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The Homeownership Obsession
It's also true, as economist Mark Zandi shows in his new book, "Financial Shock," that today's housing collapse had multiple causes: overconfidence about rising home prices and demand; cheap credit, in part supplied by overseas investors; lax lending practices; inept government regulation; speculative fever, and sheer fraud. Still, the government's pro-housing policies contributed in two crucial ways.
First, they raised demand for now suspect "subprime" mortgages. The Department of Housing and Urban Development sets "affordable" housing goals for Fannie Mae and Freddie Mac to dedicate a given amount of credit to poorer homeowners. One way Fannie and Freddie fulfilled these goals was to buy sub-prime mortgage securities—many of which have now gone bad. Second, government's housing bias created a permissive climate for lax lending. Both the Clinton and present Bush administrations bragged about boosting homeownership. Regulators who resisted the agenda risked being "roundly criticized," notes Zandi. In 2005, mortgage delinquencies were low. Regulators couldn't easily make "the case to lenders that their lending standards were out of whack."
Good intentions have led to bad outcomes: an old story. Fannie's and Freddie's losses impelled the Treasury Department to propose a rescue for the companies; given their size and the government's implicit backing for their debt, doing otherwise would have risked a financial panic. Personal savings have been skewed toward housing. Many Americans approaching retirement "have accumulated little wealth outside their homes," concludes a study by economists Annamaria Lusardi of Dartmouth College and Olivia S. Mitchell of the University of Pennsylvania. Even some past gains from the prohousing policies are eroding; the homeownership rate has dropped to 68 percent.
We might curtail housing subsidies without subjecting the economy to the disruption of outright elimination. The mortgage interest deduction could be converted to a less generous credit; Fannie's and Freddie's expanded powers could be made temporary; FHA's minimum down payment could be set at a more sensible 5 percent. But taking even these modest steps would require a recognition that the obsession with homeownership has gone too far. It would require a willingness to confront the huge constituency of homeowners, builders, Realtors and mortgage bankers. There is no sign of either. When the next housing crisis occurs, we will probably find its seeds in the "solution" to the last.
© 2008
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Member Comments
Posted By: Abram @ 08/17/2008 12:08:34 PM
Comment: Everyone in this discussion seems to already be a homeowner, so let me broaden your perspective. The alternative to home-ownership is renting. Personally, my family moved from a rental unit into a house a little bit smaller for a $100/month increase,(not including that meager 3% down paymernt.) ...which we would have had to pay within another year anyway given the market. When Robert mentions that sometimes the only savings a howeowner has is in there home, remember that a renter doesn't have even that modest achievment. I'll concede that some people live beyond there means, but subsidizing housing can be good for families, and the economy; and isn't nearly as bad as subsidizing banks who pushed those failure fraught subprime loans and securities.
Consider the ratio of minimum wage increases to inflation and rental prices over the last two decades. Now watch as single parent families struggle to make the mortgage payment for someone else while still trying to put food on the table. THEN talk to me about FHA subsidies.
Posted By: sky1 @ 08/07/2008 9:38:32 PM
Comment: Homeowner obsession will likely cause quite a problem for years to come. In general, Americans have taken home ownership to an extreme of sorts; however, so have bank lending pratices of the not-to-distant past. We live in a word of instant gratification -- a buy now and pay later mentality. I'm not against owning a big home, although we don't live in a so-called 'McMansion', we do have sufficient for family needs. We also decided when first looking for a home, not to over do our home ownership by getting a bigger loan and more space/amenities then we really needed. As a consequence of principled, consertive effort to become true homeowners, we paid it off our mortgage in seven years (as of lask week), instead of a 30-year time-frame all on one income. We look at our house as a home not as an investment. Consequently, we're able to save, as we have in the past, for more important things, like retirement and our children's educations; only this time, we have the ability to save more. True home ownership, not to an extreme, is the real american dream.
Posted By: 19xxdinosaur @ 08/03/2008 11:59:16 AM
Comment: I agree that as a general rule increasing home ownership levels has many beneficial effects. I wonder though if people putting only 3% down understand how risky that is. Even if prices do not decline they may face foreclosure if the have to sell in less than about 5 years since they probably won't have built up enough equity to cover their closing costs. There is an article that goes through some of the math at http://observationsandnotes.blogspot.com/2008/07/sub-prime-mess.html