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Friday, October 24, 2008

The Goal of Increasing Home Ownership

If someone has been paying rent month after month, year after year, and has a good credit record, it seems to me there ought to be some way for them to buy a house.

We are about to start passing rules and regulations to try to prevent another financial crisis from happening, and I don't want to see people excluded from home ownership unnecessarily. I know it's unfashionable to stick up for the poor right now, to advocate for increased home ownership, and in particular to say that it was not a mistake to try to increase home ownership rates at lower income levels, but (1) poor households didn't cause the financial crisis, though in many cases they were victims of it, and (2) it's the right thing to do in any case.

One thing I hear is that lower income households should just rent, as though that's equivalent to owning a home except for the financial arrangement. But renting is not the same as owning a home. I'm not saying one is better than the other, though I have a preference, but they are different. Each has advantages and disadvantages that suit different preferences, and those who prefer ownership shouldn't be needlessly excluded.

I would be willing to pay quite a bit not to have to ask if I can paint a bedroom the color that I want, change the landscaping, hang a picture securely on the wall, have a dog or a cat, not to even have to think about whether something is okay or not with the owner if I want to change it. I don't want to have to let someone in with 24 hours notice. If I want a  basketball hoop above the garage, that's my choice. As an owner, I don't have to worry about my rent going up over time - I can lock into a fixed payment - or not having the lease renewed because the landlord has decided to do something else with the property.

However, if the roof leaks, the hot water heater stops working, a pipe breaks, anything like that, then it's my responsibility to pay for it. If I want to move it's a lot harder, I can't just give notice, pack up and go once the lease ends. Instead I have to worry about selling my house, and maybe losing money on it.

But there's something about owning I can't quite explain, but it's different, at least to me. I don't like that, when I rent, I'm only able to live somewhere so long as someone else gives me permission to do so. As long as I make my house payment every month, I have a place to live. Always. I don't know why that is comforting, but it is.

If we, say, require a 10% or 20% down payment for all buyers, that will impose a substantial barrier to purchasing a home. Many people can get access to a down payment somehow - real estate agents will fill you in on tricks such as how to borrow the money from family and have it look like a gift - but many others don't have access to those resources, and saving money when you are living close to the edge is not easy at all.

But what about all the lower income households who have never missed a rent payment, that have decent credit, but cannot possibly meet even, say, a 10% down payment hurdle, how do we ensure that they have a path to home ownership? They have shown themselves to be able to reliably pay a particular amount, and there ought to be a house they could buy with a similar payment profile.

I don't know the data well enough to conclude this for sure, but if my impression is correct, many of these households weren't sold houses they could afford, houses with payments, say, equivalent to the rent they had been paying. Instead, they were sold houses far above that rate, and probably sold a plan along with it for how they could meet the payments, and how they could escape if things didn't work out (since prices would, of course, continue rising). I don't know whose fault it is that the households ended up in highly risky positions that would, in many cases, lead to default - the homeowner surely wanted a dream house and to join in the money-making, the real estate agent certainly wanted a large sale since they earn more when the sales price is higher, the broker incentives were to get the deal done, and so on. But something went wrong and these households did not end up in the right houses, or with the right financial arrangements.

So let's fix that instead of excluding them from ownership. Households with a verifiable, reliable payment history and with decent credit need a way to buy a house if that's what they have their heart set on doing. But it has to be a house they can afford, the payments have to match their income and their rental history. The process has to ensure that this happens.

[Sketching something out quickly without intending to get every detail correct, perhaps something like the following would work. First, you only get one shot at this program. If you walk away or default, that's it, you can't ever use this program again. That probably means not buying a house again for a long, long time, if ever. The program would involve mortgage loans with minimal down payment requirements.

Second, if your household income is in the qualifying range, the government will grant you an equity stake in the house of, say, $5,000 (or pick an amount you like better). If you stay in the house for seven years or more, then the $5,000 is yours if you ever sell the house (perhaps as a tax credit).  [There could be some payback mechanism if the homeowner makes an excessive amount on the sale, or not. Also, I don't like that there is an incentive to sell the house after seven years, so perhaps the $5,000 could go into an IRA or something similar if it is not used to purchase a new house, that way the cash would not be immediately available if the household went back to renting.]

Third, a big problem would be repairs - roofs, plumbing, that sort of thing. Big expenditures like that could cause problems and lead to default. Some sort of insurance against this could be made available and required as part of the house payment (along with co-pays to create better incentives but still keep the cost reasonable).

And so on, someone else can take the time to get all the details and incentives right, feel free to offer your own, but the main thing is to find a way to allow households with lower incomes to purchase a house with little or no down payment, yet still give the buyers some equity stake in the purchase so that they have something at risk giving them less incentive to walk away or default (hence the restriction on only using the program once).

There ought to be a way to get this done.]

    Posted by on Friday, October 24, 2008 at 02:34 AM in Economics, Financial System, Housing | Permalink  TrackBack (0)  Comments (89)

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