Reason Foundation

New Study: Unmasking the Mortgage Interest Deduction

Posted on July 28, 2011, 9:00am

Ditching homeowner subsidies would allow everyone's income tax rates to be lowered 8 percent in revenue neutral solution

The mortgage interest deduction does not increase homeownership rates and amounts to little more than a subsidy for wealthy homeowners, according to a new Reason Foundation study that recommends eliminating the deduction and streamlining the tax code. The Reason Foundation report suggests a revenue-neutral solution: eliminate the mortgage interest deduction and lower federal income tax rates for all Americans by 8 percent.

"The mortgage interest deduction subsidizes and rewards wealthy people for buying expensive houses they would've purchased anyway," said Anthony Randazzo, director of economic research at Reason Foundation and co-author of the report. "The deduction is used almost exclusively by people in the top income brackets with large mortgages. Renters, along with lower- and middle-class families, are getting a raw deal. Taxpayers and the economy would be best served by ditching the mortgage deduction and lowering overall tax rates."

The mortgage interest deduction was used on about a quarter of all tax returns filed in 2009. But the Reason Foundation report shows the home mortgage deduction was used on 73 percent of tax returns filed by those with incomes over $200,000 that year. The average tax savings for those homeowners: $2,221. In contrast, just 5.5 percent of tax returns filed by those making $20,000 to $30,000 used the mortgage interest deduction in 2009, with no significant tax savings. Thirteen percent of tax filers making between $30,000 and $40,000 used the mortgage deduction. Their tax savings was a paltry $96. And 23 percent of tax returns with incomes between $40,000 and $50,000 used the mortgage interest deduction, with an average tax savings of just $114.

The study finds that the mortgage interest deduction has not increased homeownership rates and that eliminating it would not reduce homeownership figures or hurt housing prices. The full report is online here: http://reason.org/studies/show/the-mortgage-interest-deduction

More on the Housing Bubble and the Politics of Land Use Planning

Posted on June 15, 2011, 1:27pm | Samuel Staley

Wendell Cox's recent study for the National Center for Policy Analysis (NCPA) on how planning may have influenced the size and scope of the housing bubble is getting well deserved press. The Wall Stree Journal recently highlighted the analysis in an article recently and a video of the core ideas can be found here. I've also previously commented on this relationship before over at Planetizen.com.

At the core of Cox's analysis is that local land-use planning has greatly restricted the supply of housing. As demand for single family housing increased, prices inevitably went up. Higher mortgages were necessary to cover higher housing costs. Eventually, household incomes couldn't support the super-size mortgages and the entire system imploded. Cox points out as evidence that 73 percent of the value "lost" from housing market deflation has been in those housing markets that have restricted housing supply the most. The difference is an average loss of $175,000 in highly restrictive markets compared to just $12,000 on average in less restrictive markets.

This line of reasoning is eminently plausible. While I would like to see a more rigorous statistical analysis, I find the arguments against Cox's position less than compelling. While restricted housing supply can't explain all foreclosure activity, the geographic diversity of the housing bubble collapse, if not the entire housing market, strongly suggests restrictive land-use planning was a major factor in limiting the economic dynamism in local housing markets necessary to forestall the worst of the housing price collapse.

My primary quibble with Wendell (and others) is the tendancy to lump all restrictive land-use policies into the general category of "Smart Growth." I think the key factor is the degree to which land development has been politicized through the approval process, not whether the intent is to shape the community into a particular form (which is the goal of Smart Growth). The limits on housing supply are implicit in the process we have chosen to review, modify, and approve land and housing development proposals, not the goals themselves. Indeed, in some cases, Smart Growth advocates--those favoring higher densities and mixed uses--have streamlined the approval process for those types of development, allowing markets to become more dynamic. While not the market-driven alternative we (free marketeers) prefer (e.g., Houston), these streamlined procedures, including form-based codes, can improve the dynamism of housing markets in urban environments if they are implemented in highly restrictive planning environments like California, Oregon, Washington State, or Florida.

Hopefully, we'll have more to say about this at Reason Foundation in the coming months. Until then, great job Wendell Cox!

Thoughts on Housing Prices

Posted on February 8, 2011, 8:31am | Anthony Randazzo and David Godow

At the end of last year, Peter Schiff noted in a WSJ op-ed that, looking at historical trends, housing price still needed to drop further to get to where they should be without government supports. The finance analyst who famously predicted the financial crisis—with all cries falling on deaf ears—notes that "the home price boom that began in January 1998, when the previous 1989 peak was finally surpassed, topped out in June 2006... If we assume the bubble was artificial, we can instead imagine that home prices should have followed a more traditional path during that time. In stock-market terms, prices should have followed a trend line."

So where should prices be today? First, we know a few basic things. Price is influenced by both supply and demand. Holding demand constant, if supply remains constant or grows slightly—as has happened in the past few years with an over saturation of homes in certain areas and a growing shadow inventory due to growing foreclosures—then prices will decline. However, the government has been attempting to avoid those price declines by boosting demand, as with the First Time Homebuyers Credit. The Making Home Affordable programs, including HAMP, have sought to decrease the number of home foreclosures, adding to supply. And the Federal Reserve has worked to keep interest rates low, making mortgage prices cheap, and stimulating demand for housing among marginal buyers. We know that without those things. housing prices would have fallen lower than they have in the past three years. We just don't know exactly how low. 

Schiff has an estimate: "In January 1998 the 10-City Index was at 82.7. If home prices had followed the 3.35% annual 100 year trend line, then the index would have arrived at 126.7 in October 2010." Adding in November's data, made available since the Schiff op-ed was posted, the price index looks like this:

There is a clearly visible bump in the price index starting in March 2009 when a number of the programs to help housing started to kick in, including low interest rates and the first-time homebuyers credit. 

If you look at the same time period for the entire index, not just the top ten cities, a similar trend is visible, though the gap is much more narrow:

If you look at if you look at the change in housing prices year over year, it looks like we are pretty much back to zero price growth (instead of negative price growth).

So it is difficult to speak with any absolute certainty on where housing prices stand. HousingWire reported last week, "S&P expects that it will take 49 months to clear the supply of distressed homes on the market in the U.S. — an 11% increase over the previous quarter and a considerable 40% increase from 4Q 2009." With this massive, looming shadow inventory on the horizon, we do know that the supply of homes at least hold steady over the next several years, if not expand. And with mortgage rates pretty much as low as they are going to go (interest rates are at zero and QE2 is not expected to change rates much), the demand for housing over the next few years will likely not skyrocket. Simply put: it is going to be difficult to quickly chip away at the inventory of homes. 

If mortgage prices rise and the demand for homes drops, then the prices of homes will decline as well. The basics of economics tell us so. But, again, they do not explain exactly how much the prices will decline. Schiff may be right. 

