in possession of a negative statistic must find a way to blame Millennials for it.

Generational blame is alive and well even in our advanced rational and enlightened age. Talking about generations is an easy shorthand for analyzing social trends. Whether such talk holds water compared to other age breakdowns or other data may be another matter…

Argument: homeownership is not worth risky financial situations

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Megan McArdle argues that policies and leaders promoting homeownership for those with less resources are doing a disservice:

Because, I think, most of us still haven’t managed to shed the idea that buying a house is a good way to get some unearned bonus wealth. Too many people managed to do just that for too many years. We think of 2008 as an aberration, rather than reversion to the mean. And that’s a costly mental error.

The long, steep increase in American home prices from 1946 to 2008 was driven by a whole lot of trends that are hard to repeat: the invention of the 30-year, fixed-rate, self-amortizing mortgage, which allowed people to pay more for a house by lowering the monthly payments. The securitization revolution, which lowered mortgage risk by bundling the loans into large, diversified portfolios, thereby lowering rates. Rising inflation, which pushed up the price of houses. Falling inflation, which lowered interest rates and monthly payments still further and allowed people to pay even more for those houses. The credit-scoring revolution, which allowed banks to offer loans to more people, increasing demand for the existing housing stock. And in dense coastal areas, you also had the rise of NIMBY zoning laws, which made housing scarcer and therefore more expensive…

Which is not to say I am against buying homes. I am very much for buying a home — so much so that I went and bought one myself a few years ago. But buying a house is a good idea only if you meet the following conditions:

  1. You can afford a sizable down payment to cushion you from the effects of local economic downturns or you have a super-stable job, such as working for the government or your father-in-law, that makes you unlikely to ever miss any payments.
  2. You can afford the maintenance as well as the payments, insurance and property taxes.
  3. You have good disability and/or mortgage insurance to make sure that you do not miss any payments even if you break your back and can’t do your job anymore.
  4. You are pretty sure you do not want to leave your area or move to a larger, more expensive home anytime in the next five years.
  5. Your payment is a reasonable percentage of your take-home pay (I shoot for under 25 percent; anything over 35 percent is far too risky).
  6. You have a sizable emergency fund to deal with contingencies.
  7. You can afford other forms of savings, rather than counting on your house as a piggy bank for future needs. In general, if declining home prices would send you into a hysterical panic about your financial situation, you are buying too much house.

If you do not meet these conditions, then buying a house is gambling — not just on rising home prices, but also on the continued soundness of your roof, boiler and plumbing. If you wouldn’t borrow the money to go to Vegas, then don’t borrow it for a house, either.

It sounds like McArdle is concerned with two issues:

1. People have not learned the lesson of the housing crash: housing prices do not inevitably go up. They may go up – and generally have over time – but this is not a guarantee. If you don’t accept this premise, then you will treat real estate differently.

2. The general American desire for owning a home is not enough compared to economic realities. Americans generally like owning homes: they are part of the American Dream in symbolizing status, we assume homeowners are less transient and care more about their communities, and they allow for individual freedom. But, if people can’t properly afford them, McArdle says it is not worth stretching financial bounds to make it possible. Instead, we need sound principles like saving up your money over time to make a good down payment on a house.

Both are valid concerns. Generally, Americans like seeing homes as an investment as well as an essential part of a successful life. Telling them otherwise may not be popular for politicians…

Different areas to address to help millennials purchase homes

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Survey data suggests Millennials want to buy homes but have a hard time finding the resources. Here is a quick look at different hurdles:

So why aren’t all young would-be homebuyers just taking advantage of the low down-payment options offered by these plans to get into the market before prices rise further? Not everyone has access to the programs that can shrink a down payment, and even for those who do, such help may not be enough. “Typically the down payment is the biggest hurdle for a homebuyer” says Ken Fears, director of regional economics and housing finance at the National Association of Realtors. “Programs that have a lower down payment are going to provide a bigger boost for the consumer.” Some programs, like Fannie Mae’s Community Home Buyer’s, require a 5 percent down payment, a sum that still makes saving a difficult proposition for many young people, particularly those in areas with quickly climbing home prices, such as San Francisco and San Diego. States like North Carolina and New Hampshire, have particularly well-regarded programs that allow for down payments of about 3 percent. Some private lenders also offer assistance to new homebuyers, but fees and additional factors, such as debt-to-income ratios, can prove more restrictive.

