It’s way too late, but I have insomnia. Plus, Brad Inman of Inman News published a rare Op/Ed about Bernie Sanders’s housing plan with what seems like approval:
I don’t agree with all of it, but Bernie Sanders was not afraid to put it forward. Cheers to that. Moreover, it is not a plan guided by self-interests — though I figure the unions will play a heavy hand if Sanders were elected president.
So, what is the Sanders plan? He has a 15-point scheme; here are a couple of highlights.
- He promises to increase funding for the housing trust fund to at least $5 billion a year in order to construct and rehabilitate at least 3.5 million affordable housing rental units.
- Demand more from developers. Housing that is built with government subsidies should remain affordable longer than the 10 years typically required by federal housing programs. “In my view, once we subsidize rental housing, we shouldn’t have to pay again and again simply to preserve it,” said Sanders.
- Protect Homeowner Mortgage Interest Benefits. Sanders supports tax policies that promote homeownership. However, he wants to close the second home and yacht deduction, “and expand homeowner mortgage interest benefits to the 19 million homeowners who do not itemize their deductions.”
I posted a brief comment on the story on Inman, but then thought, I can’t sleep anyhow… why not go full Notorious on this? I’m not actually that interested in Sanders’s plan, because it’s very general, easy to pick apart if one were so inclined, and so on and so forth. (My guy Cruz hasn’t even proposed a housing plan, except to say that he would eliminate HUD, so there’s not even anything to pick on over there….)
Instead, let’s focus on one key issue, which I consider to be the fundamental issue, and then craft an actual affordable housing solution.
So here we go.
The Key Question
Again, try to ignore the details, like $5B for housing trust fund. Forget about all the stuff about taxes and government interference and so on and so forth. All of that is detail, and not relevant to a broad articulation of policy and principles.
The key question, to me, is this:
Will affordable housing rent be higher or lower than the mortgage payment on a comparable property?
I originally went with “median home price” but realized that we’re talking about low income families here. So maybe we’re looking at more like the bottom 20%. So I’m gonna go with “comparable” property, whatever that means in a particular area.
That is to say, suppose we’re talking about a 800 sq.ft. 2BR/2BA apartment with modern amenities, appliances, and the like. (After all, all affordable housing plans have in them encouraging construction of new units.) But as low-income housing, it’s in a relatively less desirable part of town, and it’s basic, rather than upgraded. Nonetheless, we’re talking about a safe, well-constructed, non-infested place suitable for families, not a crack den.
Say that unit would sell for $150K if it were a condo on the open market. A rough calculation for a 30-yr fixed mortgage using 3% down (the latest in BofA low-down mortgage programs) with 4.5% APR gets us to $1,073 ($737 P/I, $119 PMI, $67 Insurance, and $150 Tax). Who knows what the market rent of that same unit would be, but one assumes it would be significantly more than $1,073 just to account for vacancy risk and property management costs and so on.
So that unit, if it were part of an affordable housing rental program (however such a program is done) would rent for more than $1,073 or less than $1,073?
Why This Is the Key Question
The reason I think this is so important is that every politician who has ever run for office since FDR has praised homeownership. Bernie Sanders, in his affordable housing plan, says “Owning a home remains one of the best ways for families to build wealth and enter the middle class.” NAR would certainly agree.
Let us, for the sake of discussion, agree that homeownership is the best path out of poverty and cycles of low income families. Even if you pay interest, you put away a little bit of equity with each monthly payment, and after 10-15 years, suddenly you have an asset!
So the key question is the key question because of homeownership.
Affordable Rent Is Lower Than Mortgage
If “affordable rent” is lower than $1,073 (enough to make a difference), then that discourages homeownership. What is enough to make a difference? I don’t know, but by definition, it has to make a difference in the family’s life. $10 or $20 a month ain’t gonna cut it, right? Would $200 a month cut it? Maybe — that’s possibly a couple of weeks of groceries. $400 would make a substantial difference, one would imagine. So come up with a number for “affordable rent” in your mind. In my mind, that amount is 25% — $750/mo for that 2BR/2BA apartment. (Again, we’re not talking about market rents here, which we agree would be more than the mortgage payment, but about somehow-subsidized-or-controlled affordable rent.)
If my housing cost is $750/mo, and since it’s affordable, it has to be controlled and not part of the market rent. It’s not going to go up after two years to $1,500/mo. It’ll stay around $750 a month. Doesn’t that below-market rent provide a major incentive to me not to ever buy a house?
In this context, note that in 2010, a couple of activist types crunched census numbers and found out that there are millionaires living in NYC rent-stabilized apartments. And not just a few. We’re talking about 2,300 people making $500,000 per year or more living in rent controlled, affordable housing units:
Citizens Budget Committee and DNAinfo crunched the census numbers and found that in 2010,22,642 of the city’s 970,000 rent-stabilized apartments (approximately 2.3 percent) were occupied by households making more than $199,000. Of those, 2,300 apartments were occupied by people making more than $500,000, including a former Philip Morris executive, a polo-playing multimillionaire whose father is one of the country’s biggest McDonald’s franchisees, and other such cartoonishly rich people.
Ignore for the moment that these folks are completely taking advantage of a law/regulation that was not intended for them, and likely taking affordable housing stock away from low-income families who need it. Instead let’s focus on incentives. Are those people not buying a comparable place in NYC because they can’t afford it? Of course not; they have a strong incentive NOT to purchase when their monthly housing costs are so far below what the mortgage would be.
So any affordable housing program that puts the monthly cost of housing below what a mortgage would be is discouraging homeownership, the “best way to build wealth and enter the middle class.” Does that make sense to you?
