Tag Archives: homeownership

Revisiting “Privatopia”

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One of the key texts in the last 20 or so years regarding gated communities and homeowners associations was Privatopia, published in 1994. With a recent book, Beyond Privatopia: Rethinking Residential Private Government, the same author updates his thoughts and talks about the financial viability of homeowner’s associations:

A: The (housing) boom is clearly over, and right now few of these associations are being created. The problem shifts to sustaining the ones we have. What was sustaining them was an endless rise in housing prices. People could always sell at a profit, and the association would get its money. Now we have foreclosures and people not paying their assessments for six months or a year, and associations aren’t getting their assessments. The banks in foreclosures don’t want to pay overdue assessments…

It’s presumed that monthly assessments will cover operating expenses, which can include things like trash collection, pool maintenance, even resurfacing the streets. But studies that have been done show they probably don’t have enough money in reserve. At least a third of them … don’t have half of what they should have. After the housing collapse and the foreclosures, it’s probably more like half don’t have enough. Many of them are having to go to the bank and get a loan, but if you have a high delinquency rate, you can’t get a loan…

Q: Do you have any numbers on how many such associations are in dire financial straits?

A: No, and that’s a problem. I’m starting a six-month sabbatical now to work on exactly that. Everything I get is anecdotal, and I want to get a quantitative handle on how bad the problem is.

If many local governments are having budget problems, it is a surprise that many homeowners associations are facing similar troubles? I would imagine that the locations with more associations in financial trouble would mirror locations with more foreclosures and the most depressed housing prices. I wonder how many people within these associations are aware of these troubles. Actually, I wonder how many residents pay much attention at all to what their associations are doing.

Ultimately, perhaps this will all end up in the courts as associations and lenders who own foreclosures battle over assessments.

Great Quotes in Homeownership #2: Herbert Hoover on the value of owning a home in 1931

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Herbert Hoover is not a well-regarded President. But he did have a lot to say about home ownership even as the country was going through the Great Depression. Here are some of Hoover’s thoughts from 1931:

“Next to food and clothing, the housing of a nation is its most vital problem. . . . The sentiment for home ownership is embedded in the American heart [of] millions of people who dwell in tenements, apartments and rented rows of solid brick. . . . This aspiration penetrates the heart of our national wellbeing. It makes for happier married life. It makes for better children. It makes for courage to meet the battle of life. . . . There is a wide distinction between homes and mere housing. Those immortal ballads, ‘Home, Sweet Home,’ ‘My Old Kentucky Home’ and ‘The Little Grey Home in the West’ were not written about tenements or apartments. . . . They were written about an individual abode, alive with tender associations of childhood, the family life at the fireside, the free out-of-doors, the independence, the security and the pride in possession of the family’s own home. . . . Many of our people must live under other conditions. But they never sing songs about a pile of rent receipts. . . .”

Over these warm words and some 1,900 others like them President Hoover had worked with a full heart for two months. One evening last week he took them all, in the form of a keynote address, to Constitution Hall and there, in a voice brimming with emotion, delivered them to the assembled delegates of the President’s Conference on Home Building & Home Ownership. At this great gathering President Hoover again demonstrated his ability and leadership in an unofficial activity outside the constitutional realm of the Presidency.

The conference’s major purpose, President Hoover said, was “to stimulate industrial action,” not “to set up government in the building of homes.” To promote home owning the President urged a better system of home financing, thus keying his program in with his proposed Home Loan Discount system (TIME, Nov. 23).

Of course, Hoover gets some of the blame for not being able to move the country out of a position where it was difficult for many Americans to imagine homeownership, let alone a steady job. But these and other quotes from Hoover suggest he was a President who was committed to helping average Americans move from a monthly rent to a mortgage even in dark economic times. He suggested homeownership would lead to better social outcomes plus lead to feelings of nostalgia, “independence,” “security,” and “pride.”

