How to fix the American housing system

[Tranplanner]

Ok, maybe the Canadian system would be better, but the question (politically) is did the Canadians ever have a system similar to ours?

No, I don't think we ever did. It's always been private lending AFAIK. We do have the Canadian Mortgage and Housing Corporation (CMHC) which, AFAIK, just offers mortgage insurance in terms of involvement on the financial side of the housing market.

With respect to the originally quoted minimum of 20% down for purchasing a home in Canada, that's wrong. It is generally 10%, although it was lowered for a time to 5% (I believe the 10% min. has been reinstated now). The 20% rule involves mortgage insurance. If you have less than 20% down, you MUST have mortgage insurance (through CMHC). This adds a bit, but not much, to carrying costs. We also had a program which allowed you to borrow tax-free against your RRSPs to purchase (first home only). The money must be repaid over a 10-year period. As someone stated, mortgage payments are not tax deductible in Canada.

I would assume that there are lots of pitfalls to home ownership in Canada as well.

Possibly...Canadian banks are much more conservative and products such as sub-prime mortgages were not available here. I would say it is probably harder to buy a house in Canada and, at least in our major cities, we have a greater history of renting.

The Canadian system would have you renting your tankless water heater from the utility.

That might have been true 30 years ago but not anymore. In fact, if you wanted a tankless water heater you would probably have to buy it as I'm not sure utility companies rent them (yet). I would wager that most people do rent their tanks though (I do). It's easier, and if anything happens it's the utilities cost to replace it. I think it's $15/mo. to rent it. The cost of replacing it with a new "owned" tank would probably take me 10 years to break even.

[Cismontane]

Canadian Mortgage and Housing Corporation

Thanks for that perspective. It's useful to note that CMHC (and it's private-sector competitor, GE Capital) together provide guarantees (to the under 20% mortgages) for less than 45% of theCanadian mortgage portfolio, as opposed to 90 to 95% of US mortgages backed by the Three F's. Also, only 25% of the Canadian mortgage portfolio is securitized. Thus, however incentives ad disincentives are designed, most consumers buy homes with much more down than the minimum.

I think CMHC may do more than the Three F's-triumvirate to steer development toward things that comport with national land-use policies/targets.

There are many other differences, described in this article:

http://www.americanprogress.org/issu...rue_north.html

[mike gurnee]

Thanks for that perspective. It's useful to note that CMHC (and it's private-sector competitor, GE Capital) together provide guarantees (to the under 20% mortgages) for less than 45% of theCanadian mortgage portfolio, as opposed to 90 to 95% of US mortgages backed by the Three F's. Also, only 25% of the Canadian mortgage portfolio is securitized. Thus, however incentives ad disincentives are designed, most consumers buy homes with much more down than the minimum.

I think CMHC may do more than the Three F's-triumvirate to steer development toward things that comport with national land-use policies/targets.

There are many other differences, described in this article:

http://www.americanprogress.org/issu...rue_north.html

Get a life, please.

[Pragmatic Idealist]

my point is a different one. 20% of what? 5% of $400,000 is the same as 20% of $100,000. My point is, maybe that house shoudn't be $400,000, it should be $100,000. Or better yet, developers should be building, for that particular consumer, $100,000 product instead of $400,000 product and that consumer just has to live with a small apartment as opposed to an 8000 square feet mcmansion.

Ordinarily, I'd agree with Stroskey. The system should fix itself. But at this moment in time, we have valuations wildly out of wack, products not suited to the people who should be buying them and virtually ZERO private sector financing available - as in FHA/Freddie and Fannie is fully 90% of all dollars financed in mortgages issued since the beginning of 2006. For clarity, this means that there is effectively no functioning private sector housing finance system in the US right now.

This is a planning question - because it suggests the possibility that the wrong mechanisms are being subsidized by the Federal government, under its rules, to provide the wrong product. Goldstein's numbers (now being bandied about by the WH) appear to suggest at least the possibility that there is no financially viable single family product being built in the US, period full stop... as least no product being paid for with mortgages. Basically, these numbers are a Smartgrowther's wet dream - it means Federal debt issuance is the only thing that still enables mcmansions and other suburban single family units to get built. If this is true, the possibility exists, and we stop making these subsidies available, every city in the land may as well rezone, say 80% of all that unbuilt1 to 8 to an acre area into parkland, and 20% into multi-unit TODs.. 'cause the single family stuff is basically now just a welfare entitlement for the rich.

