Aug292013

A weak plea for more housing subsidies

I am a supporter of home ownership — not loan ownership as it’s become perverted into — but real home ownership free of encumbrances like a hefty mortgage. Most people who achieve home ownership go through a period of indebtedness because few can save enough (or get gifts from relatives) to buy a house for cash. Those that achieve home ownership do so through disciplined repayment of mortgage debt without adding to it to supplement consumer spending via the home ATM.

Anyone who plans to stay in one location for five years or more should consider home ownership. It is advantageous to fix one’s housing costs with an amortizing fixed-rate mortgage, and over time, between house prices inflation and amortizing mortgages, equity builds up into a significant nest-egg useful in retirement. These are great reasons to become a homeowner.

Home ownership has been linked to greater community involvement and other positive societal goals. This link may or may not be true, but many in the government accept it as so, and this has long been used as a justification for a plethora of policies and misguided government subsidies encouraging home ownership.

However, Housing subsidies are detrimental to America. They do not raise the rate of home ownership, they cause house price inflation and volatility that inflicts financial pain and distress on the population, and these subsidies cost the government an enormous amount of money. Homeownership doesn’t need to be encouraged with government subsidies.

Homeownership remains a goal that should be encouraged

If we convince ourselves that just because home values declined after 2007 the U.S. should stop encouraging ownership, we’ll be making a drastic mistake.

By Michael Hiltzik — August 27, 2013, 2:20 p.m.

I have a confession to make: I am a homeowner.

That’s a dangerous thing to say. We homeowners are getting blamed for a lot of today’s economic ills, and labeled dupes besides.

We need to make a clear distinction here. Homeowners are not being blamed for anything. People with a substantial equity claim in their properties are not the problem. The lingering economic ills we are facing today is caused by loanowners, those with little or no equity stake that cannot afford their properties, often because they used their home like an ATM machine. And, for the record, they are dupes.

It’s said that we profiteer from an undeserved tax break.

They do.

That our obsession with ownership drove the nation to make unwise policy choices during the last eight decades.

Also true.

That our 30-year fixed-rate mortgages are dinosaurs dependent on government subsidies.

Not true. the 30-year fixed-rate mortgage would exist with or without government subsidies, only the price would change.

We’re told that by treating our homes as piggy banks, we impoverished ourselves and our children.

They did. In a big way. How much emotional pain was inflicted on children because their parents were Ponzis?

That we would almost certainly be better off renting rather than owning.

From 2004 through 2011, anyone would certainly have been better off renting than owning financially.

That we would be richer had we sunk our nest eggs into stocks and bonds.

But it’s time to stand up for homeownership. Because if we convince ourselves that just because home values declined after 2007 the U.S. should stop encouraging ownership, we’ll be making a drastic mistake.

Specifically, what does he mean by “encouraging?” We clearly shouldn’t be subsidizing home ownership. We shouldn’t be encouraging or discouraging any method of obtaining shelter. Our housing policies should be completely neutral on this question.

The fact is that there are sound reasons for homeownership — though it’s not for everyone — and very sound reasons for government policy to encourage it.

No, there isn’t.

Much of today’s attack on the principle of homeownership doesn’t address that principle at all.

Much of this article’s defense of home ownership doesn’t address that principle at all either. He is arguing for subsidies and continued government support. We can have home ownership without the handouts.

It deals instead with the housing crash, and purports to find that the crash was the result of excessive encouragement of homeownership, especially among low-income families.

The culprit, according to this argument, is the Community Reinvestment Act, a President Carter-era initiative that targeted banks’ discrimination against home buyers in low- and moderate-income neighborhoods. The claim is that the CRA induced banks to lower their lending standards to meet CRA lending goals in disadvantaged neighborhoods, setting the nation up for the subprime crash.

This notion has been thoroughly debunked. As early as 2008 it was systematically demolished by Federal Reserve Gov. Randall Kroszner. In 2011 it was so discredited that even the Republican minority of the Financial Crisis Inquiry Commission disavowed it as a cause of the crash. …

I have addressed this nonsense many times. This is right-wing political spin used by those who want to deflect responsibility for the housing bubble.