But programs aimed at reducing down payments for first-time homebuyers can feel like a double-edged sword. In competitive areas, where homes are scarce and multiple bids are common, an affordably low down payment can be limiting. “You’re not very competitive. If you’re going into a house with multiple offers and they see 3 percent down versus 10 or 20 percent down, they’re not going to go with your offer,” says Anne Simpson, a 27-year-old teacher and prospective homebuyer in Washington D.C…

Tight inventory is also a major hurdle for first time buyers. “In a majority of large metro areas nationwide, the inventory of lower-priced homes for sale is much lower than inventory of mid and high-priced homes for sale,” says Humphries. That can make for a stressful and competitive shopping experience where prospective buyers feel like there’s a race to save up for their down payment before rates go up and favorite neighborhoods sell out…

And for more Millennials, issues of poor or nonexistent credit and lack of consistent wages push dreams of homeownership just out of reach. High student-debt payments combined with escalating rent leaves little extra income for savings and even those with steady jobs have learned that significant raises are hard to come by. According to Humphries, there’s no quick fix. Instead, patience, education, and advocacy programs for newer buyers will be the key to boosting first time home purchases among younger buyers, progress that could take another three to five years.

As the article notes, even with higher renting costs, it is not easy to buy a home. While this article provides just a brief overview, it seems like there is an opportunity for private lenders to really help or develop this market. Imagine college graduates with some student loan debt that want to own, have decent jobs, and yet don’t have the credit or big down payment yet. Isn’t there a way to craft something based on their education (tied to lower unemployment rates, higher earnings down the road)?

Ending a long-term relationship can lead to downward mobility in housing

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The end of a long-term relationship can negative influence one’s housing options:

Many (though declining numbers of) marriages end in separation today. Besides the emotional turmoil that the marital separation causes, this event has profound effects on the chances to remain in homeownership for both ex-partners. Generally, at least one, if not both partners, will leave the previously shared dwelling. As separation often involves a loss of financial resources, people may have a hard time re-entering homeownership. After falling out of love and separating, a fall down the housing ladder may follow, as we show in a study recently published in European Sociological Review.

How drastic this fall will be depends very much on the housing market environment (see Figures 1 and 2). In the past in Britain, easy access to housing finance and high supply facilitated (re-)entry into homeownership for ex-partners even under house price inflation in the 1990s and early 2000s. In tight housing markets ex-partners will face more difficulties, and once access to mortgages becomes restricted, as happened in Britain after the recent crash in the housing market, problems may arise. So in the past British ex-partners could return to homeownership at some point in their lives because access to mortgages was easy – and they needed to return because alternatives in the private and social rental sector were and are unattractive. This may no longer work in future. Ex-partners may increasingly face similar problems that new market entrants currently encounter, for which the term generation rent has already been coined.

To better understand what may happen to British ex-partners, we can consider the example of Germany. The German housing market is in many ways different from the British, not the least because private rental accommodation is an attractive alternative to homeownership. Access to mortgages is also more restricted than in Britain, even after the recent tightening of regulations in Britain. High down payments are the rule in Germany. In this market environment, homeownership is a once-in-a-lifetime opportunity for many, while a considerable share of people will never enter homeownership. After separation, very few Germans will be able to return to homeownership (see Figure 2). Ex-partners will be less likely to be in homeownership through their lives post-separation. This scenario may foreshadow the British situation in the near future.

Being excluded from homeownership in the German context is not as consequential as it may turn out to be in Britain, however. First, more Germans will accept to rent after separation compared to the British, because attractive, and most of all, secure accommodation is available for – internationally seen – reasonable costs. Second, the German public pension system is relatively generous for those who continuously worked throughout their lives. To build up private wealth as a cushion for old age is not as necessary as in Britain. In Britain, where individuals are expected to privately invest in financial products and property to build an individual safety net – an idea called asset-based welfare – people that experience a separation may lose this safety net. This may result in stark disparities between the separated and those remaining married in old life.

Many (though declining numbers of) marriages end in separation today. Besides the emotional turmoil that the marital separation causes, this event has profound effects on the chances to remain in homeownership for both ex-partners. Generally, at least one, if not both partners, will leave the previously shared dwelling. As separation often involves a loss of financial resources, people may have a hard time re-entering homeownership. After falling out of love and separating, a fall down the housing ladder may follow, as we show in a study recently published in European Sociological Review. – See more at: http://blog.oup.com/2014/10/home-ownership-marriage-separation/#sthash.bcXULRwJ.dpuf
Many (though declining numbers of) marriages end in separation today. Besides the emotional turmoil that the marital separation causes, this event has profound effects on the chances to remain in homeownership for both ex-partners. Generally, at least one, if not both partners, will leave the previously shared dwelling. As separation often involves a loss of financial resources, people may have a hard time re-entering homeownership. After falling out of love and separating, a fall down the housing ladder may follow, as we show in a study recently published in European Sociological Review. – See more at: http://blog.oup.com/2014/10/home-ownership-marriage-separation/#sthash.bcXULRwJ.dpuf

The authors conclude that changes in family structures over the past few decades mean that housing policy primarily built around families and stable relationships just won’t work. In other words, we need more housing options for smaller, changing families and people who live alone.