My fear is that you can't really expect something that's failed so utterly as to be non-existent to fix itself.. not without a double dip recession and more economic pain than 1933. Right now, the government owns the entire US housing sector not financed with owner cash, in terms of both new-build and secondary market product. All this pickup in housing starts and new mortgage applications the media has been trumpeting over the last 2 or 3 months appears to be fully financed by Uncle Sam.. your Federal stimulus debt at work.

If we unravel the situation by only building T.O.D. in the future, can we do so in such a way that the new attached residential products do not merely absorb demand for housing among lower-income people but that a greater mix of incomes is created in these transit villages by devaluing those single-family homes that are not connected to transit? Essentially, that prospect is the point of the thread I entitled, "High-end & high-density residential."

Smartgrowthers don't get their wet dream unless a mix of incomes is created. And, T.O.D. is unlikely to be welcomed by established communities unless the high-end condos. and apartments provide balance.

[Cismontane]

If we unravel the situation by only building T.O.D. in the future, can we do so in such a way that the new attached residential products do not merely absorb demand for housing among lower-income people but that a greater mix of incomes is created in these transit villages by devaluing those single-family homes that are not connected to transit? Essentially, that prospect is the point of the thread I entitled, "High-end & high-density residential."

I think those are excellent questions. I suspect it'll be answered in steps. The first step is that planners and policymakers need to make a determination of how much forecasted growth "planned" for single family homes simply won't happen (i.e., is unfinanceable). This will give some idea of the scale of the problem to be solved. The next step will require careful consideration of the amount of real cost of Federal subsidies - in the form of future fannie, freddie, FHA, etc, bonded indebtedness - associated with all that now unfinanceable planned development. Some of these "savings" could get redeployed toward rental development subsidies of various types and new programs will to be redesigned.

I made a quick list of things I would love the Feds to do in terms of Federal policymeasures. I don't know whether TODs and Smartgrowth is the right answer or the only measure, but there are things that can be done nonetheless:

1. Gradually raise agency mortgage guarantee premia until total mortgage costs are the same for both Federally subsidized and unsubsidized money. This should enable some real price discovery to occur in overvalued markets.
2. Once mortgage costs to consumers reach parity, either eliminate the guarantee agencies or restructure them after the Canadian model.
3. Impose a Federal transaction tax on single family home purchases (assuming that such a tax would be considered constitutional, which I'm not sure it would be) but waive it for any household who agrees to buy a home out of foreclosure. If allowable, this will dampen speculative pressure once the recovery starts in earnest as well as steer development activity away from the Greenfield sprawlvilles that spawned the crisis.
4. Consider a provision to waive the transaction tax for those who can certify that they are moving for employment-related reasons or moving closer to their place of primary employment, as we would not want to impede job growth by limiting residential mobility.
5. Require any state receiving FHWA, DOT, HUD or EPA funds of any sort whatsoever to charge concurrency (or impact) fees for (suburban/exurban, somehow qualified) greenfield development equal to the sum of all fairly valued concurrency costs associated with that development (developers absorb 100% of all incremental costs required to achieve full concurrency including the associated cost of financing). TIFable concurrency costs may be allowed as a carve-out against the fees up to a certain cap. This should effectively end leapfrogging and excessive sprawl – nobody will be able to build anything without paying the full cost of the fiscal impact of whatever it is they want to build.
6. Eliminate the mortgage interest deduction on all residential mortgages except for those in (primarily infill) priority neighborhood stabilization areas (such areas to be periodically reevaluated and where rigid downpayment or downpayment grant conditions are met). This will remove much of the policy bias toward unaffordable homeownership.
7. Develop bank regulatory measures to push banks toward mandating a minimum 20% downpayment for all residential home purchases, although allow tax credit and grant programs to buy down that downpayment for low income households and in some targeted areas (particularly those that are infillable or inner city/NSPs). This should help ensure that people who buy homes can really afford to buy them, and that they have left another cushion between the amounts they are proposing to borrow and their reasonable debt capacity.
8. Use the now unused agency para-sovereign debt capacity to pay for more affordable housing tax credits for construction of rental units, to help facilitate development of adequate rental stock... basically, new HUD programs.
9. Allow for full deductability of rental insurance premia, renters brokers fees, etc., to make rental housing more affordable.

I'm sure that some of these are probably nonsensical, but wanted to make a list nonetheless... Basically, use Federal policy levers to make rentals easier to develop amd affordable, make sprawl more expensive (or rather more realistically priced relative to their real cost), remove some of the policy bias toward homeownership, and incentivize responsible borrowing behavior. Oh well.. hopefully the BIA and the Nat'l Association of Realtors don't read this and decide to cast a hex on me or something...

[Linda_D]

I'm sure that some of these are probably nonsensical, but wanted to make a list nonetheless... Basically, use Federal policy levers to make rentals easier to develop amd affordable, make sprawl more expensive (or rather more realistically priced relative to their real cost), remove some of the policy bias toward homeownership, and incentivize responsible borrowing behavior. Oh well.. hopefully the BIA and the Nat'l Association of Realtors don't read this and decide to cast a hex on me or something...

So, basically, your real aim is to use the alleged "need" to "fix the American housing system" to penalize American homeowners and reward landlords in order to effect what you consider the desirable outcome of forcing more people into renting rather than buying their own homes?

Well, you are entitled to your opinion. I don't think the BIA or NAR will have to put a hex on you at all --- tens of millions of American homeowners will beat them to it.

[TerraSapient]

Does it really matter if the federal government is subsidizing the ability of Americans to purchase homes instead of rent? What I mean is, our government already does this for roads, primary education, public safety, etc. I would prefer to see an extension of this into higher education, but that is my personal preference.

So, if the US government is single-handedly responsible for 90% of loans made to American families to purchase a home, and this is the desire of the American people, than perhaps we should substantially reduce the private sectors involvement in the process, thereby reducing the amount of extra costs for homes that are tacked on for private sector profits when loans are made. If this is truly what the American people want, and there is no private sector economy for single family mortgages, wouldn't this be an alternative to examine rather than removing the ability of Americans to purchase a home at all.

Note: That was a completely rhetorical point, only made for perspective.

I think one of the main points in Cismontane's argument that we have been missing so far in this discussion is that the reason most Americans cannot afford 20% down to purchase a home is that the federal government's subsidization of the loan process has resulted in prices skyrocketing. People can "afford" to buy much more expensive properties with this system because it comes with a lot less out-of-pocket expenses, thus sellers (and real estate agents and banks) can tack on extra value to their homes. "What is another $5k over a 30 year mortgage after all? Buyers won't hesitate over that! Add $10k!" A few decades of this has resulted in major price inflation, and thus reduced the ability of the majority of Americans being able to afford the 20% on a home. Banks know this. This is why 90% of money lent isn't coming from their coffers.

[wahday]

I think one of the main points in Cismontane's argument that we have been missing so far in this discussion is that the reason most Americans cannot afford 20% down to purchase a home is that the federal government's subsidization of the loan process has resulted in prices skyrocketing. People can "afford" to buy much more expensive properties with this system because it comes with a lot less out-of-pocket expenses, thus sellers (and real estate agents and banks) can tack on extra value to their homes. "What is another $5k over a 30 year mortgage after all? Buyers won't hesitate over that! Add $10k!" A few decades of this has resulted in major price inflation, and thus reduced the ability of the majority of Americans being able to afford the 20% on a home. Banks know this. This is why 90% of money lent isn't coming from their coffers.

I was thinking about this same issues as I read through this thread. This is a not-too-uncommon scenario that has gotten way out of hand. When the government gets in the business of giving loans like this, they often find themselves in a situation where they are lending to those who the banks will not (and there is often a reason - lack of collateral, assets, good credit or history of credit). In the end, the government tends to take on MORE risk than a private bank would and, as one might expect, also LOSES on those loans quite a bit because of those risks. This is as true for business and commercial loans as it is for housing.

I'm not saying the government shouldn't be in the business of housing loans or certain other loans. I actually think for first time buyers and others (like immigrants, who often possess significant cash savings, but little collateral and poor credit or no credit history at all) its a good thing and can bring those at the fringes into the economy as more complete participants. But we find ourselves in a situation now where we have gone so far down this road that its going to be very hard to back our way out.

Government loans can serve a useful purpose, but when it becomes too large of a player in any one market, I fear it can artificially alter the economic landscape in a way that ultimately screws us in the end.

