Homeowner Beware - "Robbing the Hood"
The budget crisis from 2011 is a clear indication that homeowners should beware! As Congress decides who will be winners and losers in paying for the cost of government, homeowners will likely be "on the menu" as they were in 2011 when Congress passed a two month payroll tax and unemployment extension on the backs of homeowners by increasing mortgage fees. This translated to an astronomical tab, adding to the ongoing enormous transfer of wealth that is "robbing the hood."
Lessons from the 2011 Crisis
On Dec. 17, 2011 the United States Congress approved a two-month extension of tax breaks and unemployment benefits. As a result, every new mortgage loan borrower whose mortgage is sold to Fannie Mae and Freddie Mac for the next ten years will be charged as much as $180 annually on an average $200,000 mortgage for the duration of their mortgage. Estimates predict that these changes will lead to the collection of roughly $36 billion, more than enough to cover the $33 billion cost of the bill itself. The U.S. Congress needed a piggy bank to raid and alarmingly, unemployment benefits and tax breaks were "paid for" on the backs of homeowners because they were an easy target
Thirty-six billion dollars translates to money America's homeowners won't have to improve their lives and the lives of their families, save for a college education or retirement, establish a business, or give back to their communities. Low to moderate income families whose ability to move up the socio economic ladder is proven to be directly linked to homeownership are negatively impacted. Minority families wishing to purchase a starter home, and who are projected to account for 74 percent of all new households created in America between 2010 and 2025 have had their chances for homeownership decrease as $36 billion of future wealth has been transferred away from homeowners and their communities without their knowledge or consent.
Tougher to Buy A Home
Today, America's homes are on sale at bargain prices. Yet, the rate of homeownership continues to drop despite a sustained period of historically low mortgage interest rates. Estimates suggest that about half of all homes sold are on a cash basis, which means families are being crowded out of the market primarily by cash buyers, usually investors. Investors play a very important and valuable role in the market, but regulation, public and private policy have placed home buying families at a distinct disadvantage.
These families are unable to compete against cash offers, especially on foreclosed homes offered for sale. Many find themselves making dozens of offers without success. Large numbers have simply given up. The inability to purchase a home means that communities that once housed owner occupant families whose fortunes could improve with their home appreciation are now feeling the impact of transient renters instead. The result has been a massive transfer of wealth from owner-occupied family residences to investors, both native and foreign: "robbing the hood."
Credit is tighter for single family homeowners and higher loan fees paid to Fannie Mae and Freddie Mac make credit costlier and unattainable for many existing and new homeowners. Simply stated, current policies are foreclosing on America's future.
As Goes Housing So Goes America
The residential housing market has historically fueled and helped sustain just the sort of economic activity that a vibrant recovery demands. Housing demand has contributed between 1 percent and 1.5 percent to our national GDP in previous recoveries. However, during the most recent recovery the restorative impact has been nil. A 2013 report from the St Louis Federal Reserve helps to make the case. Household wealth peaked in 2007 and declined at the rate of about 15 percent per year until 2010; median household wealth dropped 39 percent from the peak. Coinciding with a drop in U.S. household net worth was the precipitous drop in home equity of about $7 trillion between 2006 and 2011.
Only 45 percent of the wealth lost during the Great Recession which ended in June 2009 has been recovered. Younger, less educated, and historically disadvantaged demographic groups experienced the worst of the decline since most or all their net worth was in their family home. They suffered the most foreclosures, and they are the majority of the population.
Older, higher educated, families with little or no debt suffered far fewer foreclosures and they are the minority of the population. A closer look paints an even bleaker picture. Almost two-thirds of the increase in U.S. household wealth since 2009 was due to a soaring stock market, 80 percent of which is in the hands of the wealthiest 10 percent of Americans. The other 90 percent of Americans remain in the struggle to try to regain their previous wealth. Although home prices have begun to rise they are still down by 28 percent from their peaks. Studies show that the downward spiral in wealth for most Americans has had a direct negative effect on consumer spending which represents 70 percent of the American economy.
Additionally, further caution is needed when the following key drivers of homeownership are currently being deliberated in Washington.
Mortgage Interest Deduction -- one of the most important benefits of owning a home is in Congress's cross-hairs as a potential target for elimination or reduction!
Low Down Payment Mortgage -- under proposed policies, it could take a majority of homeowners and most aspiring homeowners more than 20 years to save enough down payment to qualify for a 30-year mortgage.
The 30-Year Fixed-Rate Mortgage -- If policymakers aren't careful how they construct the future of Fannie Mae, Freddie Mac and FHA, the 30-year fixed rate mortgage could become increasingly rare, as we might revert to the lending practices of the 1960s with primarily adjustable short-term mortgages.
Increasing Costs of Mortgage Financing -- Existing and aspiring homeowners find it harder, more time consuming and more expensive to get mortgage financing under current and newly contemplated policies and regulations.
New Home Construction Lending -- Policies and regulations have precipitously shrunk the availability of acquisition, development and construction financing to meet the future housing needs of America. That's why we have only constructed about 600,000 family homes annually since 2009, instead of the 1,300,000 per year needed to keep up with population growth.
Government Dominance -- Since 2009, the opportunity of homeownership is subject to political whims, as more than 90 percent of mortgage finance has been controlled by the federal government through Fannie Mae, Freddie Mac and FHA. Private sources of capital must not be periodically or perpetually "boxed out" by government programs.
America Beware
Net worth is what drives economic opportunity from one generation to the next; a fact borne out by studies controlling for education, income and family background.(3) Homeownership is the largest contributor to higher family net worth for 90+ percent of the American families. In the past decade the average family net worth of homeowners to be 31 to 46 times higher than renters, and for minority families the multiples have been 85 to 145 times respectively.
Enough is enough! Existing and aspiring homeowners need to band together with a strong and singular voice to protect and promote sustainable homeownership for all segments of America, lest we continue to foreclose on our future. As recent history has demonstrated, we must be especially mindful during budget crises.
America's Homeowner Alliance has been formed to sound the alarm on issues such as these. Together our collective voice will stop elected and appointed officials from choosing solutions that cost homeowners billions of dollars and have a negative impact on America's families and economy. Make your voice heard.