Yesterday's USA Today posted a story about policymakers in Washington reconsidering how much the government should be doing to help people own their own homes. I should explain that my husband and I bought our first house in 1969 with the help of a Veteran's Administration loan. Although I have been a homeowner for most of my life, I am very naive about the intricacies of buying a house or how that has changed over the past 70 years.
The article points out:
"...Freddie and Fannie, with their government backing, allowed the proliferation of 30-year, fixed-rate mortgages -- a product that lenders would otherwise shun. Reason: Long-term, fixed-rate loans struggle in any interest rate scenario. If rates rise, banks are squeezed, because their revenue remains fixed even though they have to pay more for deposits and other funding. If rates fall, homeowners refinance. "No rational market participant is going to bear that risk," Date says.
"Long-term fixed-rate mortgages make sense only if the government is absorbing some of the risk. Reforming housing finance, Date says, could jeopardize the future of long-term, fixed-rate mortgages or raise interest rates on them, perhaps a quarter to half a percentage point."
I don't necessarily agree with that statement. Banks make money on thirty-year fixed rate loans. The interest over time on those loans is at least twice the value of the house. The fees banks charge for refinancing home loans vs the cost to the bank allow them to make a profit on the refinance. I don't begrudge them their profit, but I don't believe the thirty-year mortgage is a bad product for the banks.
The article points out what the housing mark was like before World War II:
"...Banks demanded 50% down payments for mortgages that would last just five or six years; then, the homeowners would have to cough up the balance in a balloon payment. Homeownership remained mired around 40%."
One of the conclusions of the article:
"High homeownership rates also impose economic costs. They lock workers into houses that can be tough to sell, especially in recessions, so it's harder for them to move to find new jobs. The percentage of Americans changing addresses hit a record low 11.9% in 2008 before bouncing up a bit last year; the so-called moving rate exceeded 20% as recently as 1985.
"Florida has found that U.S. cities with high homeownership rates tend to lag behind other cities in job creation and earnings. He argues that the government should nudge the homeownership rate lower, perhaps to around 55%, by cutting the subsidies that prop it up."
Again, I disagree. One of the main things that props up home ownership is the tax deduction for mortgage interest. Although that tax deduction is not what it used to be due to low interest rates, on a large mortgage it is significant, along with the fact that building equity in a house over a lifetime is a good thing.
Based on personal experience, I have a few comments. My father was a returning World War II veteran. A few years after returning from Europe, he and my mother bought a house in Levittown, New York--their first house--small houses built specifically to be affordable housing for returning veterans. Because of the corporate structure in the 1950's, by the time I entered sixth grade, I had attended five different elementary schools--as my father moved up the corporate ladder, we got transferred. I am really not sure I would recommend that experience (although it helps me relate to the military branch of my family). (I learned about the War Between the States in North Carolina in fifth grade, then learned about the Civil War in New Jersey in seventh grade!)
In my (humble?) opinion, the thirty-year mortgage would survive without government intervention. Home ownership, because of current tax breaks, is a good thing right now. If those tax breaks go away, it might be time to reconsider. Also, generally speaking, over a lifetime of home ownership, equity will be built and some wealth acquired. I am not an economist, but unless that changes, owning a home is a good thing. I don't think it makes sense to aim for a lower percentage of home ownership. Most homeowners take pride in their homes and work to keep that investment in good shape. Home ownership is part of being a responsible adult and meeting your obligations. Maybe the problem is that our society has lost its sense of responsibility, not that the government is helping too many of us buy houses.
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