[JimPlans]

As I read through this thread, I'm reminded of what it is that truly bothers me about home prices today: That we aren't talking about the price of a home at all. In most cases, we're talking about the price of the land.

For example, my wife's childhood home in Bergen County, New Jersey is assessed at $400,000. The structure (i.e.the actual house) is assessed at $150,000. This isn't surprising, as it is a 1,500SF 1 1/2 story cape. It would probably cost about $100/SF to build in its current condition. So far, so good.

However, the 6,000 SF of land that it sits on is assessed at $250,000, or about $40 per SF. Why? Does that land have any value? I can't dig it up and ship it somewhere for that price. I can't really do anything with it except put a house on it. Why is that land worth more than the same size lot that I used to own in a poor New England mill town that was assessed at $25,000, or $4 per SF?

The reason, of course, is location, location, location. Her part of Bergen County is a short ride away from Manhattan, while my old mill town is 100 miles from the closest major employment center. So you're not paying for the house or the land, but the proximity to a workplace.

But you're not even paying for that. Your really paying for the privilege to compete for that same location with a bunch of other people who also want to be there. Worse, those people probably make more money than you working for Goldman-Sachs and can outbid you for that location. Even worse, that causes the County's Computer Aided Mass Appraisal system (CAMA) to automatically raise the appraisal of every other 1,500 SF cape on 6,000 SF of land to the price that the Goldman-Sachs employee bid it up to.

In short, every time I walk down this road in my mind I end up at income disparity junction. A small amount of wealthy people bidding up the cost of certain locations and causing a wave of appraisal increases that drive up home prices for everyone.

The solution? I'm not sure. But during much of the time of middle-class prosperity in this country (1950s and 1960's), the upper income tax bracket was 90 percent. Now it's 35 percent. Coincidence?

[The One]

As I read through this thread, I'm reminded of what it is that truly bothers me about home prices today: That we aren't talking about the price of a home at all. In most cases, we're talking about the price of the land.

For example, my wife's childhood home in Bergen County, New Jersey is assessed at $400,000. The structure (i.e.the actual house) is assessed at $150,000. This isn't surprising, as it is a 1,500SF 1 1/2 story cape. It would probably cost about $100/SF to build in its current condition. So far, so good.

However, the 6,000 SF of land that it sits on is assessed at $250,000, or about $40 per SF. Why? Does that land have any value? I can't dig it up and ship it somewhere for that price. I can't really do anything with it except put a house on it. Why is that land worth more than the same size lot that I used to own in a poor New England mill town that was assessed at $25,000, or $4 per SF?

The reason, of course, is location, location, location. Her part of Bergen County is a short ride away from Manhattan, while my old mill town is 100 miles from the closest major employment center. So you're not paying for the house or the land, but the proximity to a workplace.

But you're not even paying for that. Your really paying for the privilege to compete for that same location with a bunch of other people who also want to be there. Worse, those people probably make more money than you working for Goldman-Sachs and can outbid you for that location. Even worse, that causes the County's Computer Aided Mass Appraisal system (CAMA) to automatically raise the appraisal of every other 1,500 SF cape on 6,000 SF of land to the price that the Goldman-Sachs employee bid it up to.

In short, every time I walk down this road in my mind I end up at income disparity junction. A small amount of wealthy people bidding up the cost of certain locations and causing a wave of appraisal increases that drive up home prices for everyone.

The solution? I'm not sure. But during much of the time of middle-class prosperity in this country (1950s and 1960's), the upper income tax bracket was 90 percent. Now it's 35 percent. Coincidence?

What Jim said aka Robert Reich?

[TerraSapient]

The reason, of course, is location, location, location. Her part of Bergen County is a short ride away from Manhattan, while my old mill town is 100 miles from the closest major employment center. So you're not paying for the house or the land, but the proximity to a workplace.

But you're not even paying for that. Your really paying for the privilege to compete for that same location with a bunch of other people who also want to be there. Worse, those people probably make more money than you working for Goldman-Sachs and can outbid you for that location. Even worse, that causes the County's Computer Aided Mass Appraisal system (CAMA) to automatically raise the appraisal of every other 1,500 SF cape on 6,000 SF of land to the price that the Goldman-Sachs employee bid it up to.

In short, every time I walk down this road in my mind I end up at income disparity junction. A small amount of wealthy people bidding up the cost of certain locations and causing a wave of appraisal increases that drive up home prices for everyone.