New Paper: No Government Guarantees for Mortgages

Posted on February 4, 2011, 9:00am | Anthony Randazzo

This morning Reason published a new policy brief outlining ten reasons that an explicit (or implicit) government guarantee for the housing sector would be a bad idea. The report is timely in the Fannie Mae & Freddie Mac reform debate as the Washington Post ran a story this month suggesting that even the Treasury Department is looking at reducing the role of government in the housing industry. My new paper argues that "whether by the sale of insurance on mortgage-backed securities or a public utility model replacing Fannie Mae and Freddie Mac with new government-sponsored enterprises, this would be a tragic mistake, repeating the errors of history, and putting taxpayers and the housing industry itself at risk." 

Here are the 10 Arguments in short:

1. Government guarantees always underprice risk.
2. Guarantees eventually create instability.
3. Guarantees inflate housing prices by distorting the allocation of capital investments.
4. Guarantees degrade underwriting standards over time.
5. Guarantees are not necessary to ensure capitalization of the housing market.
6. Guarantees are not necessary for homeownership growth.
7. Guarantees drive mortgage investment in unsafe markets.
8. Guarantees are not necessary to preserve the “To Be Announced” market for selling mortgage-backed securities.
9. Guarantees are not needed to prevent “vicious circles” that drive down prices.
10. Even a limited guarantee on just mortgage-backed securities targeted at protecting against the tail risk will slowly distort credit allocation and investment standards, ultimately destabilizing the market and forcing the need to rely on the guarantee.

There is a one page summary version of these arguments, available here. 

If you would like to step into some of the data and reasoning behind these arguments, there is a 4-page policy summary and a full 16-page policy brief with more data, charts, and historical information.

Homeownership Rates and Housing Subsidies

Posted on February 2, 2011, 4:28pm | Anthony Randazzo

Numbers can be really enlightening when you start moving around the pieces. Let's take a look at some the homeownership numbers over the past few decades.

Last week, homeownership data released by the U.S. Census showed that there were fewer Americans that owned a home at the end of 2010 (66.6%), than did before the housing bubble (67.9% in the first quarter of 2002). Any gains that were thought to be added to the system by the housing bubble have since been wiped away—prices have plummeted, less people have homes, vacancies are skyrocketing, and rental is expanding.

We haven't seen homeownership rates this low since 1998, and overall the homeownership rate has increased barely one percent from 1980 (65.5%) to 2010 (66.6%). To be fair, if you start the data at the beginning of 1994 when the Clinton Administration's housing programs that exacerbated the GSE mess began to get the housing bubble rolling, homeownership has gone from 64.1% to today's rate, an increase of 2.5%. It is not a lot, but some might say it is something.

There has been a lot written on what caused this small growth (that was actually large growth for a while since the homeownership rate nearly hit 70% at the height of the boom) but what about the cost of this growth? Sure we have more homeowners than in 1980 and 1994, but has the cost of this been worth it?

To answer that we have to first assess the costs. Roughly speaking, the bailout of Fannie Mae and Freddie Mac has cost the U.S. taxpayers $150 billion. The U.S. government will also likely loose about $20 billion on the TARP bailout of banks.

The GSEs were undoubtedly key players in the boom that boosted the homeownership rate. To what degree is still heavily debated (as was evidenced by the official view presented in the Financial Crisis Inquiry Commission report and the split dissent from Republican panel members), but they were certainly players. Financial institutions that were brought back from the brink also heavily contributed to the housing boom, though the exact degree is also still not firmly agreed upon.

In any event, whether it was the banks, the regulators, or the GSEs—or some combination of the three (which is my own view)—the U.S. taxpayer has been left in the red because of public policies that promoted homeownership as a end all be all to be pursued.

Some of those policies caused the GSEs to take on risky mortgages, leading to short term homeownership growth, but heavy losses from Fannie and Freddie. Some of the policies drove regulators to ignore the toxic build up of debt in the system, since no one wanted to stop the incredible expansion of the housing industry, but the result has been a crippled construction industry and taxpayer bailout losses to cover that toxic debt. And some of the policies were the product of regulatory capture by the mortgage bankers, the home builders, and realtors who all wanted federal subsidies to drive their businesses, and made a serious profit in the boom time, only to have the house of cards come crashing down on their heads, and the taxpayers.

Now, let's assume for the moment that the losses to the taxpayers are only $150 billion—we don't have final figures on TARP yet, and the GSEs are paying a dividend to Treasury as a part of the conservatorship that slightly complicates the loss figures. And I want to limit the potential criticisms.

Also, we'll generously assuming that the GSEs have actually boosted homeownership by 2.5%, since we're using end of 1993/beginning of 1994 numbers as the starting point.

But here is where numbers don't lie: even with these generous assumptions, it still means that taxpayers have paid out $60 billion in losses to subsidize each percent gained in homeownership.

That's $60,000,000,000.00 per one percent benefit.

Such a huge number is hard to really wrap one's mind around, so let's turn the cube of numbers again to see what we find. Between 1994 and 2010, the Census Bureau reports that 19,207,000 housing units were added to the inventory of homes. That's a lot of places to live, so could it be that the $150 billion in losses were worth it?

We'll, a little division reveals that the taxpayer subsidy breaks down to just $7,809.65 per housing unit. Which further breaks down to a little over $20 bucks a month over 30 years (plus the amortized interest on the mortgage). That kind of benefit doesn't quite seem worth the massive cost. And consider that the losses are likely higher and the homeownership gains really aren't that strong. So it is likely even less worth the cost.

* As a side note, all of these numbers are seasonally adjusted by the Census Bureau. The Census Bureau puts out separate homeownership data, but the story is basically the same. Check out the Census data yourself here.

Another Proposal on GSE Reform

Posted on January 20, 2011, 9:37am | Anthony Randazzo

Free market defenders Peter Wallison, Alex Pollock, and Ed Pinto have released a joint white paper offering a series of changes to reform the housing finance system. The proposal this morning is built on four principles for building a solid foundation for US housing finance:

1. The housing finance market—like other US industries and housing finance systems in most other developed countries—can and should principally function without any direct government financial support.
2. To the extent that regulation is necessary, it should be focused on ensuring mortgage credit quality.
3. All programs for assisting low-income families to become home-owners should be on-budget and should limit risks to both homeowners and taxpayers
4. Fannie Mae and Freddie Mac should be eliminated as government-sponsored enterprises (GSEs) over time.

The inability of Congress to take up a reform effort for Fannie and Freddie over the past two years is one of the most glaring failures in Washington. The GSEs were at the center of of the financial crisis and recession, yet have gone virtually unchanged since being taken into government conservatorship in mid-2008.

The GOP in the House has pledged to take up GSE reform early in the Congressional year, though it is unclear what priority the Senate is giving a fix for the housing finance system. But as most economic outlooks for 2011 indicate, a bad housing market is going to be the biggest drag on GDP growth in the coming year. It is imperative that the mess is cleaned up, Fannie and Freddie wiped out, the FHA standards reformed, and a new system for financing homes ushered in—and soon.

This paper offers a quality vision for what the housing finance system should look like in a reform environment. While those seeking a market-oriented solution may disagree with some of the details in the report, the most important aspect of this proposal is that there is no government guarantee for mortgages and Fannie and Freddie would go away. There are a number of things that can be done to encourage private capital to fully fund the mortgage and secondary mortgage markets, but the most critical thing is to end the cycle of government subsidies that have distorted the housing market for the past 80 years. 

