Tag Archives: homeownership

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.

Exactly how many American homes are vacant?

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Two bloggers have a disagreement about how many vacant homes there are in the United States. Check out the debate and the comments below.

The moral of the story: one still needs to interpret statistics and what exactly they are measuring. The different between 11% and 2% is quite a lot: the first figure suggests 1 out of 10 housing units are vacant while the second figure suggests it is 1 out of 50. If you look at Table 1 of this Census Bureau release regarding housing figures from Quarter 4, it looks like the vacancy rate is 2.7%. But there may be confusion based on Table 3 which suggests the vacancy for all housing units is roughly 11% for year-round units. And later in the release, page 11 of the document, gives the formula for the vacancy calculation and an explanation: “The homeowner vacancy rate is the proportion of the homeowner inventory that is vacant for sale.”

There are some other figures of note in this document. Table 4 shows that the homeownership rate is at 66.5%, down from a peak of 69.2% in the fourth quarter of 2004. (It is interesting to note that this rate peaked a couple of years before the housing market is popularly thought to have gone downhill. What happened between Q4 2004 and the start of the larger economic crisis? Table 7 has homeownership rates by race: the white rate has dropped 1.1% since 1Q 2007 while Blacks and Latinos have seen bigger drops (3.2% and 3.3%).

Deciding whether to buy or rent

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One of the New York Times blogs discusses whether residents should buy or own. The decision could be based on a ratio for metropolitan areas that gives some indication of whether owning or renting is a better choice:

A good rule of thumb is that you should often buy when the ratio is below 15 and rent when the ratio is above 20. If it’s between 15 and 20, lean toward renting — unless you find a home you really like and expect to stay there for many years.

While the metropolitan average is 15.1, 17 metro areas have ratings over 20 (led by East Bay, CA, Honolulu, HI, San Jose, CA, San Francisco, CA, and Seattle) and 14 metro areas have ratings below 15 (with the five lowest being Pittsburgh, PA, Cleveland, OH, Detroit, MI, Phoenix, AZ, and Dallas – Fort Worth, TX).

The blog writer come to this conclusion about the data: “It’s pretty amazing when you think about it. The country has suffered through a terrible crash in home prices, yet buying a house remains an iffy proposition in many markets.”

While this may be true, what is even more remarkable is that homeownership is still such a widespread goal. If this measure is reliable and valid (meaning that it is consistent and it really tells us something about buying vs. owning), then homeownership might never really be about an economic improvement over renting. Rather, Americans have made owning a home an important cultural value and then use economic rationales to justify their decisions.

What exactly is it that appeals to people about owning their home? They get to make their own decisions, they don’t have to pay a landlord or wait for them to take care of repairs, they get some separation from their neighbors, and overall, they feel like they have made it on their own. If renting was a cheaper option but people could still afford to buy a home, how many Americans would decide to rent?

Why rent when you can own?

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Chris Suellentrop of Wired makes a case for more renting and less owning:

Everything, everywhere, all the time. That’s the dream of the Rentership Society. And we’re almost there. If you want to be able to possess some things, in some places, some of the time, well, keep on buying. But I vote for infinite abundance, on demand. Doesn’t that sound like the new century’s American dream?

This vision seems to revolve around a world of never-ending Internet access that gives people the ability to read, listen to, and watch whatever they want, whenever they want.

But this is also a reminder that American ideas about the defects of renters, particularly when it comes to housing, is a cultural construct:

In the American mind, renters are regarded as an unsavory lot, willful dissidents from the American dream. They do things like put cars up on cinder blocks in their front yard or, worse, live in your basement. The vision of an Ownership Society was about more than just houses, but the promotion of homeownership was, for a time at least, its most successful element.

These ideas about renters could change if we do move as a society away from ownership.

Homeownership rates back to 1999 levels

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With the economic and housing troubles of the last few years, the homeownership rate in the United States is now down to 66.9%, the lowest level seen since 1999:

The percentage of households that owned their homes was unchanged at 66.9 percent in the July-September quarter, the Census Bureau said Tuesday. That’s the same as the April-June quarter.

The last time the rate was lower was in 1999, when the rate was 66.7 percent.