Recently, another attack on the principle of homeownership has moved to the forefront. The claim, put forth chiefly by Andrew J. Oswald of the University of Warwick in England and David G. Blanchflower of Dartmouth College, is that a high level of homeownership is associated with a high level of unemployment in a state or community. Their reasoning is that chiefly by hampering workers’ ability to move to find work, homeownership suppresses economic growth.

Yet, as they acknowledged, there’s no evidence that homeowners themselves are disproportionately unemployed, or that the inability to sell a home (this is known as “house-lock”) affects anyone’s ability to find a job. In their latest paper on the topic, published this spring, they conceded that the relationship between homeownership and unemployment “remains poorly understood.”

It might be more accurate to say it’s unproven. “All sorts of things keep people from being mobile,” says Richard K. Green, director of the Lusk Center for Real Estate at USC, who has debated Oswald on the topic. He observes that age and marital status are highly correlated with homeownership, but also are factors that can keep families from being mobile even if they’re renting. …

What’s even more accurate is to say this counter-argument refutes nothing. The fact remains there is a strong correlation between high rates of home ownership and lower rates of economic growth. While the correlation may be poorly understood, it exists, and it is a strong argument against continued mortgage subsidies (See: New report may kill the home mortgage interest deduction).

There’s no real doubt that homeownership is a goal that should be encouraged by government policy.

I worked out so well last time, right?

Yes, there is plenty of real doubt that home ownership should not be subsidized by taxpayer money, and it should not be the sole focus of government housing policy.

Homeowners vote more often than renters. They engage more with neighborhood and community groups. Studies suggest that their children do better in school and are more likely to graduate from high school and move on to postsecondary education.

This is an attack on renters. Are renters substandard people who don’t support their communities and their children? As a renter, I find this offensive. Home owners are not superior people who deserve special government subsidies paid by the people they deem inferior. This is tyranny of the majority.

The difference in the length of homeownership is the single largest factor underlying the wealth gap between black and white families, according to research by Thomas Shapiro of Brandeis University. That’s important because from 1984 to 2009 the gap in median net worth tripled, from $85,000 to $236,000. Much of the difference is home equity, which gives home-owning families a leg up in helping relatives with down payments, lowering the cost of borrowing and improving access to credit, Shapiro has found.

It’s true that some of these advantages were sapped by the housing crash. But many long-term homeowners were still able to weather the storm better than renters.

As I pointed out previously, renters did much better than homeowners from 2004 through 2011 — much better. However, loanowners did much better than renters during the recession. Loanowners who decided to quit making housing payments were allowed to squat in their comfortable homes. In contrast, renters who lost their jobs or otherwise felt the pinch of the recession were not allowed to miss any housing payments. If a renter quit paying for their housing, they were quickly put into the street. The gross unfairness of this fact was lost on the homeowners and loanowners that somehow felt they deserved their special treatment.

It’s also true that renting is a good choice for many Americans, including young people who may need to move often at the outset of their careers.

I guess that means people in their 40s like me who rent are complete losers.

And it’s proper to question whether the mortgage interest tax credit is the best tool for promoting homeownership. Green, for one, advocates replacing it with a refundable tax credit, which could be phased out for wealthier homeowners and wouldn’t encourage people to buy bigger homes than they need just to capture the tax break.

A tax credit would be better than the HMID, but I would rather see all subsidies phased out.

But the worst thing that could happen as a result of the debate over housing is that government policy could reverse.

No, the best thing that could happen is the government supports for home ownership would disappear. Prices would fall, then they would become less volatile, the government would obtain more tax revenue, and it would have no impact on the home ownership rate, nor would it make home ownership less desirable. Home ownership might be marginally less financially advantageous, but it would never be any less emotionally desirable.

Already credit is tighter for low- and moderate-income Americans than it should be.