This is also a reminder that the American value of homeownership was not just a post-World War II phenomenon. The rate of suburbanization was impressive in the post-war period but there had been a wave of suburbanization in the more prosperous 1920s that was interrupted by the Great Depression. I have occasionally found it interesting to think about how suburban growth patterns would have been different without the Great Depression and World War II. Several things might have happened earlier, like the building of interstates or the mass building of suburban communities (exemplified by the Levittowns). Perhaps the whole process might have simply taken longer, giving citizens and politicians more time to react and adjust.

I also wonder how Hoover’s goals of homeownership are viewed by today’s scholars who look back at this period: did these sentiments directly contribute to prolonging the Great Depression? How many of Hoover’s ideas ended up getting implemented in some form by subsequent leaders?

Great quotes in homeownership #1: Owning a home keeps Americans from Communism

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In a recent conversation with a college friend, we talked about how keeping up with a home takes a lot of time. This reminded me of a quote from William Levitt, a member of the famous family who built the Levittowns:

He [William Levitt] was a prime facilitator of the American Dream in its cold war formulation. “No man who owns his own house and lot can be a communist,” he once said. “He has too much to do.”

So the key to fighting the Cold War through homeownership was not about owning private property; it was about keeping men (and women?) busy taking care of their homes so they can’t get involved in causes like communism.

The trick is that people have to want to and be able to put the time, effort, and money into homes that they buy. Starting mainly in the 1960s, Americans were given new options for homeownership that didn’t require as much work: townhomes and condos. (Contrary to the typical interchanging of the two terms, these two types of units are actually different: in a townhome, the homeowners own the land while condo owners do not.) The associations in these developments take care of much of the outdoor work leaving the homeowners to tackle the interior.

In addition to Baby Boomers who are retiring and downsizing to homes that will require less work, I would guess that many in the younger generation want homeownership without all the work.

With banks and lending institutions owning so many homes, housing values will be lower for several years

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Foreclosures are not just an immediate problem; the New York Times reports that the number of foreclosed homes now owned by banks and mortgage lenders are likely to depress the housing values for years to come:

All told, [banks and mortgage lenders] own more than 872,000 homes as a result of the groundswell in foreclosures, almost twice as many as when the financial crisis began in 2007, according to RealtyTrac, a real estate data provider. In addition, they are in the process of foreclosing on an additional one million homes and are poised to take possession of several million more in the years ahead.

Five years after the housing market started teetering, economists now worry that the rise in lender-owned homes could create another vicious circle, in which the growing inventory of distressed property further depresses home values and leads to even more distressed sales. With the spring home-selling season under way, real estate prices have been declining across the country in recent months…

Over all, economists project that it would take about three years for lenders to sell their backlog of foreclosed homes. As a result, home values nationally could fall 5 percent by the end of 2011, according to Moody’s, and rise only modestly over the following year. Regions that were hardest hit by the housing collapse and recession could take even longer to recover — dealing yet another blow to a still-struggling economy.

Not good news for those who want to sell a home in the near future. It is interesting that we now hear very little about this at a policy level. There are certainly other important pressing issues in the world (jobs, gas prices, military actions, Republican candidates for President?) but housing values affect a lot of people.

At the same time, I have heard and seen new advertisements from the National Association of Realtors. I wonder why they are running these ads now: are they worried that more people will rent rather than buy? Is there an uptick in the number of people who are trying to combat lower housing values by selling the home on their own? Do they feel that there might soon be changes in public policies, perhaps through measures like limiting or getting rid of the mortgage-interest deduction, that would limit the government’s promotion of homeownership? And interestingly, these advertisements have stressed that homeownership helps create jobs.

High housing prices in Vancouver due in part to increase in Chinese homeowners

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Vancouver may be known as one of the most liveable cities in the world but the housing prices are also quite high. This is in part due to an increase in Chinese homebuyers:

Buyers from mainland China are leading a wave of Asian investment in Vancouver real estate as China tries to damp property speculation at home. Good schools, a marine climate and the large, established Asian community as a result of Canada’s liberal immigration policy make Vancouver attractive, said Cathy Gong, who moved from Shanghai to the Shaughnessy neighborhood on Vancouver’s Westside about three years ago.