A change like this is going to require a rethinking of homeownership, which I wrote about last October in this paper. 

Read the whole AEI report here. 

Five Best and Worst States for Housing in 2011

Posted on January 17, 2011, 8:27am | Anthony Randazzo

Last week, MarketWatch listed the top five states expected to recover from the nationwide housing slump the fastest and slowest.

Five best housing states

1. North Dakota: lowest mortgage delinquency rate (0.9%) and highest price gain since 2005 (7.2%); however unemployment is relatively high (7.5%) compared to South Dakota
2. South Dakota: second-lowest mortgage delinquency rate (1.5%) and one of only four states to see a price gain (0.5%) since 2005, plus unemployment is very low (3.7%)
3. Iowa: low mortgage delinquency rate (2.2%) and minimal price decline (0.4%) since 2005, plus its unemployment rate (6.8%) is below the national average
4. Nebraska: low mortgage delinquency rate (2.0%) and second-lowest unemployment rate (4.4%) in the nation, plus prices only had a modest decline (3.5%) since 2005
5. Oklahoma: low mortgage delinquency rate (2.9%) and minimal price decline (2.3%) since 2005, plus a relatively low unemployment rate (6.9%) compared to the national average

MarketWatch writes that there is a patter here: the first states to recover are generally in the middle of the country: "Add Kansas, Texas, Louisiana and Arkansas to that bunch. Other states that fall in to the the early-recovery category include Vermont, Hawaii, Montana, Wyoming, New Mexico, Colorado and New Hampshire."

Five worst housing states

1. Nevada: highest mortgage delinquency rate (8.3%), highest unemployment rate (14.4%), and biggest price decline (56.4%) since 2005
2. Michigan: high mortgage delinquency rate (5.1%), second-highest unemployment rate (13.1%), and a serious price decline (31.7%) since 2005—but on the upside, the University of Michigan has a great new football coach in Brady Hoke
3. California: tied for second-highest mortgage delinquency rate (6.0%), third-worst unemployment rate (12.4%), and a very serious price decline (40.8%) since 2005
4. Florida: tied for second-highest mortgage delinquency rate (6.0%), unemployment rate (11.7%) above the national average, and a severe price decline (46.9%) since 2005
5. Rhode Island: relatively modest mortgage delinquency rate (4.9%) is offset by a home price decline (25.6%) above the national average and the fourth highest unemployment rate (11.7%) in the country

Increasing GSE Fees

Posted on January 3, 2011, 9:49am | Anthony Randazzo

Fannie Mae and Freddie Mac offer a guarantee that mortgage payments will be delivered to investors, and they charge fees to cover the risks inherent with these promises. But they don't charge enough. At least that's the word from GSE regulator Edward DeMarco, the acting director of the Federal Housing Finance Agency. 

As reported by National Mortgage News last week, DeMarco wrote a response letter to Rep. Scott Garrett (R-NJ) that claimed: "The high upfront fees Fannie Mae and Freddie Mac charge on certain single-family loans still do not 'fully cover' all the costs and risks associated with those loan guarantees."

One option is to require more private mortgage insurance (PMI) on originated loans. This would mean the mortgages would carry less risk for the GSE's and, by default, the taxpayers who are covering all of their losses. But DeMarco writes that the PMI industry isn't fiscally sound and "remains at risk of being unable to meet all future claims on existing business." 

Another option would be to just raise the fees. The downside is that this would cause the already frustrated realtors, mortgage bankers, and homebuilders who haven't liked how the fees have been raised over the past year to be even more irate. Actually, that is the upside. 

The more frustrated lenders are with the prices the GSEs are charging for their guarantee, the more likely they are to sell their mortgages to private investors. Currently Fannie and Freddie dominate over 90 percent of the secondary market, but with higher fees, there will be room for the private sector to chip away at this monopoly.

In fact, this would be one way to slowly work the GSEs completely out of the market. Additional fees charged by the GSEs would make selling to them progressively unappealing—and at the same time it would help cover the risks associated with guaranteeing mortgages and maybe even recoup some of the taxpayer losses. Hypothetically, the GSEs could phase in a 1/2 point fee (in addition to what is already charged) starting later this year, and let it rise by a 1/2 point every six to twelve months after that as a way of trying to create a wedge for private capital to out compete the GSEs. Eventually selling to the GSEs would be so expensive that they couldn't do business any more. An in theory at that point we wouldn't need them to do business anymore. 

Addressing Affordable Housing Goals

Posted on December 20, 2010, 11:18am | Anthony Randazzo

There is a need to reframe this GSE debate: mortgage finance policy and affordable housing policy are two different things. Whether we should subsidize low-income Americans putting a roof over their heads is one question. How we should do this is another question. But neither is necessarily relevant to how the government manipulates mortgage prices for nearly the entire housing market. Separating mortgage finance from affordable housing is an important process to shedding light on what policy options can best be pursued to prevent another catastrophic boom-and-bust.

Over the past several decades these two issues have become confused, as policymakers used GSEs to expand access to mortgage credit and advance a social mission of increasing homeownership. In 1993, as a part of the Affordable Housing Initiative, the Housing and Urban Development Department began increasing the affordable housing mandates for Fannie Mae and Freddie Mac. By 2006, the percentage of “confirming” loans the GSEs were required to purchase, based on certain standards of quality and affordability, grew from 30 percent to 55 percent.

But conflating the two policy realms has wound up failing on both fronts: the mortgage credit market is more than 90 percent dominated by Fannie Mae, Freddie Mac, and the FHA. At the same time, the homeownership rate has been falling steadily from a peak of 69.2 percent to 66.9 percent today. 

Mortgage finance policy should be focused on simply establishing the rules of the game for banks that originate loans, financial institutions that securitize them, and investors who buy them. There is no inherent need for government to support this market and, as the financial crisis has painfully taught us, federal guarantees lead to credit misallocation, mispricing of risk, unstable price swings, and weakened underwriting standards, all of which contributed to the destabilization of the housing market.

Now, libertarians will not necessarily like this, but here is some good news for the debate: eliminating affordable housing goals and removing government supports for mortgage finance in the process of developing a sustainable housing market does not mean Congress has to end subsides for the poor. I will point out here that I do not think we should have subsidies for housing at all. But I will accept that with pandora's box open, it is likely impossible to eliminate all low-income housing subsidies. This aid can be pursued in more effective ways than the current system that do not distort the entire mortgage market.

For instance, it has now become universally accepted that it is not a good idea to push people into homes they cannot afford. If Congress chooses to encourage homeownership for low-income families they should ensure it is sustainable for the homebuyer.  Any subsidies provided by the government should be 1) direct to the borrower, 2) on-budget and subject to appropriation, 3) narrowly targeted so as not to compete with the private sector, 4) built on sustainable underwriting standards, and 5) governed by responsible accounting standards.