Affordable Rent Is Higher Than the Mortgage
On the flipside, if “affordable rent” is actually higher than what the mortgage (expensive one, due to low down payment, probably low credit score, etc.) payment would be… then that makes precious little sense in a different way.
Homeownership is the best way to build wealth, as we’ve said, but we’re going to penalize the low-income families with higher monthly housing costs than those already well-off enough to own a home? That’s our affordable housing plan? A family that would qualify for affordable rents presumably has below-average income, no? (Again, NYC didn’t intend for Philip Morris executives to ride the rent control gravy train.) So we’re going to take even more of their income compared to someone who owns that exact same unit so they have an even harder time saving up for a down payment?
Sure, such an “affordable rent” might still be far less than market rent — maybe $1,200/mo instead of $1,500/mo or more. But it’s still higher than the comparable mortgage payment, which penalizes those who can least afford to be penalized.
And we wonder why the wealth gap in the country continues to grow.
The Notorious Affordable Housing Plan
So, here’s my housing plan. If I’m elected President, which is slightly more likely than my being named the next CEO of NAR, here is what I would do: subsidize homeownership, not rentals.
The two barriers to homeownership are down payment and qualifying for a mortgage. OK, let’s just get rid of those two barriers.
If you qualify for low-income housing, you will pick a house/condo on your own. It must be in the bottom 20% in terms of price in your area. Uncle Sam will give you the down payment assistance as follows:
- The first $5,500 is a grant. I picked that amount because that’s what the Federal Pell Grant amount is. (It’s actually $5,775 for 2015/16, but let’s make the math easier on ourselves). If college education is important enough for the government to just subsidize straight up, then so is homeownership.
- The remainder may be borrowed, up to a maximum of 80% of the down payment required, directly from the Federal government at the Fed Funds rate (currently 0.5%). So the family has to shell out at least 20% of the down payment amount; if we’re talking about 5% down, it gets affordable real quick. That $150K apartment above? 5% down is $7,500. $5,500 is the Homeownership Grant. That leaves $2,000 — come up with $400, and borrow $1,600 from the Down Payment Assistance Program.
- This is a once-in-a-lifetime program. You only get the assistance once. After that, we expect that you will have some equity in your home when you sell it to make a normal market down payment on your move-up purchase.
That takes care of down payment. What about the mortgage?
That’s easy: Uncle Sam will guarantee your mortgage. We do it with FHA loans and VA loans and other loans. Just expand the program and simplify it. If you default, the Federal government pays the lender. Lender has zero risk. In exchange, the interest rate will be fixed at prime minus 100 bp (today, that would be 3.5% – 1% or 2.5%). Not too bad for what is pretty much a risk-free loan, no? But not so great that banks wouldn’t want to make market-rate mortgages to folks not in the low-income program, with the attendant higher risks.
If you default, the U.S. will take what you owe out of your various checks from the government. Whether that’s Social Security payments, tax refunds, whatever — they get reduced slightly to repay the mortgage. If you have a job, your wages will be garnished to repay the loan.
There. That’s my affordable housing program. No Section 8, no subsidies to builders, and a minimum of bureaucracy. The application process can be automated, since there is no credit check, no DTI checks, nothing — the whole thing is guaranteed by the United States. Just verify your income (or lack thereof) and off we go. No renters, but only homeowners on their way to building wealth, pride of ownership, and joining the middle class.
What would be the cost? I don’t know. I didn’t crunch the numbers, nor do I really have the desire to do so. But HUD’s 2017 budget asks for $48.9 billion, so that’s a starting point.
But… What About Those Who Do Default?
The wrinkle is what to do about those people who enter this low-income housing program, and then default anyhow.
Well, this is where the wind turns cold. As I see it, defaulters have three choices.
- Open Market: You are now at the mercy of the open market in rentals, since you blew your chance at homeownership and affordable housing.
- Private charity: Since there will be zero other affordable housing programs, there may be private charities that pop up to help those who defaulted on their Fed Homeownership Program. I urge Bill Gates and Zuckerberg and the like to think about spending some of their billions on that.
- Government Housing: As a last resort, you can go live in government housing for free. These will not be, however, family residences or private apartments. No, they will be barracks, with a mess hall, and a PX: exactly as if you were a soldier. If it’s good enough for our men and women in the military, then it’s damn sure good enough for Mr. Defaulted-On-My-Low-Income-Mortgage-Program guy. If you have a job, best start saving up while you have free housing and free food. If you don’t have a job, you will be given one at the prevailing minimum wage. It might be cleaning highways; it might be menial clerical work; it might be whatever we need done as a nation at that time. If that sounds uncomfortably like some sort of a labor camp, well, so be it. You are free to leave anytime, of course, since you are not a criminal. But that’s government housing going forward. It’s not a good option, but you won’t be homeless.
So, what do you say? Do I have your vote?
The Point Is…
Obviously, I don’t expect this to go anywhere past these pages. But it’s worth thinking about “affordable housing” holistically. The continued assumption that affordable housing must mean rentals goes against all of our praise of homeownership as a real positive. Why subsidize and spend billions of dollars on a second-best option? Why not spend it on subsidizing the best option, which is homeownership?
There may still be renters in this fantasy world. There are valid reasons to rent, such as mobility, not wanting to deal with the headaches of homeownership, not wanting to take on a 30-year debt, etc. But let those people do what they want in the open market. If the government — and by extension all of us taxpayers — are going to subsidize anything, it should be homeownership, not Renter Nation.