U.S. Housing Policies No Longer Reflect Reality
There is a problem with the U.S. housing market that few are willing to admit.
The country is experiencing job growth, unemployment rates have dropped and hourly wages have started to increase for lower-income workers. The overall U.S. economy has mostly recovered from the 2007-2009 recession. The housing sector has not.
It's time for a new conversation about U.S. housing policies.
The U.S. Department of Housing and Urban Development's goal in 2015 is to increase homeownership rates. But, there is a distinct possibility that homeownership rates will never return to their pre-recession levels given the number of young Americans who either cannot or will not buy homes.
The new housing conversation should stop focusing on ways to justify homeownership subsidies and stop assuming that owning is always better than renting.
Instead, the conversation should ask: what housing policies would we enact now if we focused solely on the economic realities young adults are facing? A new housing conversation would acknowledge that old housing policies continue to work well for the "model" renter — a married college graduate with a full-time job and little consumer debt. The conversation would need to concede, though, that fewer 25 year olds fit that model given soaring student loan debt, higher under-employment rates and lower marriage rates.
U.S. housing policies have largely ignored trends that suggest young adults will be unable to purchase homes for the foreseeable future. Student loan debt, for one, diverts funds from lower-paying jobs that would in other eras have been dedicated to saving for a down payment. The housing industry (builders, real estate agents and lenders) continues to encourage young adults to buy homes, and aggressively lobbies against any legislative attempts to decrease home buying subsidies especially the politically popular mortgage interest deduction. Other groups, including civil rights and progressive housing groups, also support housing policies that push homeownership because these groups believe that owning homes is the best way for lower-income renters and racial minorities to build wealth.
Mortgage applications are flat or falling. Home sales to first-time homeowners remain sluggish, despite low interest rates. Numerous efforts to jumpstart home sales have failed, and recently introduced efforts including the FHA's reduction of its annual premium rates, revamped low down-payment programs and the return of subprime mortgage lending address the symptoms of stalled home sales, not the causes.
U.S. housing policies focus almost exclusively on increasing sales of single-family homes. Homeownership-focused housing policies are based on the unrealistic assumption that young adults will graduate from college, get a full-time job with secure and stable income, marry, save for a down payment, have kids and then buy a house.
A new housing conversation would explore alternative housing options, like community land trusts or shared equity plans that help lower- and middle-income renters buy homes and split the home's appreciation with a trust or other entity. Likewise, a conversation that is not anchored to single-family homeownership would explore the feasibility of rent-to-own or other collaborative homeownership options.
Homeownership options that are different than those we have grown accustomed to seeing can allow lenders the leeway needed to rekindle the creativity that was lost during the financial crisis and post-Dodd-Frank environment. Financing models that make sense for a group of owners, but that would be inappropriate for the traditional single-family buyer, for instance, could breathe new life into an industry struggling under the weight of new and heavy regulations.
Allowing financial services providers to join new conversations about how to help people find the housing solution of their choice could yield answers to some of housing finance's biggest questions such as what can replace the mortgage interest deduction. There has been a significant increase in the number of renters overall, and especially in major U.S. cities. Young adults are not buying homes because they lack savings and have too much debt. Rising rents also make it harder for them to save for a down payment.
A new, even bolder, housing conversation would encourage employers to offer housing savings plans that let renters save for security deposits or homeowners save for down payments, just as employers offer tax-favorable retirement savings plans. More realistic housing policies would also let renters save tax-free for housing (rented or owned) just as families now save for their children's college education in 529 savings accounts.
None of these options are economically feasible now, largely because of the enormously expensive interest deduction. If, however, homeownership is not the sole focus of housing policies, politicians might actually be willing to consider ways to reduce or repeal the interest deduction at least for some homeowners or certain types of homes.
The U.S. remains wedded to housing policies that are not working, and have not worked for some Americans for decades. Unless we are willing to consider housing policies that reflect the economic conditions young adults in this country are actually facing, we will never solve the problems in U.S. housing markets.
A. Mechele Dickerson is a law professor at the University of Texas-Austin.