October 18, 2015
No one reads the Post’s opinion pages for serious economic analysis, and Bethany McLean’s Outlook piece on Fannie Mae and Freddie Mac reminds us why. While the basic point is fine (we should keep Fannie and Freddie), the argument is more than a bit confused.
The problem starts near the beginning when McLean tells us that GSE stands for “government-supported entities.” In fact the acronym is for “government sponsored enterprises.” The government created Fannie and Freddie and then turned them into largely private companies. (I apologize if the “government-supported entities” was meant to be ironic, but it went over my head if that’s the case.)
Getting to more substantive matters, McLean tells us:
“Since 2008, while Fannie and Freddie have sat in limbo, homeownership has plunged. This summer, the Census Bureau reported that the homeownership rate had fallen to 63.4 percent, the lowest level in 48 years. (It had peaked at 69 percent, in 2004.) ‘Renter nation,’ one blog called the United States. The decline is particularly pronounced in minority communities. At the Congressional Black Caucus Foundation’s annual legislative conference this year, housing advocates pointed out that the homeownership rate for the black population has decreased from nearly 50 percent in 2004 to about 43 percent, its lowest level in 20 years. It’s projected to continue to drop.”
The story on homeownership rates is of course true, but it is not clear what it has to do with Fannie and Freddie being in “limbo.” The GSEs continue to buy up the vast majority of newly issue mortgages in spite of their “limbo” status. Mortgage interest rates are at the lowest levels the country has seen in more than half a century. It’s hard to see how the situation would be better for potential homebuyers if Fannie and Freddie were not in limbo.
The reasons for the plunge in homeownership are fairly obvious. The labor market remains weak, especially for African Americans. Wages have stagnated ever since the turn of the century and employment levels are still far below pre-recession levels, especially for African Americans. In this context, why would anyone be surprised by a drop in homeownership rates?
It also didn’t help that many housing advocates, like the industry funded Harvard Joint Center on Housing, encouraged people to buy homes even at the peak of the bubble. When people have seen their life’s savings disappear with collapsing house prices, or have seen this happen to friends and family members, it is not surprising that they would be slow to rush to buy into the housing market.
We then get this utterly bizarre analysis of the relative cost of renting and owning:
“According to Zillow’s data, while homeowners with a mortgage can expect to spend about 15.3 percent of their income on monthly housing bills, renters must plan to set aside almost double that share. As rents rise, it gets harder to save for the down payment required to buy a home. Add in the burden of student loans, and financial challenges increase. According to an analysis by Enterprise Community Partners and the Harvard Joint Center for Housing Studies, since the start of the 2000s, the number of severely cost-burdened renters in the United States — meaning those who pay more than half their income in rent — has risen substantially, from 7 million in 2000 to 11.3 million in 2013. The number is expected to keep increasing.”
It is not clear how Zillow found that homeowners with a mortgage only pay 15.3 percent of their income on monthly housing bills, but insofar as there is a big difference in the percentage of income that renters pay for their rent and homeowners pay for housing costs it is mostly on the denominator side. Homeowners have higher incomes, so the same monthly housing costs would be a smaller share of their income. The idea that someone will get a huge savings on monthly housing costs from switching from renting to owning is absurd on its face.
There is the possibility of accumulating wealth through homeownership, but this depends both on the direction of house prices and the amount of time people can expect to spend in their homes. In normal times, house prices on average rise in step with the overall rate of inflation. House prices are somewhat above their long-term trend right now (probably due to unusually low mortgage interest rates) so it might be reasonable to expect less than normal rates of appreciation.
There are also large regional differences. People buying in San Francisco are likely to take a beating if reality ever sets in on the stock price of Uber, Twitter, and the rest. Homeownership is hardly riskless, as should be apparent to everyone after the 2007–2011 crash.
The issue about the amount of time people can expect to spend in their homes is also crucial. In an economy where few jobs offer stable employment, many people may have to move to get a job. The round trip costs associated with buying and selling a home are roughly equal to 10 percent of the purchase price. If there is a price to rent ratio of 20:1 (probably ballpark in most areas) then someone will be paying two years worth of rent for flipping their house. This may not be a big deal if they can live there 15–20 years and accumulate some equity, but it probably does not make sense if they will only be in the house 2–3 years. In short, if people don’t have reason to believe that they can stay in a home for a substantial period of time, ownership does not make much sense.
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