Monday, April 21, 2008

The Homeownership Ideologues

Go to Original
By Dean Baker

The economy is sinking into a recession and faces the worst financial crisis since the depression. The unemployment rate is rising, the foreclosure rate is soaring and home prices are plummeting. It’s time to settle some scores with the people who brought us to this sorry state of affairs.

The identity of some of the villains is already widely known. At the top of the list is Alan Greenspan for his malfeasance in allowing the housing bubble to expand to ever more dangerous levels and ignoring the explosion of predatory mortgages. Then, we have the mortgage brokers who made the predatory loans and the Wall Street wunderkind who repackaged them in complex financial instruments and sold them all around the world. We can also include the builders and the realtors who profited from and promoted the irrational exuberance that fed the housing bubble.

But there is one group that still needs to be singled out for their role in bringing about this disaster: The ideologues of homeownership. These are the folks who push the ideology of homeownership as an end itself. They insist on lavish government subsidies, even in situations where homeownership is not a good solution for the people affected.

To be clear, homeownership is often desirable. It can be a mechanism for providing good secure housing and, also, for accumulating wealth. It is, therefore, reasonable to have policies like a limited mortgage interest deduction or credit that make it easier for low- and middle-income people to become homeowners.

However, homeownership should not be viewed as an end in itself. One of the reasons millions of families face foreclosure and/or the loss of their life’s savings is the ideologues of homeownership continued to promote homeownership even when it was clear buying a home would be financially detrimental.

Recognizing the risks of homeownership in a bubble wasn’t a matter of rocket science - it was simple arithmetic. The ratio of house sale prices to annual rent soared past 20 to 1 in the bubble markets, approaching 30 to 1 in the most inflated markets.

If a homeowner takes out a 7 percent mortgage (very low for a subprime buyer), pays 1 percent of the value in property tax each year, and another 1 percent for insurance and maintenance, then ownership costs are equal to 9 percent of the sale price. If the house sells for 20 times annual rent, then this family is paying 80 percent more in housing costs as homeowners each year than they would pay as renters. If the house was selling for 25 times the annual rent, then the family would be paying 125 percent more as homeowners than they would as renters.

For low- and moderate-income families who are struggling to make ends meet and pay for necessities like health care and child care, how are we helping them by having them pay 80 percent to 125 percent more than necessary for their housing costs? Oh, yeah, but they will accumulate equity in their home.

Right, the housing bubble will keep inflating indefinitely. Maybe the ideologues of homeownership thought housing prices would just keep rising forever, but this was an unbelievably stupid thing to believe.

The homeownership ideologues really screwed over an awful lot of low- and moderate-income families because they didn’t know what they were talking about. If progressives ever advocated policies that were as wrong-headed as pushing homeownership in the middle of a housing bubble, we would be hearing about it for the next 40 years. Real or invented excesses of the 1960s are still a backdrop right wingers use in current political debates.

Incredibly, instead of acknowledging their mistake, the homeownership ideologues want the government to throw even more money at homeownership. (The money is more likely to end up with bankers than homeowners, as I have argued elsewhere.)

In the interest of promoting better housing policy in the future, it is important to have a public acknowledgment of the follies of homeownership ideology. We don’t have a bottomless pit of money to satisfy their perverse ideology. If homeownership does not make economic sense, then we should not tell people to sacrifice health care and other essential needs to make the ideologues happy. It’s time to force some honesty into the discussion of housing policy.

No comments: