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Millions of
Americans became stockholders in the late 1990s, just in
time to experience the biggest bear market in a
generation. Does the same fate await millions of
first-time homeowners?
One issue
on which Republicans and Democrats agree is that more
people should own their own home. It is part of President
Bush's "ownership society" initiative.
Homeownership has risen to a record 69% of all households,
from 67.5% when Mr. Bush took office in 2001, despite
persistent unemployment.
Low
interest rates get most of the credit, but Mr. Bush would
like to nudge it along. His American Dream Down-payment
Initiative, signed into law in 2003, offers as much as
$200 million a year to subsidize first-time home buyers'
down payments, especially for low-income and minority
families. He has instructed his tax-reform panel to
preserve tax breaks for homeowners. At the same time, he
has tried to curtail rent subsidies.
But are
these policies wise? Housing prices, adjusted for
inflation, are up 36% since 1995, the steepest boom in at
least 50 years, according to Dean Baker, co-director of
the Center for Economic and Policy Research in Washington.
"This is a particularly bad time to be promoting
homeownership among young people," Mr. Baker told a
media briefing last week. "A lot will see substantial
losses in home value as a result of that bubble, which
will be ending soon."
At the same
event, Federal Reserve governor Edward Gramlich
acknowledged concerns. Some 7% of "sub-prime"
mortgages -- those made to borrowers with poor credit, who
are predominantly on low income -- are already seriously
delinquent, compared with 1% of prime mortgages.
"There has been this strong incentive to try to get
people in homes and building wealth. In general, that's
worked out, [but] it could be now is a particularly risky
time to do that," Mr. Gramlich said.
Like most
Fed officials, Mr. Gramlich discounts the notion of a
housing bubble. But signs of growing speculation, such as
a doubling in the share of houses bought for investment
purposes, has made the central bank a bit more wary.
The housing
boom's demise has been wrongly predicted many times
already. Still, there are straws in the wind. Housing
starts and new-home sales both fell sharply in November
and mortgage applications to buy homes dropped in early
January. Prices in two of the world's most buoyant housing
markets, Australia's and Britain's, have stopped rising.
The International Monetary Fund has found that housing
booms and busts are synchronized around the world, so
those countries' experience may foreshadow the U.S.'s
The overall
economy should easily bear a flattening or modest decline
in house prices. Mr. Gramlich noted that as long as prices
remain near today's levels, most homeowners will still
have a lot of equity against which they can borrow to
finance other types of spending. And in theory, rising
wages, business investment and exports should pick up the
slack as housing-related spending tapers off.
Yet for
many new homeowners, especially those on lower incomes, an
end to annual double-digit house-price gains could spell
real financial hardship. Mr. Baker says such families
seldom benefit from the tax deductibility of mortgage
interest, either because they don't owe income taxes or
they don't itemize their deductions.
And they
move more often, typically in less than four years, so
transaction costs like commissions and mortgage fees,
generally 10% of the purchase price, bite more deeply. Mr.
Baker calculates that even if prices rise at the overall
inflation rate for the next four years, someone who bought
a $130,000 house with 5% down and sold it in four years
will spend 25% more than if he had rented. If housing
prices decline, many families would be unable to sell
their home for enough to pay off the outstanding mortgage,
making it harder to move to another job.
Even if
homeownership turns out to have minimal private benefits,
advocates say it generates social benefits, like less
crime or more civic involvement. But a review of academic
studies co-written by housing economist Donald Haurin of
Ohio State University finds little empirical evidence that
homeownership produces these "neighborhood
effects."
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