The nation’s homeownership rate was around 64 percent from 1985 through 1995. It then rose dramatically during the Clinton and Bush administrations, hitting a peak of more than 69 percent in 2004 at the height of the housing boom.

The economic boom played a large role but both Clinton and Bush pushed homeownership across the board as an unmitigated good for America and its citizens. How will current politicians respond regarding homeownership? We received a number of pieces of campaign literature in the mail this election season where both Republicans and Democrats talked about helping to save homes. Will owning a home be seen as something that helps uphold the American dream or will the rhetoric change?

Mortgage interest tax deduction being discussed

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With the federal government looking for more money, a budget deficit commission has been discussing possible changes to the tax code to bring in more revenue. One option among a number of options: limiting or revoking the mortgage interest deduction.

Whatever this commission recommends, I can imagine the political fights that may ensue.

The possible housing bubble in China

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While the American housing crisis continues, FinanceAsia takes a look at the current housing situation in China:

Many homebuyers nowadays in China consider their property assets as part of their long-term savings plan, as well as a hedge against inflation.

Why property? China’s tightly run financial system leaves only three places for its zealous savers to put their money. Bank deposits are one option. But they yield 2.25%, less than the 3.1% rise in May’s consumer price inflation. The equity markets are a second choice. But stocks have been performing poorly; Shanghai’s benchmark index was one of the world’s worst performers in the first half of 2010. (And the bond market is underdeveloped.) Even with its high transaction costs and manic price moves, property has become the preferred investment choice for everyone from young married couples to middle-aged factory workers trying to ensure their retirement.

Recent statistics show that there are about 64 million apartments and houses that have remained empty during the past six months, according to Chinese media reports. On the assumption that each flat serves as a home to a typical Chinese family of three (parents and one child), the vacant properties could accommodate 200 million people, which account for more than 15% of the country’s 1.3 billion population. But instead, they remain empty. This is in part because many Chinese believe that a home is not a real home unless you own the flat.
And so people prefer buying to renting, and as a result, the rental yield is relatively low.

That’s a lot of vacant property. This is a testament to the power of cultural norms regarding housing: since renting is less desirable, a large percentage of the housing stock goes unoccupied. Also, savings behavior seems partly driven by these norms (and perhaps also by limited economic returns elsewhere) – houses have developed into investments rather than just places to live.

I don’t know much about the Chinese housing market but it is intriguing to read about non-American norms and values attached to housing. I wonder how these norms and values developed over time.

Thinking about a culture of homeownership

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The recent cover of Time featured a story about homeownership. While the story emphasized the idea that homeownership is not an unquestionable good (particularly economically), it also argued something else: homeownership is an important part of American culture that should be examined.

For generations, Americans believed that owning a home was an axiomatic good. Our political leaders hammered home the point. Franklin Roosevelt held that a country of homeowners was “unconquerable.” Homeownership could even, in the words of George H.W. Bush’s Secretary of Housing and Urban Development (HUD), Jack Kemp, “save babies, save children, save families and save America.” A house with a front lawn and a picket fence wasn’t just a nice place to live or a risk-free investment; it was a way to transform a nation. No wonder leaders of all political stripes wanted to spend more than $100 billion a year on subsidies and tax breaks to encourage people to buy.
With the economic crisis surrounding homes (and the foreclosure issue is going to be around for a while), some are beginning to question the role of housing within the American dream. From the early days of American life, the single-family home was a special place that dovetailed with American emphases on individualism, the nuclear family, and an anti-urban bias.
Of course, this cultural ideal was pushed along and aided by government and economic policies that emphasized homeownership. So, now faced with economic troubles, the country could either support or move away from this value:
1. Support this value by making houses a safer investment and tightening up the mortgage markets so that lenders and borrowers are working together rather than simply trying to profit.
2. Change or work against this value by supporting other kinds of housing tenure, primarily renting. But this could include moves toward more co-operative housing or other options.
Thus far, I would say Option #1 has been chosen: try to shore up the housing market without questioning whether homeownership should be the ideal or if other options are possible.
I’m not suggesting homeownership is necessarily good or bad. What this housing crisis does offer is an opportunity to ask how homeownership fits into our future vision of America.