Renting: the new American dream

Years of efforts by Democrats and Republicans alike to promote home-ownership for everyone have received their share of criticism in these post-bubble days, now that we've seen what can happen when no attention is given to whether prospective buyers are financially ready or the loans they're getting are reasonable for their life situations. Paula M. Cino, director of energy and environmental policy at the National Multi Housing Council (NMHC) has strong opinions on the topic.

How does government support for home-ownership compare with government support for renting?

Cino: Federal home-ownership subsidies outnumber rental support 4 to 1 or about $230 billion to the renters’ $60 billion. If subsidies were adjusted to reflect the true distribution of households that rent vs. own, rental housing subsidies would have to increase by about $36 billion. The unbalanced nature of our housing policy is even more obvious when you consider that the richest 20 percent of the population claimed more than a third of the home-ownership subsidies through the mortgage interest deduction.

Why does it matter if the government offers more breaks and incentives for home-ownership?

Cino: The current allocations simply don’t reflect the diversity of housing needs nationwide. One third of all Americans rent their housing. Moreover, changing demographics and consumer preferences show an increased demand for apartments. The U.S. Census Bureau’s Housing Vacancy Survey shows that 2.83 million new renter households were created between 2004 and 2008. In 2008 alone, 63 percent of net new households were renter-occupied.

For decades, married couples with children dominated housing markets. But today those families make up less than 25 percent of all households. Apartments are needed to accommodate the growing number of young professionals, empty-nesters and childless couples seeking smaller, centrally-located, more affordable homes that don’t necessitate a long-term financial commitment.

What role do you think government policy played in the housing bubble and bust?

Cino: Years of “home-ownership at any cost” housing policy created or exacerbated the problems underlying the housing crisis, like over-supply of housing inventory, inflated prices and the proliferation of risky loan products. The bubble and burst resulted from the culmination of many different policies and programs. One example is the widespread use of zero-down and seller-financed (also called “charity”) down payment programs.

In seller-financed down payment programs, home sellers contribute funds to an outside organization, which then gifts the contribution to a home buyer for use as a down payment. Although this may sound like a good idea, these programs have long been criticized. As early as 2005, the Government Accountability Office reported that this practice artificially inflated home prices because sellers usually raised the home’s selling price to recoup the down payment gift. In 2006, the Federal Housing Administration (FHA) noted that loans involving these transactions were three times as likely to go into foreclosure. Yet, Congress didn’t ban this practice in FHA-backed loans until the July 2008 housing stimulus bill, after more than 1 million buyers used these programs.

These programs contributed to the current problem of negative-equity or “upside-down” mortgages, which has led to the relatively new concept of voluntary foreclosure (i.e. where a financially sound owner walks away from a home). Despite this, Congress has considered legislation to reinstate seller-financed down payment programs.

Skewed housing policy pushed many people towards home-ownership regardless of their financial or lifestyle needs. The bust is really a reconciliation—bringing home-ownership back to sustainable levels.

Should the country be trying to get everybody into homes they own?

Cino: Home-ownership is not the right choice for everyone. A range of considerations work against across-the-board home-ownership, including changing demographics, the financial burden, lack of mobility, inflexibility in the face of job changes and family status and the simple preference for the convenience of apartment living.

Moreover, we’ve seen that home-ownership is not a sure-fire path to build wealth. Like any other investment, people need to weigh the pros and cons in light of their individual needs.

How should the government change its home-ownership vs. renting policies? Are there ways it can be more renter-friendly without adding to the national debt?

Cino: Even after the housing collapse, federal policy continued to push home-ownership through the new home-buyer tax credit instead of rental assistance for those newly unemployed or foreclosed. Economists have estimated that the credit has cost taxpayers more than $40,000 for each additional house sold because 1.7 million of the 2 million who have taken the credit would have bought a house even without the tax break.

Clearly we need a more balanced housing policy that includes home-ownership and a robust rental market. A reallocation of some home-ownership subsidies should be directed towards the development and support of affordable housing. We also need to encourage responsible land use choices and promote the production of all types of housing.

Author: Jamie Smith Hopkins, The Baltimore Sun