President Barack Obama, in his annual address to the country last week, stressed the importance of keeping “the dream of homeownership alive for future generations of Americans.” One of the main ways he plans to do that involves lowering mortgage premiums.
Renters, who make up about 35% of American households, as usual were left out in the cold.
Although the speech stressed the importance of “helping folks” afford a home, Obama never mentioned the importance of helping them find an affordable one, regardless of whether it’s rented or owned. Simply put, renters are largely invisible in federal housing initiatives.
Instead, middle-class families were encouraged to plunge further into debt to chase the dream of homeownership. So much for “middle-class economics.”
Still waiting to recover
It has been more than 30 years since a president mentioned the need to increase affordable housing in a State of the Union address. In 1981, just days before he left office, Jimmy Carter argued that more money needed to be spent on rental vouchers and public housing. Since then, presidents have extolled the benefits of homeownership but have been unwilling to acknowledge why so many middle-class renters are unwilling or unable to buy houses.
While wealthy American households can buy homes because most have recovered from the financial crisis, most households are still waiting to bounce back.
According to the Federal Reserve’s 2013 Survey of Consumer Finances, income and wealth for the top 3% of US families rose to historically high levels in 2013. The increase in income for wealthy households, however, is like a reverse mirror of the declines experienced by the bottom 90%.
Income for all workers, except the highest earners, has been stagnant for more than 30 years. Census data show that, adjusted for inflation, average family income is about the same now as it was in 1995.
Although parts of Obama’s middle-class economics plan will likely help middle-class workers, in his words, “feel more secure in a world of constant change,” the housing initiative fails to respond to the primary reasons they are not buying homes.
Middle-income households are not buying homes because they cannot afford to.
The wrong plan to change this
Under Obama’s plan, the Federal Housing Administration will reduce its mortgage insurance premiums by 0.5% at the end of January. This reduction is supposed to make it easier for Americans to buy homes.
A slight discount in insurance premiums, however, won’t do the trick for most households. Homeownership will continue to be a wealth-building device for higher-income Americans because they can afford to save for a down payment and qualify for a low-cost mortgage loan.
But, if you can’t save enough for a down payment, you can’t take advantage of one of the main and most expensive ways - at $70 billion a year - the government tries to make housing affordable: the mortgage interest deduction.
Since most taxpayers do not itemize their tax deductions, most don’t benefit. Data from the Joint Committee on Taxation and other tax policy groups consistently show that only one-third of taxpayers itemize and that only 25% claim the mortgage interest deduction.
Meanwhile housing is becoming ever more unaffordable.
More than one-third of all US households cannot afford their homes, based on the traditional standard that housing costs consume no more than 30% of income, according to the State of the Nation’s Housing 2014, prepared by the Harvard University Joint Center for Housing Studies (JCHS).
The report found that the number of households who could not afford their housing jumped from 29.6% in 2001 to an all-time high of 37.2% in 2010, a year after the recession officially ended.
Renters continue to face a housing affordability crisis mostly because of stagnant income. The JCHS study noted that median renter incomes were 13% lower in 2012 (more than three years after the recession) than in 2001. And at the same time as incomes were falling, median rents were increasing, by about 4% in the period. The Federal Reserve Survey found that families in the bottom 10% saw “substantial declines in real net worth” from 2010 to 2013.
Just as Obama accurately observed that it is impossible for workers who earn the federal minimum wage to “work full time and support a family on less than $15,000 a year,” it has now become virtually impossible for many lower- and middle-income renters to afford to buy houses on the wages they receive.
More than 80% of the families who earn the federal minimum wage spent more than 30% of their income on housing expenses in 2012, according to the JCHS study. Almost 70% spent more than 50% of their income on housing.
Focus on affordability for all, not just homeowners
Middle-income, and especially lower-income, households do not need to hear another speech that proposes relief for homeowners. They need a speech that announces a plan to help improve their housing security by providing more affordable housing, whether rented or owned.
Policymakers need to develop housing policies that make the middle-class visible. For example, shouldn’t Congress finally be willing to modify, if not repeal, the mortgage interest deduction? Although politically influential groups like the National Association of Home Builders and the National Association of Realtors routinely lobby against any attempts to modify this deduction, it is undisputed that this deduction disproportionately benefits higher-income homeowners.
A middle-class economics housing policy also would consider ways to develop housing tax deductions, credits, or subsidies that would encourage Americans to own homes communally, jointly or cooperatively.
Finally, legislators need to create housing policies that help Americans save for a security deposit for a rental home, just as state and federal programs provide down payment assistance to help renters buy homes.
In declaring national housing policies more than 50 years ago, Congress stated “that the general welfare and security of the Nation and the health and living standards of its people require … the realization as soon as feasible of the goal of a decent home and a suitable living environment for every American family.”
We have not achieved those goals. And if US housing policies continue to ignore why middle-class Americans cannot and will not buy homes, we will never achieve them.