The Right Way to Encourage Home Ownership 18 comments
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If someone has been paying rent month after month, year after year, and has a good credit record, it seems to me there ought to be some way for them to buy a house.
We are about to start passing rules and regulations to try to prevent another financial crisis from happening, and I don't want to see people excluded from home ownership unnecessarily. I know it's unfashionable to stick up for the poor right now, to advocate for increased home ownership, and in particular to say that it was not a mistake to try to increase home ownership rates at lower income levels, but (1) poor households didn't cause the financial crisis, though in many cases they were victims of it, and (2) it's the right thing to do in any case.
One thing I hear is that lower income households should just rent, as though that's equivalent to owning a home except for the financial arrangement. But renting is not the same as owning a home. I'm not saying one is better than the other, though I have a preference, but they are different. Each has advantages and disadvantages that suit different preferences, and those who prefer ownership shouldn't be needlessly excluded.
I would be willing to pay quite a bit not to have to ask if I can paint a bedroom the color that I want, change the landscaping, hang a picture securely on the wall, have a dog or a cat, not to even have to think about whether something is okay or not with the owner if I want to change it. I don't want to have to let someone in with 24 hours notice. If I want a basketball hoop above the garage, that's my choice. As an owner, I don't have to worry about my rent going up over time - I can lock into a fixed payment - or not having the lease renewed because the landlord has decided to do something else with the property.
However, if the roof leaks, the hot water heater stops working, a pipe breaks, anything like that, then it's my responsibility to pay for it. If I want to move it's a lot harder, I can't just give notice, pack up and go once the lease ends. Instead I have to worry about selling my house, and maybe losing money on it.
But there's something about owning I can't quite explain - it's different, at least to me. I don't like that, when I rent, I'm only able to live somewhere so long as someone else gives me permission to do so. As long as I make my house payment every month, I have a place to live. Always. I don't know why that is comforting, but it is.
If we, say, require a 10% or 20% down payment for all buyers, that will impose a substantial barrier to purchasing a home. Many people can get access to a down payment somehow - real estate agents will fill you in on tricks such as how to borrow the money from family and have it look like a gift - but many others don't have access to those resources, and saving money when you are living close to the edge is not easy at all.
But what about all the lower income households who have never missed a rent payment, that have decent credit, but cannot possibly meet even, say, a 10% down payment hurdle, how do we ensure that they have a path to home ownership? They have shown themselves to be able to reliably pay a particular amount, and there ought to be a house they could buy with a similar payment profile.
I don't know the data well enough to conclude this for sure, but if my impression is correct, many of these households weren't sold houses they could afford, houses with payments, say, equivalent to the rent they had been paying. Instead, they were sold houses far above that rate, and probably sold a plan along with it for how they could meet the payments, and how they could escape if things didn't work out (since prices would, of course, continue rising). I don't know whose fault it is that the households ended up in highly risky positions that would, in many cases, lead to default - the homeowner surely wanted a dream house and to join in the money-making, the real estate agent certainly wanted a large sale since they earn more when the sales price is higher, the broker incentives were to get the deal done, and so on. But something went wrong and these households did not end up in the right houses, or with the right financial arrangements.
So let's fix that instead of excluding them from ownership. Households with a verifiable, reliable payment history and with decent credit need a way to buy a house if that's what they have their heart set on doing. But it has to be a house they can afford, the payments have to match their income and their rental history. The process has to ensure that this happens.
[Sketching something out quickly without intending to get every detail correct, perhaps something like the following would work: First, you only get one shot at this program. If you walk away or default, that's it, you can't ever use this program again. That probably means not buying a house again for a long, long time, if ever. The program would involve mortgage loans with minimal down payment requirements.
Second, if your household income is in the qualifying range, the government will grant you an equity stake in the house of, say, $5,000 (or pick an amount you like better). If you stay in the house for seven years or more, then the $5,000 is yours if you ever sell the house (perhaps as a tax credit). There could be some payback mechanism if the homeowner makes an excessive amount on the sale, or not. Also, I don't like that there is an incentive to sell the house after seven years, so perhaps the $5,000 could go into an IRA or something similar if it is not used to purchase a new house, that way the cash would not be immediately available if the household went back to renting.
Third, a big problem would be repairs - roofs, plumbing, that sort of thing. Big expenditures like that could cause problems and lead to default. Some sort of insurance against this could be made available and required as part of the house payment - along with co-pays to create better incentives but still keep the cost reasonable.
And so on. Someone else can take the time to get all the details and incentives right - feel free to offer your own - but the main thing is to find a way to allow households with lower incomes to purchase a house with little or no down payment, yet still give the buyers some equity stake in the purchase so that they have something at risk giving them less incentive to walk away or default (hence the restriction on only using the program once). There ought to be a way to get this done].