China, where home prices rose 28 percent in Beijing and 26 percent in Shanghai last year, according to the country’s biggest real estate website owner SouFun Holdings Ltd., has taken steps to curb property speculation within its borders. Chinese home prices gained for 19 straight months through December and climbed in almost all 70 cities tracked by the government during the first quarter. Premier Wen Jiabao placed curbs on mortgage lending, boosted down-payment requirements and limited the number of purchases.

“As the Chinese get more and more prosperous, they are diversifying their assets out of China,” said Jim Rogers, an American investor who moved to Singapore from New York four years ago so his daughters could learn Chinese. “Vancouver is very high on the list.”…

The current group of Chinese homebuyers in Vancouver is the third “wave” from Asia since 1990, following Taiwanese and Hong Kong immigration, said Manyee Lui, a veteran Vancouver realtor. “People from mainland China are the new immigrants,” Lui said.

This is a reminder that real estate truly is a leading industry in the global economy as people from different countries seek out desirable properties. In escaping a real estate bubble in China and increased regulation but with money to spend, Chinese homebuyers are now looking at Vancouver. (Vancouver may not be the only place: I also recently wrote about a story of Chinese residents building “monster homes” in New Zealand.)

It is interesting to note the reactions of Vancouver residents: the influx of Chinese homebuyers has raised housing values, perhaps pricing others out of the market, and the schools now have a large number of non-native English speakers. At the same time, I assume Vancouver residents take pride in the cosmopolitan nature of their city. One resident mentioned the possibility of the government restricting foreign homeownership – is this really the route to go? Will this end up turning into a debate between local and global interests?

Another article on declining homeownership rates

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Bloomberg Businessweek highlights how American’s view of home ownership has changed in the last few years:

The most affordable real estate in a generation is failing to lure buyers as Americans like Pauli sour on the idea of home ownership. At the end of 2010, the fourth year of the housing collapse, the share of people who said a home was a safe investment dropped to 64 percent from 70 percent in the first quarter. The December figure was the lowest in a survey that goes back to 2003, when it was 83 percent.

“The magnitude of the housing crash caused permanent changes in the way some people view home ownership,” said Michael Lea, a finance professor at San Diego State University. “Even as the economy improves, there are some who will never buy a home because their confidence in real estate is gone.”…

“If we’ve learned anything from this mess, it’s that housing is not a risk-free investment,” said Michelle Meyer, a senior economist at Bank of America Merrill Lynch Global Research in New York. “Everyone knows someone underwater in their mortgage or struggling to sell a home.”…

The U.S. home ownership rate dropped to 66.5 percent in the fourth quarter, the lowest in more than a decade, according to the Census Department. The rate probably will retreat another percentage point by 2013, according to Meyer, of Bank of America Merrill Lynch, and Lea, the finance professor. That would put it back to a 1997 level.

“People will still aspire to own their own homes,” Lea said. “They’ll just be a lot more practical about it.”

This article tends to focus on the money side of things (housing as less of an investment, tighter credit, lots of people with underwater mortgages, a future with a reduced or no involvement from Fannie Mae and Freddie Mac, etc.) but I think the key (or exciting) information is in the last two paragraphs I cited above:

1. The homeownership rate has dipped but not a whole lot. Even in the housing boom of roughly the mid 1990s to the mid 2000s, the US homeownership rate increased from 63.6% in early 1993 to 69.2% in late 2004. So over an eleven year stretch of relative prosperity and increasing home values, homeownership rose about 6.5 percentage points. From this peak in late 2004 (69.2%), the homeownership rate had dropped to 66.5% for the fourth quarter in 2010. In a six year stretch, the rate had dropped 2.7%. If you look at the historical data since 1965 (all of these figures are from an Excel table on the Census website – Table 14 on this page), before the 1990s, the homeownership rate moved fairly slowly either up or down. Perhaps what is not so unusual about homeownership is not that it has fallen in recent years but rather that it rose so much between 1993 to 2004.