Using these guidelines we can have a mortgage finance market that is funded solely by private capital and at the same time provide narrow, direct subsidies limited to low-income Americans if Congress wants to appropriate the funds as necessary. There need not be any arbitrarily established affordable housing goals.

On the Mortgage Interest Deduction

Posted on December 14, 2010, 2:41pm | Anthony Randazzo

Ask anyone on the Hill, and they'll tell you the Mortgage Interest Deduction (MID) is a third rail that no one—not fiscally conservative republicans or social goal of homeownership supporting democrats—wants to touch. And its ironic because the MID is fiscally very irresponsible, and doesn't help the progressive goal of expanding affordable homeownership. 

The MID has been the subject of much debate on blogs and column space over the past couple months, particularly in light of the Bowles-Simpson plan which not only touched, but stepped two feet on the MID third rail. Though since they were already limbs splayed wide on a dozen other third rails they probably figured another couldn't hurt more. Changes for the MID are also suggested in the Bipartisan Policy Center's fiscal responsibility plan, as well as the EPI/Demos/Century Foundation proposal. 

So if such a range of views think poorly of mortgage interest deduction, why do we have it? Megan McArdle sketches out the rough origination of the MID (so I don't have to):

The reason we have a mortgage interest tax deduction is that all interest used to be deductible, because way back when the income tax was invented, consumer credit wasn't really much of a concept, so interest on loans was much more likely to be a business expense incurred in the acquisition of an income-producing asset, rather than a personal expense incurred in the acquisition of a 60-inch flat panel television with built-in Blu-ray player...

Seventy years later, the tax code had accumulated a huge number of special tax deductions, which meant that the marginal rates had to be very high in order to collect any revenue at all.  Some economists pointed out that it was not actually a good idea to have a tax code with more holes than a really enormous Swiss cheese, and the Reagan administration embarked upon its great and noble mission to eliminate the years of accumulated loopyness, allowing us to have lower marginal rates on a much broader base.

During that process, the people writing the new legislation noticed that most consumers had accumulated mortgage and credit card debt, and maybe some auto loans and a student loan or too, plus a personal loan down at the credit union for the time their brother in law got drunk and slugged a cop and had to be bailed out even though payday was still a full week off.  

It was fairly obvious that, with the possible exception of the student loans, none of this debt had any connection to an income-producing asset.  So they pencilled out the deductibility of interest payments.  Then they realized what this would do to housing prices, and the mood of taxpayers who had just lost their largest deduction, and pencilled it right back in.

So the MID comes out of politically motivated tax policy. And it has stayed in place on similar concerns (also discussed by McArdle here). But what has been the result? 

If the overall goal was to promote homeownership, then the data point to a social failure (on top of the inherent fiscal failure of the tax policy). Christian A. L. Hiber and Tracy M. Turner have a new paper out that concludes land use restrictions had a much higher impact on homeownership rates than the MID: 

We find that the MID only boosts homeownership attainment of higher income households in less tightly regulated housing markets. In more restrictive places – typically larger coastal cities – an adverse effect exists. The MID is an ineffective policy to promote homeownership and improve social welfare.

Adam Ozimek further summarizes the findings: "in areas where supply is slow or non-responsive to increases in demand, the MID may just drive house prices up instead of increasing homeownership, and may even decrease home ownership among some groups."

Even the progressive Tax Policy Center blog TaxVox (from the Urban Institute and Brookings Institute) argues that most benefits go to high-income households that would probably buy a house with or without the deduction. Since non-itemizers get no benefit from the deduction, it is not surprising that most of the subsidy goes to upper-bracket taxpayers."

This all indicates the MID is a failure from the progressive perspective.

The OMB calculated this year that the MID would cost $104.5 billion in fiscal year 2011. According to this CNN Money article, the MID will cut individual tax liability by $573 billion between fiscal years 2009-2013. From the conservative perspective, reducing people's tax liabilities is a good thing, since people should be able to use their money has they see fit instead of being redistributed by the government. However, the MID isn't about the government taking less income—its about giving money back to homeowners to reduce their net tax liability.

This perspective is important for conservatives to understand. Having the government only take 10 percent of your income instead of 30 percent is a tax cut. However, having Uncle Sam take 30 percent, but then cutting the tax bill down based on the dollar figure of particular interest paid by a specified type of American is not a real tax cut. And its not fiscally conservative. The government certainly does not have a right to all money, but arbitrarily finding ways to deduct tax liability is actually redistributionist—especially since this tax deduction favors owners over renters.

Thus, the MID is also a failure from a conservative perspective.

Again, why do we have this? 

Some argue that homeowners that have calculated into their decision on whether or not to afford a home the tax deduction. While I haven't seen data showing this to be a persuasive argument , that doesn't mean it should be ignored. The national average deduction taken in 2008 came out to $273 a month, which could have factored into people's decisions. Nevertheless, we could get around this by phasing it out over some period of time for current residents, allowing homeowners to adjust their budgets.

Beyond this, it seems that the political unease over ending the deduction (aka politics) is the real issue here. But the signs are bright that this might be an issue all sides in Washington can find common ground on—particularly if alternative means of promoting affordable housing are pursued instead of the MID, like downpayment subsidies. Again I don't personally favor any subsidies for affordable housing, but we are going to have them, making them thoughtful, direct, on-budget, narrow, and calculated through responsible accounting is preferable. The mortgage interest deduction does not meet that standard.

(Also, if you're interested in where the mortgage interest deduction goes, see this list from Tax Foundation. Maryland benefits the best, North Dakota wouldn't notice the MID if it were to disappear tomorrow.)

Randazzo on the Mortgage Mess

Posted on November 1, 2010, 3:40pm | Samuel Staley

Over on the National Review's blog "The Corner," Reason Foundation's Anthony Randazzo has a series of three posts on the mortgage meltdown and the morass that would be created by a home foreclosure moratorium:

• Populist Rage Over Foreclosures Doesn't Justify a Breakdown of the Rule of Law
• Mandatory Home Loan Repurchases Will Bind Up The Economy
• A Foreclosure Moratorium Would Not Help the Housing Market

New Housing Refinance Program Starts Today

Posted on September 7, 2010, 8:07am | Anthony Randazzo

The next stage in the Obama administration's Home Affordable Modification Plan (HAMP) kicks in today, with a new wave of "short refinancing" incentives. The new plan will allow banks to refinance borrowers into Federal Housing Administration-backed loans while writing down the mortgages to less than the value of the property. Ideally, this should eliminate the negative equity of the borrower while providing the bank with a more reliable, though less profitable, mortgage.

Of course if there are any losses on the loan, the FHA (a.k.a. Joe Shmoe taxpayer) picks up the insurance tab at little to no cost for the bank. In order to pay for these expected losses—according to The Wall Street Journal officials are preparing for a 20 percent default rate—the White House has set aside $14 billion from the TARP fund that was already earmarked for housing recovery.

Yes, the program that was passed by a terrified Congress to let Henry Paulson buy up toxic mortgage backed securities but was then used inject cash into the savings accounts of banks will be covering mortgage delinquencies through the FHA.

