- Lottery Allocations and Games for Public Rental Apartments, by Zhan Wang, Jinpeng Ma, & Hongwei Zhang, March 1, 2015.
- Wages, Housing Prices and Commutes, by Tom Mayock, Real Estate Economics, Forthcoming.
- Financial Literacy, Broker-Borrower Interaction, and Mortgage Default, by James Neil Conklin, Real Estate Economics, Forthcoming.
- Is Timing Everything? Race, Homeownership, and Net Worth in the Tumultuous 2000s, by Sandra J. Newman, Real Estate Economics, Forthcoming.
- Option Market-Based Predictors of REIT Leverage Changes, by Paul Borochin, John L. Glascock, Ran Lu-Andrews, & Jie Yang, Georgetown McDonough School of Business Research Paper No. 2577414.
- Rent-to-Own Housing Contracts Under Financial Constraints, by Sanjiv Jaggia & Pratish Patel, March 10, 2015.
Tag Archives: homeownership
Tax Expenditure Wars: Wealthy Households v. Poor
Henry Rose has posted How Federal Tax Expenditures That Support Housing Contribute to Economic Inequality to SSRN. This short article examines “how federal income tax laws benefit more affluent owner households but provide no benefits to economically-strapped renter households.” (1) Housing policy analysts (myself included) constantly bemoan the regressive nature of federal tax policy as it relates to housing, but it is always worth looking at the topic with updated numbers. And this article contains some tables with some interesting numbers.
One table provides an overview of the estimated tax savings (in billions) in FY 2014 for five federal tax expenditures for owners of housing that they occupy:
Mortgage Interest Deduction (MID) $66.91
Property Tax Deduction (PTD) $31.59
Capital Gains Exclusion on Sales $35.54
Net Imputed Rental Income Exclusion $75.24
Discharge of Mortgage Indebtedness Exclusion $3.1
Total $212.38
The next table provides an estimated distribution of two of these tax expenditures (FY 2014, savings in millions):
Tax-Filer AGI PTD Tax Savings MID Tax Savings
Below $50,000 $693 $1,443
$50,000-75,000 $2,190 $4,330
$75,000-100,000 $3,478 $6,581
$100,000-200,000 $13,648 $27,421
$200,000+ $11,798 $29,340
Total $31,806 $69,115
The article concludes by noting that despite
the great disparity in economic positions between owners and renters, federal tax expenditures lavish tax savings on primarily affluent owners and provide none for renters. The federal tax expenditures for owners are so generous that interest can be deducted on mortgage balances up to $1,000,000 and can also be taken on second homes, even yachts, as well as primary residences. It is difficult to conceive of a federal public policy that more directly promotes economic inequality than the federal tax expenditures that support owners of housing but are not available to renters. (9-10, footnote omitted)
I don’t expect this disparity to be addressed any time in the near future, given the current political environment, but it is certainly one that should stay at the top of any list of reforms for those concerned with promoting equitable federal housing policies.
Housing and Vacancies in NYC
New York City’s Department of Housing Preservation and Development (HPD) has released its initial findings of its 2014 Housing and Vacancy Survey. There are some interesting findings about the housing stock, particularly for those of us who follow the NYC housing markets closely:
- There were 1,030,000 rent-stabilized units, which amounted to 47 percent of the housing stock.
- There were 27,000 rent controlled units, which amounted to 1.2 percent of the housing stock.
- The city-wide homeownership rate was 32.5 percent, although the rate varied significantly among the boroughs.
- The rental vacancy rate was 3.45 percent.
- There were 55,000 vacant units that were unavailable because of occasional, seasonal or recreational use.
- The median annual income for all households (renters and owners) was $48,040. The median annual income for renter households was $38,500 and for homeowner households was $75,000.
- The median contract rent-income ratio was 31.2 percent.
There were also some interesting findings about housing and neighborhood conditions:
- “In 2014, housing and neighborhood conditions in the CIty were good.” (8)
- “The proportion of renter-occupied units with five or more of the seven maintenance deficiencies measured by the 2014 HVS remain extremely low; only 4.3 percent” (8)
- “The proportion of renter households that rated the quality of neighborhood residential structures as “good” or “excellent” was very high: 71.7 percent” (8)
Crowding remains a problem in the City, a finding that is unsurprising to all who are familiar with this housing market. The proportion of renter households that were crowded was 12.2 percent.
These numbers should inform numerous debates about housing in NYC, including those relating to rent regulation, foreign ownership of apartments and affordable housing goals, to name a few. It is important that these debates be data driven if we are to arrive at policy choices that are good for New Yorkers and good for the long term health of NYC itself. The whole document is worth a read for those who care about the City’s housing market and its impact on the overall health of the City.
Salary Needed for a House in 27 Cities
HSH.com has posted a study to answer the question — How much salary do you need to earn in order to afford the principal, interest, taxes and insurance payments on a median-priced home in your metro area? The study opens,
HSH.com took the National Association of Realtors’ fourth-quarter data for median-home prices and HSH.com’s fourth-quarter average interest rate for 30-year, fixed-rate mortgages to determine how much of your salary it would take to afford the base cost of owning a home — the principal, interest, taxes and insurance — in 27 metro areas.
We used standard 28 percent “front-end” debt ratios and a 20 percent down payment subtracted from the NAR’s median-home-price data to arrive at our figures. We’ve incorporated available information on property taxes and homeowner’s insurance costs to more accurately reflect the income needed in a given market. Read more about the methodology and inputs on the final slide of this slideshow.
The theme during the fourth quarter was increased affordability.
Home prices declined from the third to the fourth quarter in all of the metro areas on our list but one. But on a year-over-year basis, home prices have continued to trend upward.
