I bought my first house in 2002. Or, rather, I entered into agreement to share ownership of a house with a bank for the next 30 years. Some of my friends and relatives bought a home when they got their first job. They were smart. I was not. But it’s not because real estate has been such a fantastic money maker. On average it has done very well, but so have other investments including the stock market.
No, the reason why it was smart to buy rather than rent is because the government wanted you to buy and gave you an incentive. It made both mortgage interest and real estate taxes generally deductible from the individual federal income tax. That tax incentive is worth a great deal over the course of a lifetime. Homeowners win. Renters lose out.
Why? If you ask a politician, it has something to do with the American Dream. It appears home ownership is, or was, the ultimate mark of having arrived, of having made a success for yourself. I don’t quite see it. But it is generally considered political suicide to suggest the mortgage or property tax deduction be eliminated.
It was also the rationale behind the creation of Fannie Mae and Freddie Mac, the two “government-sponsored enterprises”, GSEs, which now seem ready to implode while holding trillions of dollars worth of mortgage backed securities. Fannie Mae, the Federal National Mortgage Corporation, was part of the New Deal and dates to 1938. Today Fannie and Freddie are today public companies with common stock shareholders. Until the current crisis, they did not have a promise of a taxpayer bail-out behind them. But most people believed they did, and in any case most place the two mortgage giants in the “too big to fail” category.
Now they have that taxpayer guarantee, and we may all wind up owning a good chunk of Fannie or Freddie or both. The first question now is whether Congress, having created the GSEs and given them special privileges which allowed them to grow at the expense of private mortgage lenders, will take actions to limit their dominance of the market. It is hard to image the logic behind allowing just two companies to hold or guarantee half the mortgages in the country.
The second issue is whether regulators will restore stability to the mortgage market by insisting on standards for loans. Fannie and Freddie actually had fairly high standards, limiting their exposure to subprime loans. But the real estate downturn is so extreme that default rates for supposedly good quality loans are unusually high. Fannie and Freddie are so big these default rates called into question the firms’ ability to raise capital to offset losses.
But we should also rethink the idea that everybody should, as a matter of policy, own a home. Historically, home values rose about 3 percent per year. At that rate, it takes a few years for a new homeowner to break even on the costs of her purchase. In some industries it is not uncommon for an employee to move every few years. In that case, renting is a better choice than owning.
Straining your budget to purchase a home also reduces your ability to make other investments. It is not uncommon for a retiree to find that virtually all of his savings are in home equity. Common sense encourages us to diversify our portfolios. So having virtually all our retirement funds tied up in our home makes us vulnerable to downturns in the real estate market, as many just reaching retirement age as now finding out.
I’m not expecting to see the tax breaks for home ownership go away any time soon. In fact, like many homeowners, I would be hard pressed to keep my home if they went away overnight. But these preferences, and others, might be addressed as part of a long overdue tax reform and simplification package. They are already “phased out” under the much hated Alternative Minimum Tax. The AMT is actually a simpler and more even handed system than the “regular” set of tax rules.
Don’t worry about the construction and real estate industries, which argue that they will be harmed when the incentives for home ownership are dropped. Someone has to build and market all those rental apartments.
Comments
Thank you for giving a prospective on the real estate market. I find that if you are not making at least $60,000/year or more, there is no way a person like me can ever own a home. Never mind the student loan debt I still have. How does one accumulate 20% of a down payment when in fact an annual salary doesn't even come close to making ends meet; especially now when inflation is over 5.6% higher than anytime within the last 17 years. Plus so many compnaies not wanting to give benefits or if companies do, employee contributions for healthcare alone are staggering, even as high as 10% of gross income (this is an estimate on my present income for a permanent part-time job after about 9 months of unemployment from 2007-2008). However, I find after 2 college degrees, several layoffs (a few from major corporations like AT&T, Landmark Communications), and still owing student loans, I and so many millions of Americans are in the hole. There is no extra to save and dream big for a safe home. Because I could not afford to pay a monthly repayment and missing only one payment for students loans through the RI Student Loan Association while I was on temporary disability before losing my job in July, 2007, I became automatically in default. How does that affect my credit score, by how many points? I have had several forebearances in the past and have made payments throughout times of employment, but it doesn't matter. So now being in Default, even though I don't want to be in default and never intentionally trying to evade paying my student loan back, I have been homeless and had to move from place to place because I could not even afford to maintain even the smallest of apartments and try to eat. I volunteer at a Soup Kitchen in which the gentleman who started the Soup Kitchen who has not gotten paid to help others in need in 16 years, won the Jefferson Award for 2004 from my nomination letter which included signatures from many volunteers at the same soup Kitchen.
So Scott, I realize this is a long winding comment, but I don't see a future when all I have ever tried to do is make my mother proud, who died when I was young, with no family support to get an education. I have two degrees in two different fields because of all the layoffs I had from losing jobs, not because I could not do the job or wasn't smart enough nor from the quality of my work, but simply because organizations don't care about ethics (you should see what I experienced in some jobs -- the lack of professionalism and competency from so many managers) -- and simply the greed of corporate executives to fatten their paychecks and stock options while so many lose jobs.
I worked at one place that didn't even have first aid kits while people are exposed to biohazard and potentially infectious agents -- where is OSHA when you need them?
Agencies do not do their jobs, yet they, top executives get rewarded with big salaries and bonuses for simply not doing a good job. $14.5 million to the CEOs of FANNIE MAE and FREDDIE MAC! and FDA, etc.
So Scott, when you write or talk about the real estate market, why don't you explain to people like me who don't even make $30,000/year, how in the world I will ever afford a decent place to live without having to use every paycheck each month to just pay rent. Never mind other essentials.
I have been a big fan of NBR for a long time, but the investing and American Dream is NOT attainable for so many. Most of the talk on NBR is really geared for the investors who have the extra 50K+ to multi-million dollar/year investors. The average worker like me can not even get the extra $100.00/month for stock and money market investing.
How? Because the ratio of taxes I pay compared to someone like Warren Buffet is a pure disgrace. The rich keep getting richer.
So, Scott Gurvey, please try in the future to have segments on hard working individuals who make less than $30K/year, how I am going to get 20% down on the ridiculous and high priced real estate market; especially in the Rhode Island area.
Thank you so very much.
Sincerely,
Lisa -- from RI
P.S. I have to log off at the library, my time is up -- I would have formalized a better letter to you, but felt I had to write some things to you as a protest to this US economy that is hurting so many people like me. How can you help?
It seems that the top executives who either get appointed to FANNIE MAE and FREDDIE MAC get rewarded for failing to see the real effect on real working people who do not make the kind of money you do. No matter how I may want to save for a better day
Thanks for the reality check Scott. Home ownership is not for everyone. Unfortunately, America's "socializing" of home ownership is being subsidized by taxation of not only the home owners who, at least, get back some of this additional tax burden, but also by renters like you and I. Although our net worth may be significantly higher (and our tax bill) we are still viewed as second class citizens but certainly don't get any financial pity showered upon us.