Nick Timiraos of the Journal writes:

One of the biggest dangers facing the housing market is the glut of underwater homeowners who could default if their personal finances or home prices worsen. About 11 million borrowers, or 23% households with a mortgage, were underwater as of June 30, according to CoreLogic Inc.

The White House hopes to reach borrowers like Irene Gerloff, 62 years old, who was turned down for a loan modification because she can afford her payments. While she owes $292,000 on her two-bedroom condominium in La Habra, Calif., the property is probably worth less than $200,000.

She is worried about what happens in five years, when her "interest-only" loan begins requiring much larger payments. "If things don't improve between now and 2015, I'm going to have to let this house go," said Ms. Gerloff, a secretary.

But not every homeowner who is underwater can participate. The bank or investors that own the loan must be willing to write down its value.

The problem here is not that banks are writing down mortgages. The problem is that the FHA is offering an insurance program putting taxpayers at risk through a spending program that was never designed for this.

Of course, the issue of refinancing and modifying mortgages is quite complex. Timiraos continues:

officials hope to reach more loans that were bundled by Wall Street firms and sold to investors as mortgage-backed securities. For more than a year, many of those investors, which include hedge funds and pension funds, have been clamoring for such a program because they have already had to mark down the value of their holdings.

"It'll take some really crappy loans out of the marketplace…and replace them with much higher-quality" mortgages, said Scott Simon, a managing director at Pacific Management Investment Co.

But that could be hard to do because mortgage servicers, which handle loan payments and decide which loans should be modified, are overwhelmed. And some borrowers might be discouraged from taking part because receiving a principal reduction will show up on their credit score.

Moreover, investors may not be able to participate as hoped because certain contracts that govern mortgage securitizations say modifications can only proceed if there is an "imminent" risk that the borrower would default.

Reducing balances for borrowers who are current could open mortgage servicers to lawsuits from investors that hold the riskiest slices of bonds. Those investors would be wiped out if balances are greatly reduced. For that reason, "lenders are going to be especially reluctant to do short refinances on folks who are current," says Alan White, an assistant professor at Valparaiso University in Indiana.

Read the rest of the Journal article here.

The Housing Policy Debate

Posted on September 6, 2010, 8:51pm | Anthony Randazzo

David Streitfeld has a pretty good article in The New York Times recapping the current state of the housing policy debate. He first notes that the current administration policies have epically failed:

Over the last 18 months, the administration has rolled out just about every program it could think of to prop up the ailing housing market, using tax credits, mortgage modification programs, low interest rates, government-backed loans and other assistance intended to keep values up and delinquent borrowers out of foreclosure. The goal was to stabilize the market until a resurgent economy created new households that demanded places to live.

Of course, instead of stabilizing anything, the government just juiced a few numbers that have all dropped off a cliff in the past weeks. So what should we do. I have argued repeatedly that we need housing prices to grow from a natural bottom, not an artificially created price floor. Streitfeld picks up on that line of reasoning here:

As the economy again sputters and potential buyers flee — July housing sales sank 26 percent from July 2009 — there is a growing sense of exhaustion with government intervention. Some economists and analysts are now urging a dose of shock therapy that would greatly shift the benefits to future homeowners: Let the housing market crash.

When prices are lower, these experts argue, buyers will pour in, creating the elusive stability the government has spent billions upon billions trying to achieve.

“Housing needs to go back to reasonable levels,” said Anthony B. Sanders, a professor of real estate finance at George Mason University. “If we keep trying to stimulate the market, that’s the definition of insanity.”

Unfortunately, the administration doesn't seem to like this idea very much. And they don't want to admit failure:

“The administration made a bet that a rising economy would solve the housing problem and now they are out of chips,” said Howard Glaser, a former Clinton administration housing official with close ties to policy makers in the administration. “They are deeply worried and don’t really know what to do.”

That was clear last week, when the secretary of housing and urban development, Shaun Donovan, appeared to side with current homeowners, telling CNN the administration would “go everywhere we can” to make sure the slumping market recovers.

Mr. Donovan even opened the door to another housing tax credit like the one that expired last spring, which paid first-time buyers as much as $8,000 and buyers who were moving up $6,500. The cost to taxpayers was in the neighborhood of $30 billion, much of which went to people who would have bought anyway.

Another tax credit would be an incredible waste of money. It didn't do anything other than prop up the market a few times, as I noted with this chart. All of those "gains" in housing starts, prices, and sales are being wiped away, and should be strong enough evidence that such a program should be avoided like the plague. Though, when politics enter the picture, common sense can get tossed out the window:

The government is on the hook for many of these mortgages, another reason policy makers have been aggressively seeking stability. What helped support the market last year could now cause it to crumble.

Another program for aiding homeowners starts Tuesday, which aims to get rid of negative equity. But given the failure of HAMP and the fact that the program is only targeted at a select group of home buyers, it won't be the answer, even if it works perfectly. After that, who knows what this administration will come up with, but whatever they do, it won't be welcomed with open arms as Streitfeld concludes:

Instead, there is a sense that, even with much more modest notions, government intervention is not the answer.

Read the whole NYT piece here.

20 Percent of Home Mortgages Are Still Underwater

Posted on August 10, 2010, 3:27pm | Samuel Staley

A recent report by the real-estate website zillow.com shows that more than one fifth (21.5%) of U.S. homeowners are still "underwater": The value of their home is less than the amount they owe on it. Some markets improved, but not by much. According to CNN.com:

"In some markets, residents were helped by improving home prices. As prices rise, it narrows the gap between what homeowners owe and what they could sell for. As a result, hard-hit metro areas such as Merced, Calif., and Orlando, Fla., recorded huge declines in the number of underwater borrowers. Merced was down to 40% while Orlando fell to 64.6%.

"In fact, most markets trended up. Only 25 of 142 markets surveyed lost ground, led by Lansing, Mich., where negative equity grew to 31.5%."

Still, it looks like housing markets are stabilizing. While underwater mortgages are contributing to foreclosure rates, the most immediate effect is likely to reduce labor market liquidity since workers can't afford to leave their homes to find work elsewhere. The key to keeping the housing market stable will be a stable housing market--keeping people employed in their own jobs or by starting their own businesses.

Homeownership Future

Posted on July 31, 2010, 1:10pm | Anthony Randazzo

From Steve Lafluer on NewGeography over the weekend:

Like many 20-something young professionals, I have no aspirations towards home ownership. I ditched my car when I moved out of the suburbs, and I refuse to sign a lease that lasts more than three months. This affords me the flexibility that my life as a freelancer requires. If I were in a profession that didn’t call for a great deal of mobility, perhaps home ownership would be appealing. When North America was a manufacturing powerhouse, most people were in that situation. But an increasingly dynamic labor market requires an increasingly mobile workforce... to an extent.

For those of us in the 18-30 demographic who work in fairly mobile industries, home ownership isn’t necessarily as big a hindrance as Florida suggests. There are people like me who work in volatile industries and simply can’t be tied down to one city, but we're in the minority. For the majority, it really depends on the location. If your home is within commuting range of a major city, it should be possible to find work in your field without uprooting.