I wonder if the same findings would hold in the United States. Perhaps it might be particularly problematic in higher-priced markets where buying homes and renting can be difficult even for stable, middle-class families.

Spain’s global lead in elevators tied to housing policies

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Spain leads the world in elevators per 1,000 people and this is the result of certain housing policies:

Compared to other countries, Spain’s elevator supply looks remarkably, well, elevated.
Spain Has Risen to the Top of Global Elevator Rankings
Quartz

At face value, there’s a pretty simple reason why. Spaniards are some of the world’s pre-eminent apartment-dwellers. In 2012, roughly 65 percent of the population lived in apartment buildings, much higher than the euro-area average of 46 percent. (The only other European countries that compare to Spain in terms of apartment-living are Latvia and Estonia, which are both also around 65 percent.)…

Top-down planning gave rise to relatively high-density urban building, often by politically connected construction companies in a building boom that stretched from the 1960s into the late 1970s.

“The dominant form of this housing was estates (apartment complexes) with over 1,000 dwellings,” wrote then Harvard academic Eric Belsky and colleague Nicolas Retsinas, in a paper on the Spanish housing market back in 2004. “These estates replaced many of the shantytowns that developed near cities like Barcelona and Madrid in the late 1940s and early 1950s.”

Thus was the modern Spanish city born.

With the emphasis on agricultural land in the Franco regime, dense cities and elevators were the result.

Given all this, what are the implications?

1. Do all those elevators detract from or enhance walking (taking the stairs versus having denser communities where walking is the norm)?

2. Are there any unique features of Spanish elevator culture?

3. Do the Spanish any sort of edge in elevator technology or maintenance?

USA Today says American Dream costs $130k per year

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Living the American Dream isn’t cheap, according to calculations from USA Today. Here is what went into the cost:

•Home ownership is central to the American dream. So, we took the median price of a new home ($275,000), subtracted a 10% down payment, then projected the annual cost of a 30-year mortgage at 4% interest. We also added annual maintenance costs of 1% of the purchase price. Total: $17,062 a year.

•We used the U.S. Department of Agriculture’s April 2014 figure of $12,659 for a moderate-cost grocery plan for a family of four.

•In May, AAA estimated it would cost $11,039 a year to own one four-wheel-drive sport-utility vehicle.

•The Milliman Medical Index pegged annual health insurance premiums and out-of-pocket medical expenses at $9,144.

•We used various estimates for the costs of restaurants and entertainment; one family summer vacation; clothing; utilities; cable or satellite; Internet and cellphone; and miscellaneous expenses (see table).

•Total federal, state, and local taxes were pegged at 30% for households at this income level, based on a model developed for Citizens for Tax Justice.

•USA TODAY calculated current educational expenses for two children at $4,000 a year and college savings (all of it pretax, we assumed) at $2,500 per year per child, based on various rules of thumb.

•Finally, the maximum annual pretax contribution to a retirement plan for people under 50 is $17,500. That’s slightly less than 15% of this American dream household’s annual earnings, in line with financial planners’ recommendations.

Total: $130,357.

It sounds like a lot — and it is in a country where the median household income is about $51,000. Add one more child and another vehicle and you could easily reach $150,000.

I can see some places where costs could be trimmed, particularly with the car and a more minimalistic approach to retirement savings. I wonder if the emphasis here should be on the overall cost – which is high and the article notes it can vary quite a bit from region to region – or the assumptions about what the middle class is about. I was recently looking at a classic sociological study Working-Class Suburb written by Bennett Berger in 1960. There is a point in the book where Berger juxtaposes the suburban critic frowning at the ills of suburban life and the suburbanite who is happy with his relative comfort of a car, refrigerator, house, and little patch of lawn. In the decades since, expectations about the good life have increased, as Juliet Schor showed in The Overspent American. If Americans need $130,000 a year to have the basics, many of which are good things, then is being middle-class something completely different today?