Somewhat apropos of this post, it would be interesting to read a response from Arnold, or a likeminded person, to the following: Kevin Erdmann
Erdmann in turn links to this commentary from Treasury.
Behind these statistics are creditworthy families who have not been able to access the wealth-building opportunity of homeownership or enjoy full mobility. This lack of access is particularly acute for minority and low-income families whose homeownership rates are considerably below the national average.
My comments:
1. Whenever people start playing the affordable housing violin, we should anticipate bad policy is to follow.
2. Kevin and Treasury are pointing to credit scores as an indicator that mortgage lenders, including Freddie and Fannie, have tightened credit. I don’t really focus so much on credit scores as an indicator of risk. I worry mostly about loan type (government-sponsored lenders should stay away from cash-out refinances and non-owner-occupied loans). Then I worry about down payments.
3. If you give a mortgage to someone with a low credit score who makes a low down payment, you are setting them up to fail (not most of the time, but enough to make it a questionable proposition). And of course, when the defaults come, you will be accused of predatory lending and have to pay a big fine.
4. I think government should get out of the mortgage subsidy business. Mortgage subsidies are mostly crony capitalism for Wall Street and mortgage bankers. If you want to support home ownership, help people save for down payments.
The issue is not affordability. It’s access, which the tectonic shift in FICO scores demonstrates has been decimated. Homes at the low end are very affordable now because it’s practically illegal to fund them for owner-occupiers. They should be less affordable.
By all means, get rid of the subsidies, although the tax benefits (most importantly the non-taxability of imputed rent) of owning dwarf any subsidies that might filter through the GSEs, in my opinion.
On down payments, I think that’s worth rethinking. The problems of marginal households owning with low equity levels should be weighed against the alternative. Those households also create costs for down market landlords.
Here, I think the focus on capital gains and equity levels is a bit misguided. Down market homes, on a price/rent basis are systematically much less expensive than higher priced homes. The relative gain for a low income household from homeownership is higher than the relative gain for a high income household in a more expensive house. Some of that gain comes from higher cash income, just because of the lower Price/Rent ratio that their homes fetch. But, also, there is the value of control. In a neighborhood with households that are prone to economic stresses, the costs of operating as a landlord are high. This means that the value of control to the owner-occupier is large. They can manage the house in a way that conforms to their goals as a tenant and as an owner. That probably adds a return of several percent per year in value. Sure, there are still some costs related to the potential for default. But, on net, it seems likely that the sorts of low down payment programs supported by the GSEs and FHA add a lot of value for those households.
This would all have been arguable 10 years ago. But, it isn’t now. The sudden federal takeover of the mortgage market and the subsequent almost complete shutdown on the bottom half of the mortgage market, as a policy choice, has been the most devastating shock imposed on the working class in decades. There is nothing subtle about this shift. It can’t be denied. And, most of the loss in home values at the low end of the housing market came after this policy shift.
Disagree with Kevin. If homes on the low-end were good investments, the private market would be happy to swoop in and buy them at a nice return. There is a paucity of good yielding investments right now. Private equity dipped a toe, but nothing more.
The high yields on residential real estate in mid-America are warranted due to the poor earnings trajectory for that population and the urbanization trend.
When prices were high in 2005, it was all irrational exhuberance, but when they are low, it’s homoeconomicus. Right?
You got a tough row to hoe here.
Good luck with this group.
Are they low now? Doesn’t seem like it. Some cities have fully recovered and, so long as they are near the center, even crummy home in sketchy areas are going for fortunes compared to comparable structures in smaller towns.
Even if they are low, why would you want the government deciding that instead of the market? The market can capture this easily via buying properties or extending loans (or other financing) to homebuyers. I see no reason to think the market is somehow prevented from swooping in on low-hanging fruit.
@Kevin: “The relative gain for a low income household from homeownership is higher than the relative gain for a high income household in a more expensive house.”
I doubt this, altho this does depend on the subjective value of “control”.
Compare a Detroit 3-bed house which can be bought today for $50k, but an L.A. 3-bed house costs $400k. After 5 years, the Detroit house can only be sold for $50k, still, while the L.A. house is then up to $450k.
That $50k absolute increase in equity is relatively less for the high income person than it would have been for the low income person, but the low income person got no increase in equity.
One of the big differences is the house price increase trend, and prices pretty much keep going up in high price (usually zone controlled anti-new building) areas.
What you are ignoring is KE’s comment on the importance to their economic well being of having a mortgage payment that does not change.
Additionally, the benefit on a percentage basis to a low income person who finally pays off their mortgage and lives rent free is incredibly high.
Why are you ignoring the fact that if someone is worth lending to, the market will lend to them. I have a good balance sheet and banks basically throw money at me.
Umm, cause according to KE’s link the market is not lending to them.
#4 — Rather than get out of the mortgage subsidy business, they should make the subsidy a clear equal credit to the whole payment, not just the interest. The real “crime” of the subsidy is that it subsidizes borrowing, not equity building — good for the bankers, bad for the working folk (wanting to build wealth; adds consumption bucks to those who want to borrow and consume more).
30% income tax credit on full house purchase mortgage payment — up to a yearly maximum of ~$25k, and a lifetime maximum of around ~$500k (1/2 and 10 times the avg prior 3 year US median taxable income, recently around $52k)
Note that John Kerry’s 2003 tax returns showed him deducting the full $50k of interest on housing, I’m sure he and most rich Congressfolk have continued and plan to continue doing so.
On downpayments, Slovakia has a system of down payment savings accounts where the gov’t adds an increased amount for those who are saving, up to some limit ($1500 or so) now. Previously 20%, it’s been going down and is now only 5% ($75 plus when saving $1500), but still it helped many normal workers get savings for downpayments.
The goal should be getting all workers who want the responsibility of owning and have a “good chance” of making the payments, a way to be buying instead of renting.
This should also be an explicitly counter-cyclical gov’t policy — that “good chance” should be lower in times of low growth, and higher in times of high growth.
A house is the single most significant investment most folks make, and is likely to remain so. It’s anti-Libertarian for the gov’t to be involved, but in our Democratic-Socialist culture, the political reality is that the gov’t WILL be involved. It would be better to be more clear about the goals of the gov’t involvement, with details about the achievement of those goals.
Like I wrote on a previous post- Erdmann boiled down is this- trying to find a way to keep the bubble inflated. I mean, seriously, he more or less admits this with….
“When prices were high in 2005, it was all irrational exuberance, but when they are low, it’s homoeconomicus. Right?”
You ignore the simple fact that the bubble was inflated by the private market cause the government allowed them to do so.
Thanks for the response, Arnold.
You say you don’t focus on credit scores. Is that because credit scoring has become skewed by political imperatives?
The quote from Treasury implies that many “low-income” families are “creditworthy” for purposes of getting a home loan. I have my doubts about that, at least if you’re talking about high-demand metro areas.
Also, if lack of access to mortgage credit is a problem, hasn’t the government played a role in causing it? I mean, the banks did tighten their lending policies largely in response to regulatory pressure after the crash, didn’t they?
Of course, the short quote reflects the premise that invidious discrimination is going on. I’ll leave it at that.
Yeah, makes a lot of sense to say that low income families are probably not credit worthy of buying homes in ” high-demand metro areas”.
Who’d thunk it?