But jobs come before home ownership in order of priority. In a scenario where state and local governments create a fiscal climate inhospitable to economic growth, rather than chase cheap housing, people migrate to the strongest economic region (for example, the Sunbelt).

There are a number of reasons why homeownership may not be the best economic decision in the 21st century. But even if it was, the federal government shouldn't be promoting homeownership from a public policy perspective.

Here is the rest of Lafluer's piece.

Here is my commentary from last week on ending subsidies for homeownership.

Renters Priced Out of Homes In Heavily Planned Montgomery County (MD)

Posted on March 5, 2010, 11:40am | Samuel Staley

The Washington Post reports on a new study by a tenant advocacy group in Montgomery County, Maryland arguing that renters are being priced out of homes. The problem is likely to get worse as the economy picks up, demand for housing increases, and the supply can't keep up with demand.

"It is a sentiment that Montgomery County tenants' advocates say is becoming more common in a costly housing market where rent increases often soar beyond growth in personal income, according to a report released Friday by the county's first "tenants work group," which held four public meetings and commissioned a survey of Montgomery renters conducted by Salisbury University. Montgomery Executive Isiah Leggett (D) appointed the group, made up of tenants and government officials, in 2008.

"The group's report concludes that Montgomery residents living in about 95,000 apartments, townhouses and rental houses are often priced out of their homes, lose security deposits with little explanation and face eviction for no reason."

the last comment, that tenants losing their housing "with little explanation and face eviction for no reason," is a clue to the group's recommendations. The county government created Tenant Work Group provides few inspired recommendations, even less understanding of how housing markets work, and relies on the conventional, ineffective, and economically disastrous policy proposals that have gutted affordable housing markets in cities for decades: rent controls, restrictions on evictions, and other tenant "rights" proposals.

The Montgomery group's recommendations include instituting a rent-control law, requiring landlords to have "just cause" before ending a lease and informing tenants about county services that could help them.

This is no mention of the role planning has played in Montgomery County that has the effect of increasing the costs of building new housing to meet rising demand. A far more cost-effective and equitable approach to addressing the affordable housing needs of Montgomery County residents would be to back off the regulatory process and allow "as of right" development of housing in built-up areas without the need for rezoning or zoning approvals.

This is an ideal case of Houston-style development regulation would be more effective than hamstringing the housing market with further regulation. In the long run, the solution is increasing supply, not reducing it.

Loan Modification Program Isn't Stemming Foreclosures in Phoenix

Posted on July 12, 2009, 2:04pm | Leonard Gilroy

The day after signing the stimulus bill into law in Denver back in February, President Obama came to Mesa, AZ—a suburb of Phoenix, the nation's foreclosure capital—to announce a new loan modification program aimed at lowering the monthly mortgage payments of homeowners who've taken an income hit in the recession. As the President said in his speech that day:

Through this plan, we will help between seven and nine million families restructure or refinance their mortgages so they can avoid foreclosure. And we are not just helping homeowners at risk of falling over the edge, we are preventing their neighbors from being pulled over that edge too – as defaults and foreclosures contribute to sinking home values, failing local businesses, and lost jobs. . . .[I]t will give millions of families resigned to financial ruin a chance to rebuild. It will prevent the worst consequences of this crisis from wreaking even greater havoc on the economy. And by bringing down the foreclosure rate, it will help to shore up housing prices for everyone. According to estimates by the Treasury Department, this plan could stop the slide in home prices due to neighboring foreclosures by up to $6,000 per home.

Nearly five months later, it makes sense to ask how that program is working out in the foreclosure-ridden Phoenix metro. After all, if the program is performing well here in the Valley of the Sun, it might bode well for the prospects in areas less severely hit, right?

Well, so far, not so good, as Catherine Reagor at the Arizona Republic reports today. And with only about 240,000 loan modifications completed thus far nationally, it looks like the administration is far, far off from its goal of helping 7+ million families avoid foreclosure.

So far the plan isn't working as anticipated. Many eligible Valley homeowners can't reach anyone at their lender who will work with them. More people are losing their jobs, which makes them ineligible for the government-backed program. For many of those who did get a modified payment, there was a harsh discovery. Modifications often were made on a three-month trial basis, and now lenders are revoking the terms - sometimes even when payments are met - and leaving some homeowners with the old payments they can't afford.

In June, foreclosures across metropolitan Phoenix jumped to 5,150, a 35 percent increase from May, reports the research firm Information Market. This jump came after foreclosures fell in March, April and May. Problems with the loan-modification program and the expiration last month of a government-requested lender moratorium on foreclosures are behind much of the Valley's increase, housing analysts say. [...]

Most borrowers and housing advocates blame lenders for loan modifications failing. They say lenders have not responded quickly to borrowers seeking loan modifications. And some lenders who agreed to participate have not developed their own plans for loan modifications. [...]

A new study by the Federal Reserve Bank of Boston found most mortgage lenders don't want to modify loans because they will lose money on the deals. The Fed's study found only about 3 percent of seriously delinquent borrowers had their loans modified to lower their payments. The study focused on loan modifications done during 2008 when lenders were encouraged by the federal government to modify loans and avoid foreclosure but weren't compensated for the modification. [...]

The Obama administration's housing plan calls for modifying mortgages so payments take no more than 31 percent of a borrower's income. To reach that point, lenders are encouraged to cut the interest rate and principal of a loan. But they don't have to do it for free, even though studies show keeping a loan out of default or foreclosure is less costly for lenders.

Lenders get a $1,500 bonus for working with a borrower before the borrower falls behind on payments. In addition, lenders get $1,000 for every loan modification they do. Then for each year the borrower is able to continue paying, the lender receives at least another $1,000 for up to three years. Homeowners get similar reductions in the principal of their loan for each year they stay current. The federal government also will kick in money to reduce the principal on the loan so the lender isn't out tens of thousands of dollars for a mortgage it modifies.

To qualify, borrowers must show they have had a significant change in their income or expenses so they can't afford their current mortgage. Borrowers must have a job to qualify. As the unemployment rate climbs, this element of the plan is becoming a bigger problem. Some borrowers who started the loan modification process have since lost their jobs. [...]

About 240,000 U.S. homeowners have received some type of loan modification through the plan, reports the Treasury Department. A record 5.4 million U.S. homeowners are behind on their mortgage payments. The goal is to use the $75 million to modify 4 million mortgages in the next few years. Many of the current modifications are still in a three-month trial period.

A problem emerging is some lenders are not extending modifications past that trial period. Government-sponsored lenders Fannie Mae and Freddie Mac, which back more than half of all U.S. mortgages, require the trial. The goal is twofold: See if borrowers can make the lower payments and give lenders time to process the new loans. [...]

It's unclear why lenders are revoking some of the modifications, though housing advocates believe lenders may have found foreclosing on Valley homes more worthwhile than modifying the loans. [...]

"The government programs are very challenging," said Sheila Harris, former director of the Arizona Housing Department. "(The programs) aren't flexible and don't respond to market conditions."