This is such an excellent point! The way that property value is estimated is a major contributor to price inflation (and deflation). This is one of the main root causes to why we end up with seas of autonomous housing landscapes, but that discussion probably belongs in a different thread.

Not too long ago I worked at a county auditor's office. The way the county estimates values for property taxes is the same system. Finding a new way to appraise property is certainly a must for correcting the housing price dilemma in the US.

[ColoGI]

In short, every time I walk down this road in my mind I end up at income disparity junction. A small amount of wealthy people bidding up the cost of certain locations and causing a wave of appraisal increases that drive up home prices for everyone.

The solution? I'm not sure. But during much of the time of middle-class prosperity in this country (1950s and 1960's), the upper income tax bracket was 90 percent. Now it's 35 percent. Coincidence?

Charlie Rose last night (10/25/10) devoted his show to this question.

The issue is really that the middle class has not had any real wage increase since ~1979 (I'm sure I've bleated on about this condition before here, so I'll stop). In addition, our wages inflated such that we are no longer competitive in the world economy, so we shuffle paper around to pretend like we make something. Our education system hasn't kept up, and we haven't invested in something real (trinkets from China that take up space in our large house/storage unit/garage isn't real investment). Pile all that on top of tax breaks to make the rich richer, and misguided housing policies coupled with bank deregulation, and you've got the condition we discuss today.

No easy solution, as this waning of empire started just after WWII. Won't get fixed in a 1/2 term of a Presidency.

[stroskey]

I've said it before and I'll say it again - make all property taxes based on the size of the lot and nothing else. It will aid in the reduction of sprawl, will help even out true costs (does a $200K house really cost more to protect than a $150K house [no]).

My sister moved from her .08 acre lot and a $210K house in the city at $6K in taxes per year to a suburb 26 miles away and has a $600,000 house on 1.2 acres and pays about $4K in taxes. Of course people will continue to flock to where taxes are cheap and unrealistic. Man... hearing that made my dad upset!

[wahday]

The issue is really that the middle class has not had any real wage increase since ~1979 (I'm sure I've bleated on about this condition before here, so I'll stop). In addition, our wages inflated such that we are no longer competitive in the world economy, so we shuffle paper around to pretend like we make something. Our education system hasn't kept up, and we haven't invested in something real (trinkets from China that take up space in our large house/storage unit/garage isn't real investment). Pile all that on top of tax breaks to make the rich richer, and misguided housing policies coupled with bank deregulation, and you've got the condition we discuss today.

No easy solution, as this waning of empire started just after WWII. Won't get fixed in a 1/2 term of a Presidency.

I think this brings up an interesting question:

Are housing prices (or land values as the case may be) artificially high?

Or have stagnant wages not kept pace with housing and other costs?

Or some combo of the two?

When my father purchased his first home (and I have said this before, so excuse the repetition) the rule of thumb was that one should not buy a home that costs more than one year's gross salary. I don't know about the rest of you, but my home is a LOT more than I make in a year.

So, should I be making that much more if salaries had kept pace and not stagnated? Or is the market also unreasonably higher? Regardless, it makes me feel that it was a lot easier to achieve a middle class lifestyle back then than today. Stuff just costs more and people are making (proportionately) less. Or so it seems...

[ursus]

The home I grew up in was purchased when I was born. My dad likes to tell the story of how he laid awake the whole first night thinking "How in the world am I going to come up with $72.00 a month to pay for this?" It was 1971, and he was a teacher. My salary is admittedly much better in terms of straight dollars, but chatting through what money went for and what salaries were for him compared to how it goes for me now I'm convinced we have much less. Electronics and other non-essentials are soooo much cheaper now by comparison, but our housing, energy, food and soft goods are eating us alive in this generation.

[Linda_D]

I'll add a couple of other points about what contributes to housing price inflation.

