Arnold Kling  

What I'm Saying

Bleeding-Heart Libertarianism:... The Top 0.1 Percent...

At a Mercatus event on the future of housing finance.

1. In recent decades, the U.S. housing finance system took the "ownership" out of home ownership. Instead of starting out with equity in the form of a 20 percent down payment, we went toward down payments of 5 percent or less. Instead of accumulating equity by gradually paying off a mortgage, we went toward equity extraction with cash-out refinances and home equity loans.

2. In the 1980s, Freddie Mac and Fannie Mae were mostly helpful to the housing finance system. However, as the housing boom took off, they lowered their standards, particularly for down payments.

3. We could return to a system in which Freddie and Fannie play a significant role. However, they should be regulated by the Treasury, with rigorous stress tests.

4. Alternatively, we could phase out Freddie and Fannie (by gradually reducing the size of the mortgages they are allowed to purchase) and let the housing finance system be determined by private behavior.

5. The key to a more stable housing sector is to put the "ownership" back into home ownership. Under no circumstances should any subsidies be given to loans with low down payments, cash-out refinances, or home equity loans. One approach would be to replace FHA with a saving program that helps people accumulate money for a down payment.

6. The 800-pound gorilla in housing policy is the housing lobby. The realtors, home builders, and mortgage bankers all want to see lenient, subsidized mortgage credit. There is no one to oppose them, so housing policy will be all f'd up no matter what the policy wonks propose. It's F'd up now, dominated by Freddie, Fannie, FHA , and foreclosure forebearance, and it's likely to remain F'd up for the foreseeable future.

COMMENTS (4 to date)
Becky Hargrove writes: that you mention it, the housing lobby also affects, through zoning restrictions:
1) where people are able to live
2) the degree to which cities can grow. In other words, they presently affect a lot more about our future than just home ownership

Jack writes:

I think now is our chance to break with a bad tradition: for many people to get stuck with real estate debt, preventing them from being mobile workers. Especially in this recession, we need people to be as mobile as possible. Mortgages should be for people who know they are staying put, and, as you emphasize, can become homeowners (as opposed to "a rental with debt").

People can rent houses or townhouses for that neighborhood feel. Enough with the near-zero equity homeownership craze

tjames writes:

One thing that seem to get missed in the equity equation is the non-trivial realtor fees associated with buying/selling a house. For some discussions, this may not be relevant, but if you are the owner of a home, and trying to sell, that money is coming from somewhere.

I'd submit that if you buy a house at 5% down, you don't have 5% equity, you are upside down, unless you are willing and able to go down the FSBO route (and even that is not free of fees and carries its own hassles). Realtor's commissions and other transaction fees will eat more than 5% in a normal transaction.

Where I think this becomes relevant is in the "walk away" threshold for home owners. That threshold is not a 5% decline in house prices, it's the failure of house prices to appreciate enough to be able to sell at any profit. At 5% down, you basically have no net asset on the day of the transaction. In fact, you may have a net liability.

JeffM writes:

Two points.

(1) The single most important reform is to ensure that the profits of any entity with an implicit government guarantee on its liabilities go to the government. It would also help to restrict government subsidies to those with income well below the median purchasing properly maintained houses valued well below the LOCAL median. I recognize that there is an argument to be made against any subsidies for home ownership, but if there is any subsidy, it should be for those just on the margin of being able to afford a very modest house. I agree that a program that requires a history of regular savings to fund a downpayment as a prerequisite for eligibility would have a number of benefits. I am less concerned about high downpayments. Marginal borrowers by definition cannot afford high downpayments and will default if they have bad luck such as divorce or unemployment with any reasonable downpayment.

(2) The issue of whether the market price of the house exceeds the mortgage is an issue for lenders and for those who buy a house to speculate on real estate appreciation. For those who buy a house as a primary residence, the primary benefit is the ongoing flow of housing services, with being "upside down" a necessarily temporary and usually secondary phenomonon.

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