Feb122016

Is home ownership a privilege or an entitlement?

Though realtors and politicians like to present home ownership as an entitlement, it’s really a privilege bestowed on those who can sustain it.

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We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.

US Declaration of Independence

Did you notice that in the defining statement of American Entitlement, the right to own a single-family detached home was not mentioned? I remember when I learned to drive, I was told repeatedly that driving was not a right, it was a privilege, a privilege I earned by learning the rules of driving and demonstrating good judgment. Why would owning a house be any different? Since sustaining home ownership requires financial skills and discipline, wouldn’t it be natural to assume home ownership is a privilege bestowed only on those with the requisite talents?Preserving_the_American_Dream

Where did the idea of a home ownership entitlement start? Was it Herbert Hoover’s campaign to give every American “a chicken in every pot and a car in every garage“? I guess everyone is entitled to a house in order to have the garage to store the car they’re entitled to, right?

I believe every American should be provided the opportunity for home ownership — assuming they demonstrate the necessary skills to sustain it. Since houses are expensive to build, we can’t simply give everyone a house, and if we make everyone wait until they saved the full purchase price, many wouldn’t save enough to buy in their lifetimes. Therefore, we need to provide access to credit to help people buy houses.

But do we need to give access to everyone? No. We must limit access to those who save money for a down payment, and those who are willing and able to make periodic mortgage payments. We tried giving everyone access to credit regardless of their proven financial literacy, and it didn’t turn out very well. Most were unable or unwilling to sustain home ownership, so we need to provide reasonable criteria for screening out the ones most likely to fail. Once you exclude people, it’s no longer an entitlement: it’s a privilege, a privilege people must earn. Realistically, that’s what it must be.

Home ownership is not an entitlement. It’s a privilege.

First-Time Home Buyers: The New Elite?

By Credit.com, February 1, 2016american_bankers_dream

Is buying a first home becoming more a privilege than an American birthright? That’s the provocative question posed recently by Issi Romem, chief economist of BuildZoom.com. And he answers it, cautiously, with data suggesting it’s true.

Romem’s most concerning assertion: Young buyers have nearly 10% higher incomes than they did less than a decade ago. … First-time home buyers now come from higher up the income distribution than they used to, clocking in near the 60th percentile.

The ability to transition into homeownership is gradually becoming the privilege of a narrower group of first-time buyers that is more financially select,” Romem says. …

So what?

Is this a natural reaction to extending credit to everyone, inflating a massive housing bubble, and imperiling our financial system?

No policy is in place that prevents people lower down the economic ladder from developing the requisite skills. Some family near the bottom of the income distribution is buying the least expensive owner-occupied home in the market. That family sacrificed, saved money, and built a sound credit score to qualify for the privilege of home ownership. The people who lack those skills, don’t become homeowners regardless of their income.

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First-time buyers are critical for the economy, because their purchases set in motion sales for others who are trading up—usually families looking to expand need to sell their “starter” homes first.“A shortage of first-time buyers will cause the equivalent of famine in the housing market: a slowdown in home sales and presumably also in prices,” Romem wrote in a recent post titled “The Rising Income of First-Time Home Buyers.”

I wrote back in 2013 that The move-up market will suffer for another decade.

Most first-time homebuyers don’t have 20% down for a house, particularly at today’s high prices, so most opt for a 3.5% down FHA mortgage or a 5% or 10% down conventional mortgage with private mortgage insurance. Over time, assuming they don’t refinance or add more debt with a HELOC, a homeowner will build equity by paying down an amortizing mortgage. With wage growth in the area, house prices will rise 3% or 4% per year, and presumably, the borrower will have a higher income as well. So after 5 to 7 years, a prudent homeowner will have sufficient equity to cover the closing costs of a sale and have 20% to put down for a move-up purchase.Norman_Rockwell_mortgaged_children

The collective action of all homeowners who purchased at the same time provides the demand for a move-up market. The equity ported from a previous sale is used to bid up prices in the most desirable neighborhoods which is why markets like Newport Beach always trade at a healthy premium to rental parity. However, the current move-up market is broken because potential move-up buyers don’t have the equity to make the move.

Nationally, sales to first-time home buyers are 16.5% below the historical norm, Romem says, but in some parts of the country, the drop-off is even more dramatic. In the West region, sales fall below the norm by 23.9%; in the South, by 22.6%. …

(See: First-time homebuyer participation hits three-decade low)

There are two ways to look at the news. Tougher lending standards, such as larger down payment requirements, clearly have something to do with a drop-off in young buyers. That might help prevent a repeat of the housing bubble and collapse, said Logan Mohtashami, senior loan manager at AMC Lending Group.

Exactly.

The upside: Today’s home buyers are qualified

“To be able to buy a home now more than ever … means you’re doing well in this economy. This cycle of home buyers is the best I have ever seen in my 20 years,” Mohtashami said. Exotic interest-only or low-down-payment loans helped some buyers get into their first homes a decade ago, and that didn’t work out well for many of them. “I always wondered how much of the previous data was jaded because a lot of first-time home buyers bought homes without the right income needed.”

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“The notion that homeownership is slipping out of reach for a growing share of the population is an uncomfortable one, especially if the trend continues,” he said. “Do we really want homeownership to become a privilege rather than a choice?

Yes. We do.

Personally, I believe shelter in some form should be an entitlement. Nobody should be forced to sleep in the street. (See: What is the minimum level of housing quality people are entitled to?) The most callous free-market advocates would suggest that people should fear homelessness and destitution so they will be motivated to work and produce goods and services for the benefit of society. I noted that the fear of homelessness is the basis of America’s economic system. It may make for principled debate, but when faced with the reality of grinding poverty, most people conclude something should be done to provide a minimal level of safe and sanitary housing.End-Of-The-American-Dream

That being said, I don’t believe ownership of a single-family detached home in the suburbs should be an entitlement. There is a big difference between providing basic shelter and providing a chicken in every pot, a car in every garage, and ownership of the house.

Does that mean the American Dream is over? No. It means we must return to the American Dream held by our ancestors, an American Dream where thrifty people worked hard, saved money, and enjoyed the fruits of their disciplined labor. That’s an American Dream I can embrace.

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