That's a pretty damning quote from a former state housing chief, and it helps to cut to the point. Take some program rigidity, add in a cup of unresponsiveness to market conditions, fold in the simple fact that the program is designed to push lenders into doing something they either (a) don't want to do, or (b) might otherwise choose to do on their own (but under their own guidelines and evaluation criteria), and bake that in a hot oven of market uncertainty and ever-shifting housing market conditions—that's sounding to my ears like a recipe for program failure.

Lending Standards Back to Bubble Era Levels

Posted on June 4, 2009, 11:57am | Anthony Randazzo

Seriously, low lending standards are a huge part of what got banks and mortgage companies into this mess. From BusinessWeek:

"Blamed for contributing to the housing bubble, zero-down-payment loans largely vanished when the market crashed and Congress blocked seller financing for government-backed loans. Now the federal government will be forking over cash at closing.

Buyers who haven't owned a home for three years or longer are eligible for an $8,000 tax credit, thanks to a provision in this winter's stimulus package. Now, under a little-noticed program announced May 29, the Federal Housing Administration will steer the funds to cover closing costs directly—in some cases even offsetting the 3.5% minimum down payment FHA loans require. That's enough to cover most or all of the down payment and fees for homes up to the U.S. median price, now about $169,000."

The government does not seem to understand that it is okay if some Americans don't own a home. While home ownership levels have risen slowly over time, they jumped 8% (from around 62% to 70%) during the bubble period, rapid growth that was bound to require many people who simply can't afford a mortgage payment. This is why we have a healthy system of rental properties around the country. 

Cutting the down payment on a home certainly will help many responsible home buyers (including one Reason staffer who recently took advantage of the program). But the FHS program is destined to lead to more foreclosures down the road as families, even with the government's help, come to terms with the reality of money. Unfortunately, it is probable that many of those families that will have to foreclose in five years on the government aided home purchase would have been fine waiting a few more years to save and get in a financial position to own a home for the next 40 to 50 years.

Reason on the "little-noticed program" from March.

Reason on Economics, Bailouts, and Stimulus.

A Concise, Modern History of U.S. Homeownership

Posted on May 10, 2009, 9:09am | Samuel Staley

City Journal senior editor Stephen Malanga has written an excellent, accessible, and concise history of federal efforts to boost homeownership since the 1920s. He does a nice job of showing how the current housing morass is the product of nearly a century of federal meddling by both Democrats and Republicans, each enamored with the holy grail of increasing homeownership.

One gem from the essay is a history of a New Deal program that tried to clean up a mess created during the 1920s by then Commerce secretary Herbert Hoover when he attempted to increase homeownership through the Own Your Own Home campaign. As homeowners became oversextended, foreclosures increased and skyrocketed after the runs on banks sent banks into bankruptcy at the outset of the Great Depression. The federal solution was to create a new program that would prop up homeownership and subsidize mortgages and loans.

The HOLC [Home Owners' Loan Corporation] was a massive new federal agency, employing at its height some 20,000 people—appraisers, loan officers, auditors. By 1936, the agency’s total payroll was $26.2 million, the equivalent of $388 million today. The HOLC eventually received 1.9 million applications for mortgages and approved 1 million. Despite the more favorable terms that the HOLC offered, however, about one-fifth of the new mortgages defaulted, a failure rate that would sink a private-sector bank. Many who failed to pay might have been able to, but chose not to work out any arrangement with the government and essentially challenged the feds to kick them out—which officials were reluctant to do in the face of public opposition. HOLC loan officers classified about 65 percent of the defaults as resulting either from borrowers’ “noncooperation” or “obstinate refusal,” according to an analysis by Columbia University economist C. Lowell Harriss. “This type of noncooperation could sometimes be attributed to a desire to obtain free housing . . . an object that, in view of HOLC’s nature, was not difficult to realize,” Harriss wrote.

The solution? Let the market determine homeownership rates based on the natural growth of the economy and income.

Banks and Mortgage Investors Battle in Congress

Posted on May 5, 2009, 2:30pm | Anthony Randazzo

Though the cramdown threat has been (temporarily) vanquished, there are still more issues Congress is facing that could skew the market. Senator Dick Durbin, who drove the lost fight for cramdowns, separated the measure from a larger bill that passed the House (HR 1106) that is aiming to redefine how the mortgage industry works. The "Helping Families Save Their Homes Act of 2009" (now S.B. 896) also contains provisions that will protect mortgage lenders from being sued by investors for rewriting mortgage terms on their own--measures the Senate supported today.

This has set up a Wall Street Civil War, as The New Republic's Noam Scheiber puts it, between the big banks that are dealing with foreclosed homes that want to restructure them, and investors that do not want to take a loss on the mortgages as a result of a restructuring. 

One of the questions I have come back to on this blog on occasion is, why would banks not just restructure a mortgage on their own so that someone could stay in their home if the bank wouldn't be able to sell the home anyway? And one of the reasons is fear of lawsuits from investors that bought securities based on certain contract conditions that they would rather not see restructured. Another is fear from investors that in a restructuring of a mortgage, banks will simultaneously restructure that mortgage with a secondary mortgage that many homeowners have in such a way that banks don't suffer losses, but investors in the first mortgage do. 

To fight this, banks have been pushing for "safe harbor", essentially protection from lawsuits by investors if they restructure mortgages. However, the investors have been pushing back that such protection would allow banks to abuse the restructuring privilege. Investors, after all, want to make money of their investment too and have it tied up when the mortgage is in foreclosure. Investors want people in their homes paying for them. They don't like foreclosure either, but they also don't have control of the renewed terms, allowing the mortgage holder to focus only on their own interests. Scheiber writes:

"...it's far from clear that banks won't abuse the safe-harbor provision they've lobbied for; if it passes, the investors could push to prevent them from using it as a shield against liability for peddling fraudulent mortgages. Investors could also play a constructive role on other issues, such as the attempt by banks to return their bailout money quickly in order to wriggle free of pay restrictions. Investors who own the banks' bonds aren't likely to be keen on this, because the bailout money insulates them from potential losses."

So with banks and investors duking it out, the Senate weighed in today, defeating a bill amendment that would have given investors the right to sue, essentially protecting safe harbor, and backing the banks they have also bailed out. The Helping Families Save Their Homes Act in amended form (without cramdowns) remains before the Senate for a vote later this week.

I stand with the investors in this battle, purely on the grounds that banks should be able to restructure loans to avoid losses on a foreclosed home but have the incentives of the investors in mind when they restructure. If they act in good faith in taking some losses on their own, while passing off a justifiable share of losses to the investors, then there should be no grounds for suit. The banks and investors should have the proper incentives to work together, to the benefit of the consumer, not have one favored over the other by Congress.

Update:

I just read this editorial from the New York Times which points out about the cramdown bill that:

"Senator Obama campaigned on the provision. And President Obama made its passage part of his antiforeclosure plan. It would have been a very useful prod to get lenders to rework bad loans rather than leaving the modification to a judge. But when the time came to stand up to the banking lobbies and cajole yes votes from reluctant senators — the White House didn’t. When the measure failed, there wasn’t even a statement of regret."