“Home prices in metro areas throughout the country continue to show solid price growth, up 25 percent over the past three years on average,” said Lawrence Yun, NAR chief economist.
Along with affordable home prices, mortgage rates fell across the board which caused the required salaries for our metro areas to decline (again, except for one).
“Low interest rates helped preserve affordability last quarter, but it’ll take stronger income gains and more housing supply to help meet the pent-up demand for buying,” said Yun.
On a national scale, with 20 percent down, a buyer would need to earn a salary of $48,603.82 to afford the median-priced home. However, it’s possible to buy a home with less than a 20 percent down payment. Of course, the larger loan amount when financing 90 percent of the property price, plus the need for Private Mortgage Insurance (PMI), raises the income needed considerably. In the national example above, a purchase of a median-priced home with only 10 percent down (and including the cost of PMI) increases the income needed to $56,140.44 – just over $7,500 more.
This sounds like a pretty reasonable methodology, but there are a lot of assumptions built into the ultimate conclusions. They are generally conservative assumptions — buyers will get a 30 year fixed rate mortgage instead of an ARM, buyers will have 28% debt ratios. I would have liked to see some accounting for location affordability, because transportation costs can vary quite a bit among metro areas, but you can’t have everything.
As always, I am particularly interested in NYC, the 24th most expensive of the 27 cities. NYC requires an income of $87,535.60 to buy a median home for $390,000. By way of of contrast, the cheapest metro is Pittsburgh, which requires an income of $31,716.32 to buy a median home for $135,000 and the most expensive was San Francisco, which requires an income of $142,448.33 to buy a median home for $742,900.
Reiss on Buying a Home
Mainstreet.com quoted me in Potential Homeowners Should Seek Counseling Before Making First Purchase. It reads, in part,
Many consumers have made buying their first home less of a daunting task by seeking housing counseling from a non-profit organization.
In 2014, more than 73,000 people received housing counseling from the National Foundation for Credit Counseling’s member agencies, making it the highest volume experienced during the past five years. The renewed interest in housing counseling could be an indicator that many people are considering home ownership as an affordable option.
* * *
Homeowners should look at a range of mortgages before committing to one since the typical American homeowner moves every seven years, said David Reiss, professor of law at the Brooklyn Law School in N.Y. For example, obtaining a “relatively expensive 30-year fixed rate mortgage may not make sense,” he said, if you can save a lot in monthly payments with an adjustable rate mortgage (ARM).
ARMs have a certain period of time where the interest rate remains the same, such as 84 months for a 7/1 ARM or 120 months for a 10/1 ARM and then it adjusts each year for the remainder of the mortgage.
“This might be particularly true for very young households or for empty nesters, both of whom may have different needs in five or ten years,” Reiss said. “It is hard to predict where interest rates and prices are going, so holding off on buying when it seems like the right time to do so for your personal situation is risky.”
Here Comes The Housing Trust Fund
HUD has published an interim rule in the Federal Register to governing the Housing Trust Fund (HTF). The HTF could generate about a half a billion dollars a year for affordable housing initiatives, so this is a big deal. The purpose “of the HTF is to provide grants to State governments to increase and preserve the supply of rental housing for extremely low- and very low-income families, including homeless families, and to increase homeownership for extremely low- and very low-income families.” (80 F.R. 5200) HUD intends to “open this interim rule for public comment to solicit comments once funding is available and the grantees gain experience administering the HTF program.” (80 F.R. 5200)
The HTF’s main focus is rental housing, which often gets short shrift in federal housing policy
States and State-designated entities are eligible grantees for HTF. Annual formula grants will be made, of which at least 80 percent must be used for rental housing; up to 10 percent for homeownership; and up to 10 percent for the grantee’s reasonable administrative and planning costs. HTF funds may be used for the production or preservation of affordable housing through the acquisition, new construction, reconstruction, and/or rehabilitation of nonluxury housing with suitable amenities. (80 F.R. 5200)
Many aspects of federal housing policy are effectively redistributions of income to upper income households. The largest of these redistributions is the mortgage interest deduction. Households earning over $100,000 per year receive more than three quarters of the benefits of that deduction while those earning less than $50,000 receive close to none of them.
So, the HTF is a double win for a rational federal housing policy because it focuses on (i) rental housing for (ii) extremely low- and very low-income households.
While not wanting to be a downer about such a victory for affordable housing, I will note that Glaeser and Gyourko have demonstrated how local land use policies can run counter to federal affordable housing policy. Might be worth it for federal housing policy makers to pay more attention to that dynamic . . ..
Reiss on Housing Unaffordability
TheStreet.com quoted me in Homeownership Unaffordable For Most Americans in Major Cities. It reads in part,
Homeownership remains unaffordable for most Americans who are living in major cities.
A median-income household can only afford a median-priced home in 10 of the 25 largest U.S. metropolitan areas, which is actually an improvement from 2013, according to a report by Interest.com, the Chicago-based consumer financial information website.
The most affordable metro areas area Atlanta, Minneapolis and St. Louis while San Francisco is the least affordable since the median income in the city is 46% less than what is required to buy a median-priced home in the area. Median-income households in San Diego, New York and Los Angeles don’t fare much better.
* * *
Many potential homeowners should evaluate what kind of mortgage they really need, said David Reiss, a law professor at Brooklyn Law School. Since most homeowners only stay in their house for an average of seven years, getting a traditional 30-year mortgage may not be the solution and an adjustable rate mortgage which resets after a period of years could be more affordable.
“This advice holds particularly true for families that are thinking about having more kids, since they may move sooner than they think if they come to realize that they want more space,” he said.