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This article has 18 comments:
It's not the way that anyone in power or anyone with a vested interest in RE wants to hear.
Lower home prices.
It's the panacea that solves all that you said and more.
If Rent Vs Own ratio isn't so out of whack, that owning is indeed equivalent to renting plus a small premium, then you will see people buying homes.
We're probably 40% away in terms of home prices right now to that goal in many areas of the country.
I bet this is not something you wanted to hear.
If you want greater home ownership for average Americans, the math has to work for the average family, meaning all-in payments of about $1,500, which is 25% of a family income of $70,000. Including taxes and insurance, this means that prices should be around $200,000, assuming a $20k down payment. When this happens, housing will be affordable.
It seems we are working very hard to ignore the reality that our home assets have become way over valued and until we deal with that every "solutution" will only incite further problems.
I believe that this is imminent. The gov't has no responsibility to keep home prices high, in fact it is irresponsible to try and keep prices high. Current, past, and future policies to subsidizing mortgages or the mortgage industry or facilitating loans, etc. only puts off the inevitable, home prices are not sustainable. The current real estate bubble was sustained by overborrowing and almost everybody was doing it. This in turn inflated prices. But what if so many people were not willing to borrow to pay for a house? What if so many people were not willing to borrow to pay for college, a car, etc? Don't you think that prices would be lower?
Remember, we are coming off of record hight home ownership rates, and I simply don't see the need to offer further subsidies at this stage of the game, since we would just be propping up a market that has further to fall. It would be folly to try to get low income families into houses that will be worth less in a few years rather than simply waiting until these families can make their own determination of what they can afford.
If you are living "close to the edge," then helping you to buy a home is not doing you a favor- even if the mortgage payment is equlvalent to your rent payment.
The reason people "weren't sold houses they could afford" is because they didn't WANT the kind of house that they could afford.
[They have shown themselves to be able to reliably pay a particular amount, and there ought to be a house they could buy with a similar payment profile.]
Your proposed program would help to artificially boost house prices, which would make that house less affordable.
Why do we always need a "crutch" in this country? We, as a people, are better than this. I wish that we could get away from the concept that every seemingly good idea has to be institutionalized.
If ideas such as this are so great, then experiment with them on a small scale. If you truly feel that this is important, then start up an organization to administer this program.
Raise the funds, find and screen the candidates, educate them, and then track them over the course of 2 or 3 years to see if it's really helping, or if it increases the risk of default, like most DPA programs do.
You'll get more personal satisfaction from this, and it won't force everyone else to participate. If it can't make it out of the "bootstrap" phase, then let it go.
All you propose are simply a lame attempts at the "social engineering" that has been tried for 100 years without much success. At this point, we have too many people chasing too few homes. That is the issue. The solution is not tax credits and subsidies.
1) Live within or below your means.
2) Understand the resposibility you incur when purchasing a home and
taking out a mortgage.
3) Treat your home as "shelter" not investement,cashcow,AT... etc. etc.
You treat your car as: transportation ! no?
appreciate the sentiment. there are other substantial financial benefits to home ownership (tax savings). however, modifying the path to ownership to make it easier is a risky bit of social engineering. Sometimes it helps e.g eliminating callable mortgages.
the main issue here seems to be a downpayment. very simply, a downpayment gives the owner a vested interest in the property. without it, the interest is more like an apartment. at the first adversity, the owner will walk (without even waiting for a lease to run out). the tradeoff is losing the downpayment or losing a credit score.
If a family can't save enough in an apartment for a downpayment, they have no business committing to a mortgage. This same family in all likelihood doesn't have enough savings to carry them thru a financial hit. To a limited and risky extent, the emergency savings and downpayment could be considered interchangeable.
Unless rents come down with house prices (is this a given?), deflating home prices won't help, except by decreasing the amount of downpayment, not the ability to save.
My own opinion is home ownership is over-rated. The govt and lobbyists have put enormous incentives in place to promote it. In many areas, homebuilding (aka growth) is/was the predominant industry. The reason of course is that homes are the largest tangible assets around. But they still go up and down; and mortgage leverage, like any leverage, makes them more risky. The peace of mind of a paid off dwelling can't be beat, but even then, people will say you're a fool for not putting the equity to work. The perspective of the home as an investment asset needs to be separated from the home as a personal security need.
First do the savings, then calculate all the bills therefrom in buying the house then think downpayment+25% of that downpayment/year for maintenence costs etc. Then you might be on a more secure footing.
When you have fairly rapid population growth, either homegrown or from immigration, developable land close to population centers will be expensive and even very modest new houses will not be affordable to low income people. Older houses in depressed markets, e.g. areas that have already suffered economic declines with population losses and may be on their way back up, will be the only kind of houses that are affordable.