This is complete nonsense. Credit is tight for those who don’t repay their debts. Low- to moderate- income Americans can readily obtain credit for as much as their incomes can support provided they have managed their finances well enough to have a moderately low FICO score of about 640.

Removing the government-sponsored housing lenders, Fannie Mae and Freddie Mac, from the market, as many conservatives advocate, would close the housing market to those borrowers even tighter.

No, it wouldn’t. These are the same arguments made by the advocates for the GSEs before they imploded and cost taxpayers $150B. It was costly nonsense then, and it’s nonsense now.

That’s the wrong option. “People still want to be homeowners,” Green observes. Why would we want to stifle an aspiration so beneficial to society and the economy?

Reducing or eliminating government subsidies is not tantamount to stifling home ownership. This is a disingenuous lie. Nobody is proposing doing anything that will actively discourage home ownership. What this country needs is an elimination of all home ownership subsidies, and we need to replace our current policies with an ownership-neutral stance where neither owning or renting is encouraged over the other. That’s the balanced policy approach housing really needs.

A homeowner deserving of government subsidies

The former owner of today’s featured property was one of the many who eagerly took the subsidies to obtain loan ownership.

  • They bought the property on 11/17/1999 for $300,000. The took out a $240,000 first mortgage, a $30,000 second mortgage, and put $30,000 down.
  • The refinanced with a $300,000 first mortgage on 9/12/2002 and withdrew their down payment.
  • On 11/20/2003 they refinanced with a $353,500 first mortgage.
  • On 8/19/2004 they obtained a $59,000 HELOC.
  • On 8/18/2006 they refinanced with a $414,000 first mortgage.

This is an example of the kind of foreclosure I am seeing more of. They were obviously delinquent for a very long time because the bank foreclosed with an outstanding mortgage amount of $532,978. That’s $120,000 more than they borrowed, so the years of missed payments and fees were added to the loan balance. Since values rose and the property was no longer underwater, the bank finally foreclosed on them, and they are offering the house for sale at a price that will make them whole.

As delinquent borrowers see their properties rise in value, lenders will foreclose on them to get their money back. This is the kind of foreclosure we will see many more of in the coming years.

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[idx-listing mlsnumber=”OC13169553″ showpricehistory=”true”]

22702 ISLAMARE Ln Lake Forest, CA 92630

$549,900 …….. Asking Price
$300,000 ………. Purchase Price
11/17/1999 ………. Purchase Date

$249,900 ………. Gross Gain (Loss)
($43,992) ………… Commissions and Costs at 8%
============================================
$205,908 ………. Net Gain (Loss)
============================================
83.3% ………. Gross Percent Change
68.6% ………. Net Percent Change
4.4% ………… Annual Appreciation

Cost of Home Ownership
——————————————————————————
$549,900 …….. Asking Price
$109,980 ………… 20% Down Conventional
4.61% …………. Mortgage Interest Rate
30 ……………… Number of Years
$439,920 …….. Mortgage
$118,490 ………. Income Requirement

$2,258 ………… Monthly Mortgage Payment
$477 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$115 ………… Homeowners Insurance at 0.25%
$0 ………… Private Mortgage Insurance
$212 ………… Homeowners Association Fees
============================================
$3,061 ………. Monthly Cash Outlays

($429) ………. Tax Savings
($568) ………. Principal Amortization
$190 ………….. Opportunity Cost of Down Payment
$89 ………….. Maintenance and Replacement Reserves
============================================
$2,342 ………. Monthly Cost of Ownership

Cash Acquisition Demands
——————————————————————————
$6,999 ………… Furnishing and Move-In Costs at 1% + $1,500
$6,999 ………… Closing Costs at 1% + $1,500
$4,399 ………… Interest Points at 1%
$109,980 ………… Down Payment
============================================
$128,377 ………. Total Cash Costs
$35,900 ………. Emergency Cash Reserves
============================================
$164,277 ………. Total Savings Needed
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