And that's true... which makes me wonder if there is some political strategy behind allowing cramdowns to fail, but then use safe harbor provisions to achieve the same goal--preventing foreclosures (again, a good endgame, but this way is going to make it more expensive long-term for homebuyers).

Bipartisan Blame for Housing Crisis

Posted on May 2, 2009, 9:00am | Samuel Staley

Thomas Sowell, the iconoclastic Hoover Institution economist, has a new book out tearing apart the why's, how's, and who's to blame in the housing crisis. The book, The Housing Boom and Bust, dissects the making of a political crisis. In his column at Townhall.com, Sowell writes:

Beginning in the 1990s, getting a higher proportion of the American population to become homeowners became the political holy grail of government housing policies. Increasing home ownership among minorities and other people of low or moderate incomes was also part of this political crusade.

Because banks are regulated by various agencies of the federal government, it was easy to pressure them to lend to people that they would not otherwise lend to-- namely, people with lower incomes, poorer credit ratings and little or no money for a conventional down payment of 20 percent of the price of a house.

Such people were referred to politically as "the underserved population"-- as if politicians know who should and who shouldn't get mortgages better than people who have spent their careers making mortgage-lending decisions.

But, in politics, power trumps knowledge. Banks whose mortgage loan approval rates for "the underserved population" did not match the prevailing preconceptions found that they could not get government regulatory agencies to approve their business decisions on opening new branches or enlarging their financial operations, the way competing banks did when those competing banks met the lending quotas set by the government.

 Sowell doesn't spare members of either party. It was an equal opportunity catastrophe, encouraging banks that are by nature conservative to take risks they were ill equipped to assess or evaluate effectively.

Sacramento Homes Now Cost Less Than a Honda Accord

Posted on April 28, 2009, 3:55pm | Samuel Staley

The Sacramento Bee has a excellent article on the dynamics of the real-estate market in the post-bubble environment (also known as the housing depression). Sacramento housing prices, like many housing markets on the East and West Coasts, increased much faster than household incomes, a result of the inability of supply to keep pace with demand and speculation. Now, dozens of homes are going on the market at $25,000 or less as banks try to unload them after foreclosure:

Many of the houses became cheap only after the roller-coaster ride of the past few years, as banks sought to unload inventory. On Tuesday, for instance, Deutsche Bank lowered the price on a vacant, 728-square-foot home on 21st Avenue in the heart of Oak Park from $29,000 to $19,000.

The house had belonged to the same family for years. An investor purchased it for $197,000, or $270 per square foot, in mid-2005, property records show.

The city around that time declared it a dangerous, vacant nuisance and started pressuring its owner to clean it up. That case remains open, much like the cases for 200 other vacant buildings (all viewable at sacbee.com/databases)deemed dangerous or substandard for more than a year.

Seven months after buying it, the first investor sold the property again to another out-of-town buyer for $255,000, or $350 per square foot. In December, Deutsche Bank foreclosed. Today, the home is selling for $26 per square foot.

Now, months after banks initially foreclosed, these homes being put back out on the market. At the lower prices, the homes are both affordable and in sync with market demand. The housing market is rationalizing.

Importantly, the private real-estate market is ready to step in and turn coal into gold:

Real estate investor Reggie Lal is happy to oblige.

"At 25K, the risk is out of the market," Lal said. "It's pretty much bottomed."

What Lal does arguably has a more positive impact than speculators who bought $400,000 homes during the boom and sold them for $500,000 a few months later, pricing out regular folks who were unwilling to take on a high-interest loan.

During better times, Lal, who maintains an office for his firm, RL Financial, on the edge of Elk Grove, mostly focused on selling homes he bought during the last bust. Because he buys all his property out of foreclosure, he said, banks, not homeowners, get hurt by the low prices.

After finding a property that interests him, Lal pays cash and starts putting more money into the property. On a $25,000 house, he might add $15,000 in rehab, he said.

When the house is ready, Lal often puts it up for rent. Once he finds a tenant, he can find financing, he said, because the home is habitable and occupied. That rent is likely to cover the entire cost of his house payments – and more.

Then, it's just a matter of waiting until the market improves.

Lal said he's careful to keep his properties maintained, and city records support that contention. Not only does he want them ready to sell, but should tenants become unhappy and leave, he would have to pay financing costs.

Lal has bought at least a dozen low-price properties during the last year, property records show, and sold several after rehabilitating them.

Recession Creates "Kidults"

Posted on April 13, 2009, 4:49pm | Samuel Staley

The subprime meltdown burst the housing bubble and the global recession has put the brakes on housing prices. This still doesn't mean that housing is more affordable. This is evident in the United Kingdom where the number of adult children living rent-free with their parents--dubbed "kidults"--has increased from 500,000 last year to 1.6 million this year.

According to London's Daily Telegraph (8 April 2009),

"While an adult living at home until their 30s is more associated with our continental cousins, the research shows that this is a trend that is on the increase here in the UK as well."

It means there's now more than 1.9million Kidults in the UK and with average rents of £441.78 per month, these individuals are saving £839 million.

The research found that areas where house prices are traditionally the most expensive are where more people are unable to afford to buy themselves.

More than 270,000 adults in London alone currently live rent-free and those living in the South of the country are twice as likely to live with others rent-free compared to those living in the North East and North West of the country.

The idea that the recession might cure housing price inflation is misguided. Prices reflect demand and supply. Demand is driven in large part by income (and demographics). Strong economies drive up the demand for housing.

At the end of the day, high housing prices most often reflect supply constraints. Until supply increases to meet demand, these booms, busts, and bubbles are inevitable.

Has the Housing Market Hit Bottom?

Posted on April 6, 2009, 8:00am | Samuel Staley

Last week, Standard and Poor's released the Case-Shiller housing price index which showed a continued drop in home prices in every one of the 20 metro areas it tracks. This isn't the whole story, however, because the National Association of Realtors reported just a few days later that new home sales were up in February.

This is good news because it suggests in some markets the back log of inventory may be hitting bottom. This may be particularly true in metro areas such as Miami, San Francisco, and Las Vegas where prices have fallen by more than 40% from their peak. The large inventory, combined with low prices, means those potential buyers with good credit histories and cash can buy up homes at a bargain.

The Realtors estimate that 45 percent of the homes being purchased are in foreclosure or in some form of financial distress. The Mortgage Bankers Association also reports an increase in mortgage activity, although 80 percent of the loan volume is refinancing at lower interest rates.

Notes David Crowe, chief economist at the National Assocation of Hombe Builders:

Urban Planning, Foreclosures and the Recession

Posted on March 12, 2009, 12:35am | Samuel Staley

My recent blog post on Planetizen.com's Interchange sparked an extensive debate and discussion on the role of land-use planning and the housing bubble. The discussion thread does a good job of encapsulating some of the main concerns and rebuttals by professional planners when someone raises the simple possibility that growth controls increase housing costs.

Reason has published several studies on the impact of growth management laws, including ones on Washington State and Florida here, and an update on Florida for the James Madison Institute here.