2. Additionally, this is all tied to American aspirations: do they still aspire to own their own home? While this article (and many others) highlight how this might now be more difficult, this key part of the American Dream still seems to be intact. Even if future neighborhoods or suburbs look different (like this article suggests they might), the interest in owning one’s property still appears to be high. While there is no guarantee that more and more Americans will be able to own their own homes (how high might the American homeownership rate realistically go anyway?), it will likely take more than this what has happened in this particular economic crisis to cast a new vision of American fulfillment that doesn’t include a single-family home or space.

Habitat for Humanity limits foreclosures for lower-income homeowners

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Some recent data about Habitat for Humanity suggests that it may still be possible to have lower-income homebuyers without higher risks of default or foreclosure:

A recent study led by the Cox School of Business at Southern Methodist University, which was commissioned by the Dallas branch of Habitat, found that foreclosures in Habitat’s Dallas market were less than 2% last year. Although the report only looked at the Dallas office of Habitat, the findings mirror those found in other Habitat offices across the country, the organization says.

If this data holds up across the country, we should then ask why Habitat owners have such low foreclosure rates. Is it just because Habitat for Humanity has a limited operation each year (a small sample to work with) or is there something about their program that makes a difference?

The article suggests that Habitat’s particular program is what makes the difference: the homebuyers go through “home-ownership education,” there is consistent interaction with Habitat after the home purchase, the purchased homes are relatively modest (not “McMansions”), and Habitat imposing a less punitive late fee for late mortgage payments. One of the study’s authors sums up the impact of what Habitat does:

“These are practices that I think any bank should implement, particularly after looking at the foreclosures in the last five years,” said Paul Hendershot, lead author of the Dallas Habitat report and an adjunct University of North Texas professor.

It would probably cost quite a bit for lending institutions to adopt the practices of Habitat for Humanity for each mortgage holder. While the up-front costs are prohibitive, the lenders would save down the road as homeowners would go through fewer foreclosures.

Chicago Tribune calls for phasing out of mortgage-interest deduction

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What interesting arguments people will make in the midst of an economic crisis. While one commentator has a number of reasons why he is “never going to own a home again,” the Chicago Tribune argues that the United States needs to phase out the mortgage-interest deduction. The main reason seems to be that the deduction primarily benefits wealthier homeowners, not the middle class:

Trade groups such as the National Association of Home Builders portray the benefit as a middle-class tax break. But it does a lot less for most Americans than those with a vested interest in promoting home sales would have you believe: If you rent, you get nothing. If you have reasons not to itemize deductions, you get nothing. If you pay off your mortgage to live debt-free, you get nothing.

Borrow a fortune for a McMansion, however, and the Internal Revenue Service provides a big discount, at the expense of every other taxpayer. More than three-fourths of the benefit from the mortgage-interest deduction goes to the 14 percent of tax filers reporting six-figure incomes. Almost one-third of the subsidy goes to the population reporting incomes of $200,000 or more. Those 3 percent of tax filers at the very top receive about the same amount as do the 86 percent earning less than six figures.

As a consequence, this deduction does little to promote homeownership — supposedly its main objective. Data suggest that almost no one now benefiting from the break would flee the real-estate market. People just wouldn’t borrow as much to fund home purchases.

What is remarkable to me about both of these arguments is that such arguments might have been unheard of before this economic crisis. But since the economy has gone downhill, the housing market in particular (and the most recent housing figures are not good), desperate times apparently call for desperate measures.

All of this bears watching: will homeownership remain a cornerstone of the American Dream?

Looking at how consumers are the major beneficiaries of fixed-rate mortgages

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The historical development of the fixed-rate mortgage, usually 30 years in the United States, helped contribute to the post-World War II suburbanization boom in the United States. Several scholars take a look at who exactly benefits from the fixed-rate mortgage (FRM):

The FRM clearly occupies a central role in the U.S. housing finance system. It has been the dominant instrument since the Great Depression and currently accounts for more than 90 percent of mortgage originations. The FRM is regarded as a consumer-friendly instrument, which is one reason why it enjoys enduring popularity. But the instrument can cause problems for both current and prospective borrowers. And part of its popularity is due to government support as well as past regulatory favoritism. The FRM is heavily subsidized through the securitization activities of Fannie Mae and Freddie Mac. These subsidies, which lower the relative cost of the instrument, are an important factor in its popularity. The FRM also imposes costs on the mortgage industry and on investors in mortgage securities—costs that are likely to rise as the economy recovers. Importantly, the FRM is a onesided design. Consumers, particularly those who utilize the prepayment option, benefit while investors and taxpayers bear the cost.