First, we have to look at inflation itself. The base year for the CPI is 1982. In 1970, the CPI was about 38. In 2010, it's about 217, meaning a house that cost $20,000in 1970 cost about $ 50,000 in 1982 and about $120,000 today -- and that's for a typical 1970 house with 3 BRs, 1 BA, and about 1000-1200 square feet. That's not including modifications that would make this home acceptable to buyers in 2010 like a family room or master bath addition. CPI

Second, increased size and more expensive site prep raises the prices of new homes, and consequently, the prices for older homes as well:

• Homes have gotten a lot bigger and have a lot more expensive "features" in them. I think the average size of new homes is well over 2000 square feet. Luxury master baths are expected. Laundry rooms on the first or second floor replace hookups and a utility tub in the basement. Kitchen islands/peninsulas and pantries seem to be the norm in new kitchens. New homes are now wired for cable/internet/surround sound, etc. Lest we forget, 1970s houses usually had 1 car garages while many new home sport 3+ garages.
• Infrastructure/site prep is more extensive than in 1970. Municipalities now require water lines and sewers and storm drains. Many communities in flood plains require sump pumps and other remediation/preventative measures. Underground electrical service is pretty much the norm in subdivision. In many parts of the country, putting in a septic system in a exurban/rural property costs five figures whereas in 1970, a septic tank and the backhoe to dig ran a rural/suburban homeowner a few hundred dollars.

[Cardinal]

This is really turning into a great discussion. Certainly something needs to be done to address the housing issue, but we seem to have difficulty even in defining what the problem may be, much less what is causing it and how to solve it. Ignoring the first two points, the solution prbably involves a combination of 1) people realigning their expectations of what is good housing; 2) communities realizing that land is a commodity, infrastructure has ongoing costs, and that development has to pay its way initially as well as into the future; and 3) our housing finance and taxation system needs to be redesigned.

We are entering a period in which there will be a radial shift from government being the solution to everyone's problem, to one in which government struggles to afford the most basic services and everything else will go by the wayside. This, of course, assumes that the lacking funds are not made up through taxes, which is an unlikely scenario. The change will certainly impact housing. Hopefully for the better.

[wahday]

I'll add a couple of other points about what contributes to housing price inflation.

First, we have to look at inflation itself. The base year for the CPI is 1982. In 1970, the CPI was about 38. In 2010, it's about 217, meaning a house that cost $20,000in 1970 cost about $ 50,000 in 1982 and about $120,000 today -- and that's for a typical 1970 house with 3 BRs, 1 BA, and about 1000-1200 square feet. That's not including modifications that would make this home acceptable to buyers in 2010 like a family room or master bath addition. CPI

Second, increased size and more expensive site prep raises the prices of new homes, and consequently, the prices for older homes as well:

• Homes have gotten a lot bigger and have a lot more expensive "features" in them. I think the average size of new homes is well over 2000 square feet. Luxury master baths are expected. Laundry rooms on the first or second floor replace hookups and a utility tub in the basement. Kitchen islands/peninsulas and pantries seem to be the norm in new kitchens. New homes are now wired for cable/internet/surround sound, etc. Lest we forget, 1970s houses usually had 1 car garages while many new home sport 3+ garages.
• Infrastructure/site prep is more extensive than in 1970. Municipalities now require water lines and sewers and storm drains. Many communities in flood plains require sump pumps and other remediation/preventative measures. Underground electrical service is pretty much the norm in subdivision. In many parts of the country, putting in a septic system in a exurban/rural property costs five figures whereas in 1970, a septic tank and the backhoe to dig ran a rural/suburban homeowner a few hundred dollars.

These are good points and I recall dealing with a lot of these issues in a real estate development class. Particularly in a case where we were considering the purchase of an existing multi-family unit. We had to make some cost calculations based on the upgrades needed to be on par with other existing units in the market (which we also had to go price and look at, pretending to be potential renters. It was a lot fun).

So, I can see how upgrades and expectations of certain amenities does contribute to price increases. But can it count for all or even most of it?

My parents purchased a home for $35,000 in 1970 and it sold for $450,000 in 1998.

My figures look different from yours for calculating price escalation with CPI (I used Current CPI - Previous CPI/Previous CPI X 100 = percent change which I get as being ~471 percent) but it comes out, if the house were sold today, to be worth $164,868 (4.71 X $35,000). Maybe I have the calculation wrong, but I don't think it could really be in excess of $450k (the value in 1998).

My parents made some upgrades to the home. Renovated a few rooms, upgraded the kitchen, switched from heating oil to natural gas, tied into the sewer line, new roofing material, and upgraded the electrical. Aside form maintenance like painting and maintaining the large yard, that's the bulk of the improvements over an almost 40 year period.

I still find it hard to account for this dramatic increase in value from improvements and price escalation consistent with CPI alone. What else might be going on to drive these values so high?

