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This article is part of a Special
Section on “The Recession’s Silver Lining; A Roof Over Our Heads?
Housing Issues and Trends” that ran in the October print issue of PA TIMES.
See the end of this article for links to others from the Special Section.
Stephanie Moulton, Roy Heidelberg
For nearly a century, homeownership has been upheld as a cornerstone of housing policy in the United States. However, the continuing housing crisis challenges the strength of this cornerstone. Time Magazine recently featured an article alleging that “homeownership has let us down” and that the nation faces now “the dark side of homeownership …foreclosures and walkaways, neighborhoods plagued by abandoned properties and plummeting home values.” Indeed, we are at an impasse in the historical “path to prosperity” through homeownership. There is no doubt that the system, as was in place just a few years ago, is no longer viable. That road is closed. A careful evaluation of the role of homeownership in both our social and economic lives is necessary.
There are many public officials, legislators, researchers, and stakeholders weighing in with their recommendations. Given that government guarantees more than 90 percent of all home mortgages today (through the Federal Housing Administration, Fannie Mae or Freddie Mac), some contend that government should remove itself from the homeownership business and let the private market (once rehabilitated) assume primary responsibility for the allocation of mortgages. The Obama administration, under the Wall Street Reform and Consumer Protection Act, is charged with providing a plan for the future of mortgage finance by January, 2011.
While much of the discussion regarding this plan appropriately focuses on the economic mechanisms and protections necessary to ensure a more efficient mortgage market moving forward, as noted by leading public administration scholar Barry Bozeman, efficient markets do not always satisfy appropriate or fair allocation of public value. We briefly consider three aspects of homeownership in the United States with significant implications for public values that should be an intentional part of the discussion of alternatives for mortgage finance moving forward.
First, after many decades of emphasizing homeownership as both an individual and community good, no matter the soundness of those arguments, individuals value homeownership, and this is not likely to change overnight. A 2010 National Housing Survey, conducted by Fannie Mae, found than 75 percent of current renters believe that owning a home “makes more sense” than renting. Thus, despite the loss of property values nationwide and rising home foreclosures, homeownership is still perceived by most as a smart investment that is about more than a place to live. People will continue to aspire towards homeownership as it has become embedded within the American Dream, and failing to consider this would be irresponsible policy.
This does not mean that government should not seek to shift more emphasis towards other affordable housing alternatives. Government initiatives facilitated the growth of ownership through affordable mortgage instruments, market liquidity, and public programs and incentives. We must be careful, though, to not over-steer away from affordability.
A neglect of public investment in homeownership (and its financing mechanisms) will not make the public values embedded in ownership go away, nor the individual pursuit of such values. Rather, a neglect of public investment would likely lead to an even less equitable distribution of wealth in this country, as equity is currently the largest source of wealth for most households, and a growth in predatory mechanisms to extend “ownership,” regardless of the cost to society.
Second, people will seek to buy homes even when they should not. Public policy can either neglect these individuals, regulate against their ability to purchase, or consider how best to position these individuals into better circumstances. Homeownership is not simply an aspiration for those with good credit, sufficient income and substantial assets. Credit-compromised, low-income and low-wealth households also pursue homeownership. Such households can enter homeownership through affordable (and more sustainable) means, or they can pursue–or be pursued by–high cost, high risk alternatives, as evidenced by the proliferation of subprime lending to this population from the mid 1990’s through 2006.
Even with affordable, government supported and/or subsidized initiatives, the push of the subprime broker was stronger and more readily accessible for many low-income, low-wealth households. Research shows that as much as 30 to 50 percent of individuals who received subprime mortgages could have qualified for conventional (or affordable) mortgages.
One of the most significant lessons to take away from the current mortgage crisis is that individual preferences for mortgage products are endogenous to the finance environment; that is, actors in the mortgage environment can shape individual preferences for more (or less) risky alternatives, what has popularly come to be known as nudging. Given this understanding of human behavior, ensuring that all individuals have equal access to and understanding of affordable alternatives becomes a substantial public value issue, not just a market issue.
Third, place matters. And communities matter. The communities where individuals purchase homes substantially influence their outcomes as homeowners. As Secretary of Housing and Urban Development Shaun Donovan recently remarked, “…when you choose a home, you don’t just choose a home. You choose a community–schools for your children, public safety and access to jobs.”
Reciprocally, while individuals purchase homes, their purchases have effects upon entire communities. Ownership investment (or disinvestment) in a community is a component part of community networks and institutions that determine the quality of neighborhoods. Research tends to find that neighborhoods with higher rates of ownership have reduced crime, better schools, less blight and higher property values; however, laissez-faire policies towards homeownership promotion (such as the mortgage interest tax deduction) tend to reinforce good neighborhoods by stimulating purchases in such neighborhoods, while compromising struggling neighborhoods.
Relatedly, the positive effects of ownership can be quickly undone when foreclosures in a community rise, reducing the value of nearby properties and eroding the tax base of the community. Thus, even if markets could finance (and price) individual homeownership transactions appropriately (commensurate with risk to the market), the long-term impact on communities from such transactions is of substantial public value.
Indeed, spatially concentrated use of unsustainable and unaffordable credit instruments can quickly influence neighborhoods as individuals default on their loans and are forced to leave the community. This systemic erosion of core community institutions, such as public schools and neighborhood infrastructure, further disadvantages households who remain in these neighborhoods. There is a critical public role in ensuring that homeownership is integrated into a larger community development strategy that does not solely depend upon ownership as an impetus for improvement.
Where do we go from here? Does the answer lie in shifting focus of policy goals to include a greater emphasis on rental housing rather than homeownership? Possibly, however, the societal affinity for homeownership is ingrained not only in the minds of policymakers, but also in the desires and longings of the American people. Eliminating direct public investment in homeownership will likely only increase the cost to society from unaffordable (and unsustainable) strategies that individuals pursue in lieu of affordable (and sustainable) alternatives.
However, continued investment in ownership as the end goal in and of itself, may actually displace investment in communities. Considering the inter-dependence of neighborhood quality and ownership, public initiatives should search for ways to decouple school quality, neighborhood infrastructure, and access to services from home prices, thereby promoting communities and society values rather than individual dwellings.
As we pause to reconsider homeownership and the public role in mortgage finance moving forward, it is essential to consider the societal values at play in the market transactions of property.
Stephanie Moulton is an assistant professor at the John Glenn School of Public Affairs at The Ohio State University. Email: [email protected]
Roy Heidelberg is a doctoral student at the John Glenn School of Public Affairs at The Ohio State University.