The PDF file linked to from this document has a lot of interesting information. A few thoughts about this:

1. The fixed-rate mortgage came about because of particular historical conditions and interests. Prior to World War II, other kinds of mortgages were sold.

2. The fixed-rate mortgage is not as common in lot of other countries around the world. There are other ways the mortgage market could be set up.

3. The authors suggest that the FRM is the primary mortgage instrument in this country because of governmental approval. Here are the final two sentences in the conclusion of the PDF:

There is nothing so special about housing finance that necessitates the government absorbing the credit risk of the vast majority of the mortgage market or underwriting the interest-rate risk of the that market. Two episodes with massive taxpayer loss should convince us of that fact.

But I think this may be overlooking the cultural and symbolic value Americans place on owning a home. While this scheme may put taxpayers on the hook, Americans also value homeownership, particularly as a lynchpin of the American Dream. Most (if not all) presidents since Calvin Coolidge have pushed policies that would boost the homeownership rate. From FHA and VA loans to Fannie Mae and Freddie Mac, the government has poured billions into homeownership. So while consumers might benefit from this setup, would we be willing as a nation to push for different types of mortgages that might make it more difficult for Americans to purchase a home?

Might the 30-year mortgage disappear?

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An article suggests that the 30 year mortgage might “fade away.” As both Republicans and Democrats think about eliminating Fannie Mae and Freddie Mac, it is unclear whether a purely private mortgage industry would retain features like a 30-year payment period:

Life without Fannie and Freddie is the rare goal shared by the Obama administration and House Republicans, although it will not happen soon. Congress must agree on a plan, which could take years, and then the market must be weaned slowly from dependence on the companies and the financial backing they provide.The reasons by now are well understood. Fannie and Freddie, created to increase the availability of mortgage loans, misused the government’s support to enrich shareholders and executives by backing millions of shoddy loans. Taxpayers so far have spent more than $135 billion on the cleanup.

The much more divisive question is whether the government should preserve the benefits that the companies provide to middle-class borrowers, including lower interest rates, lenient terms and the ability to get a mortgage even when banks are not making other kinds of loans…

Hanging in the balance are the basic features of a mortgage loan: the interest rate and repayment period.

Fannie and Freddie allow people to borrow at lower rates because investors are so eager to pump money into the two companies that they accept relatively modest returns. The key to that success is the guarantee that investors will be repaid even if borrowers default — a promise ultimately backed by taxpayers.

A long line of studies has found that the benefit to borrowers is relatively modest, less than one percentage point. But that was before the flood. Fannie, Freddie and other federal programs now support roughly 90 percent of new mortgage loans because lenders cannot raise money for mortgages that do not carry government guarantees.

The issue of a 30-year mortgage would be up for debate within a broader restructuring of an important industry. Both organizations, Fannie Mae founded in 1938 and Freddie Mac created in 1970,  were intended to help Americans become homeowners. Fannie Mae, along with several other government programs, particularly helped to boost homeownership rates after World War II. During this postwar housing boom, government programs helped lower down payments and lengthened the years in a mortgage. If I remember correctly, mortgages prior to this postwar period were 15 or 20 years at most, required much larger down payments, and were available from mortgage lenders or savings and loans associations.

Where this article needs to go next is to ask whether this means fewer Americans will have access to mortgages and homeownership. If the industry is indeed restructured in the coming years, will the homeownership rate continue to drop? If politicians from both sides of the aisle are interested eliminating Fannie Mae and Freddie Mac, does this mean the federal government is pulling away from more explicit endorsements of homeownership? It is intriguing to note that all of this might take place because of a large economic crisis (though both of these programs have had their critics for decades) while Fannie Mae was instituted in response to an earlier crisis.