And I agree with Cardinal - this is a really great discussion! Seems if we want to find a "solution" to housing issues, we need to know exactly what those issues are and the forces driving them. Dang, we got some smart people in here...

[Linda_D]

These are good points and I recall dealing with a lot of these issues in a real estate development class. Particularly in a case where we were considering the purchase of an existing multi-family unit. We had to make some cost calculations based on the upgrades needed to be on par with other existing units in the market (which we also had to go price and look at, pretending to be potential renters. It was a lot fun).

So, I can see how upgrades and expectations of certain amenities does contribute to price increases. But can it count for all or even most of it?

My parents purchased a home for $35,000 in 1970 and it sold for $450,000 in 1998.

My figures look different from yours for calculating price escalation with CPI (I used Current CPI - Previous CPI/Previous CPI X 100 = percent change which I get as being ~471 percent) but it comes out, if the house were sold today, to be worth $164,868 (4.71 X $35,000). Maybe I have the calculation wrong, but I don't think it could really be in excess of $450k (the value in 1998).

My parents made some upgrades to the home. Renovated a few rooms, upgraded the kitchen, switched from heating oil to natural gas, tied into the sewer line, new roofing material, and upgraded the electrical. Aside form maintenance like painting and maintaining the large yard, that's the bulk of the improvements over an almost 40 year period.

I still find it hard to account for this dramatic increase in value from improvements and price escalation consistent with CPI alone. What else might be going on to drive these values so high?

And I agree with Cardinal - this is a really great discussion! Seems if we want to find a "solution" to housing issues, we need to know exactly what those issues are and the forces driving them. Dang, we got some smart people in here...

I don't think it's just one factor. I think that JimPlans' view of the cost of land is a major, major factor, but that works mostly in areas of growing popular metros. In areas of the country, like the Great Lakes area or many parts of "unfashionable South" that are stagnant or losing population, housing prices have appreciated at a much slower price -- and this was before the subprime mortgage crisis and the economic downturn.

While people like "simple" solutions, most problems are much more complicated than people would like them to be, and thus don't lend themselves to simple solutions at all. Housing affordability is one of those complicated issues.

[wahday]

While people like "simple" solutions, most problems are much more complicated than people would like them to be, and thus don't lend themselves to simple solutions at all. Housing affordability is one of those complicated issues.

Well said. There is little that makes me cringe more than when a politician says "Look, its simple..."

If it were simple, we would have solved the problem long ago.

[Cismontane]

I think this brings up an interesting question:

Are housing prices (or land values as the case may be) artificially high?

This is actually the crux of my whole argument and question.. not Linda's assertion that I would like to promote renting over owning. My point is that the structure of ownership subsidies now effectively support inflated property values around the country, and those distortions are likely greatest in high population growth areas with the highest proportion of mortgages under Federal subsidization.

If, in any given market, 90% of new buyers finance with mortgages and effectively 100% of those mortgages are guaranteed, then the guarantee is what sets demand and hence pricing, not any other "real economy" factor (such as cap rates or cashflow-based valuations). Yields fall - 1-2% was quiet common right before the bust in many key markets, because of the magnitude of this distortion. Simply put, the subsidy creates the bubble, as assuredly as low interest rates create bubbles in economies more free than our own.

So I'm not saying that buyers should be required to pay 20% as opposed to 10% down on their $500,000 home (pay in $50,000, borrow $450,000). I'm questioning(a) whether that buyer should buy that particular home at all and (b) should that home really be worth $250,000 (pay in $50,000, borrow $200,000).

if the market can support a $250,000 valuation with a market, not a government, loan, then that's fine. Sprawl away. If the market supports a $350,000 house, all things said and done, and that particular buyer can't afford $70,000 down, then perhaps he needs to buy a condo instead. Or rent. It should not be up the government and the taxpayers to buy this person more house than he can afford, artificially priming the valuation pump at the same time.

To find out, we have to remove the subsidy, and ease the pain with a few a rental incentives to make sure that people don't end up being underhoused as things come back down to earth.

[Cismontane]

I should add that the guarantee program concept was created in 1934 with the following objectives:
- facilitate housing construction (whilst builders were grossly underbuilding or building in the wrong places)
- facilitate job creation by ensuring that potential workforces were housed where potential companies needed them (in a time of limited worker mobility)
- encourage credit market liquidity (at a time when the financial system was effectively non-functional)

Facilitating housing affordability wasn't a goal, neither was valuation pump-priming. It certainly was not intended that these programs become the only game in town.

This logic was all very Depression-era, and I would argue that underlying conditions have changed. We don't have a problem convincing builders to build in areas where there is demand for their product. There are now more credible developers than you can shake a stick at. With a higher wage economy now, we don't have to worry about suburban workforce housing for mass factory workers, as much as we used to (still a problem, but other programs address this kind of thing today), and the workforce in general is now highly mobile. Finally, government programs to facilitate private credit market liquidity are a little irrelevant when the government has effectively squeezed out the entire private credit market, as it has in housing today, due to these programs.

[Gotta Speakup]

Facilitating housing affordability wasn't a goal, neither was valuation pump-priming. It certainly was not intended that these programs become the only game in town.

.

Actually back in the 1930s, these programs were the only game in town. There was virtually no private mortgage market. That didnt revive until well after World War II ended.

[Linda_D]

This is actually the crux of my whole argument and question.. not Linda's assertion that I would like to promote renting over owning. My point is that the structure of ownership subsidies now effectively support inflated property values around the country, and those distortions are likely greatest in high population growth areas with the highest proportion of mortgages under Federal subsidization.

If, in any given market, 90% of new buyers finance with mortgages and effectively 100% of those mortgages are guaranteed, then the guarantee is what sets demand and hence pricing, not any other "real economy" factor (such as cap rates or cashflow-based valuations). Yields fall - 1-2% was quiet common right before the bust in many key markets, because of the magnitude of this distortion. Simply put, the subsidy creates the bubble, as assuredly as low interest rates create bubbles in economies more free than our own.

So I'm not saying that buyers should be required to pay 20% as opposed to 10% down on their $500,000 home (pay in $50,000, borrow $450,000). I'm questioning(a) whether that buyer should buy that particular home at all and (b) should that home really be worth $250,000 (pay in $50,000, borrow $200,000).

if the market can support a $250,000 valuation with a market, not a government, loan, then that's fine. Sprawl away. If the market supports a $350,000 house, all things said and done, and that particular buyer can't afford $70,000 down, then perhaps he needs to buy a condo instead. Or rent. It should not be up the government and the taxpayers to buy this person more house than he can afford, artificially priming the valuation pump at the same time.

To find out, we have to remove the subsidy, and ease the pain with a few a rental incentives to make sure that people don't end up being underhoused as things come back down to earth.

How are you "easing the pain" by subsidizing landlords while making it impossible for people who already own homes to sell them because you've significantly shrunk the market for their homes? Your plan doesn't "fix the American housing system"., but spreads the current malaise existing in the bubble markets to the entire country by deflating house prices.

The housing bubble was created by speculation and lax credit guidelines that jacked up housing prices in "hot markets". It was the classic scenario for a land/housing price run-up and crash that has happened with some regularity in US history going back to the 19th century. It was aided and abetted by the fact that US wages haven't increased as fast as prices (for everything not just houses) in the last 40 years, and especially in the last 20.

[Cismontane]

How are you "easing the pain" by subsidizing landlords while making it impossible for people who already own homes to sell them because you've significantly shrunk the market for their homes? Your plan doesn't "fix the American housing system"., but spreads the current malaise existing in the bubble markets to the entire country by deflating house prices.

True, which is why this adjustment needs to happen in steps. But you do see why 1-2% tax-effected cash flow (rental yields) on housing valuations doesn't work mathematically right, as an asset class? And why that means you have to have some type of rebalancing in rental vs ownership demand? The point is that these subsidies create a policy bias that allows speculators to transform residential real estate from a cashflow game into an asset appreciation game. Correctly functioning, real property has more bond-like characteristics, than, say, gold.. The only other way for restroing this measure of sanity is to outlaw purchases of third and fourth homes as investments, as they are now doing in China. And that would deflate house prices more than anything I've suggested. Any property market that relies primarily on asset appreciatio as opposed to cashlow (rental yields) is, by definition, dysfunctional and unsustainable. That we now think that such a thing can even possibly be the norm is a testament to the cumulative effect of market distortions in housing.

And yes, I think deflating house prices is absolutely necessary, to bring back yields into sustainable territory. The question is, what is the best way to make this happen.