Why Should We Care About Housing?

The Obama administration - fresh on the heels of its financial regulation reform legislative victory - has now set its sights on the housing market. Proposals will be forthcoming in January, probably to include a continued prop up of mortgage-finance. Republicans, who have come up with the mid-term locution of "Pledge to America" to appropriate a populist tone, have meanwhile, called for an end of the "government takeover" of Fannie and Freddie and a "shrinking of their portfolios." The specifics of the proposed legislation are still under discussion but clearly, housing has become a bellwether for both the recession and the recovery in the national discourse. Consider our investment in the housing market: Since the federal government seized Fannie Mae and Freddie Mac, the two mortgage giants and the Federal Housing Administration have more or less been the sole sources of backing for new mortgages and now have $5.4 trillion on their books. The mortgage-interest deduction and the tax-free income from housing alone cost the government at least $200 billion a year (almost half of what we spend on defense). The Fed purchased $1.4 trillion in mortgage-backed securities so that lenders could keep mortgage rates low. The question is whether it's all worth it.

The crucial point made in defense of housing is that housing creates a wealth effect that drives consumers spending, which accounts for 70% of our GDP (a misleading number since personal consumption expenditures include healthcare spending but we'll put that point aside). When the values of their homes rise, the theory goes, people spend and sometimes even cash out their equity to do home improvements or buy big-ticket items like new cars. Conversely, when the values of their homes fall, people tend to spend less and the GDP suffers. Some academics estimate that spending increases three to five cents for every dollar in increased wealth. In the words of former Federal Reserve Chairman Alan Greenspan, one percent of GDP growth is due to the fact that people "feel wealthier."

All of which makes our current crisis seem like, well, a crisis. As a result of the housing bubble, the homeownership rate in the United States is now 66.9 percent, the lowest level since 1999 and down from the all-time high of 69.2 percent reported in the 2nd and 4th quarters of 2004. Data maintained by the Federal Reserve show that the value of residential real estate directly held by households fell to $16.5 trillion in the first quarter of 2010, down from $22.9 trillion in 2006. Concurrently, consumer spending in the United States rose a meager 0.4 percent in July --not a good sign for the nation's economy's overall health.

As a point of comparison, the world's highest home ownership rate is in Singapore -- 88.8 percent. According to Tilak Abeysinghe, Deputy Director of the Singapore Centre for Applied Policy Economics, at the National University of Singapore,

"When house prices go up, the wealth effect on consumption expenditure may operate through various channels. One, people may feel rich and may spend more out of their disposable income on consumption. Two, realized capital gains by selling the property may be channeled into higher consumption. And three, equity loans using the house as collateral may be used to boost consumption expenditures."

Singapore's economy grew by a stunning 18.1 percent in the 1st half of this year, compared with a GDP that shrank approximately six percent in 2009. Consumer spending in Singapore this year has risen by 9.4 points to 65.3 points, according to the inaugural MasterCard Worldwide Index of Consumer Spending Capability (MWICSC).

All of which sounds like an iron-clad case for promoting home ownership, except that these numbers only show contiguity and not causality. It's the kind of lazy inductive reasoning (I'm equally guilty of this) that drives so much of our national debate. Ireland, which boasts a 78 percent homeownership rate, expects an anemic GDP growth of just 0.3 percent for 2010. And we won't mention Greece which has an 85.3 percent homeowner level. And none of the data draws a convincing argument for how home ownership functions as a form of behaviorist therapy, swelling credit lines and confidence and ultimately powering our economy. Couldn't job security and a social safety net be just as much of a boon to consumer spending? Some suggest that the wealth effect of home ownership is actually highly contingent -- households with a younger household head poised for a long career and many raises, are more likely to report a wealth effect; Households that scrimp and save are less likely to report a wealth effect. In our current debate, which household deserves our approbation and which our disapproval? With the national savings rate escalating past 6.4 percent, one wonders whether the wealth effect itself is poised for a decline.

The Obama administration is facing some tough realities as it retools the government's role in residential finance - from guaranteeing all mortgage loans to eliminating federal subsidies that encourage Americans to buy their own homes. The new approach might mean a baseline for equity (bigger down payments) and higher interest rates, as well as more barriers to prevent people from purchasing houses they cannot afford.

But part of the change we need is also perceptual. What's problematic about the wealth effect is the central premise, that making people feel disproportionately wealthier is a good thing. Presently, borrowers with mortgage insurance can put down less than five percent on some loans. When the tax credit was in place, a person could buy a house for $8,000 down (the bluebook value of a 2005 Dodge Caravan). The wealth effect of home ownership, then is comparable to giving someone a blank check on the basis of a handshake. Clearly, it's time for a dose of reality, which does not mean denying the chance of home ownership to any American. Part of creating a more sensible notion may be according home ownership a new conceptual category as more than a piggy bank for young American families -- that private property is an assertion of one's individual rights. John Locke's Labor Theory of Property stated that when a person works, that labor enters into the object. Thus, the object becomes the property of that person. Private property, especially a home, is a crystallization of the hard work of American families, a symbol of our individualism and energy and pride, a source of security rather than a mechanism for excess and indulgence. A home requires care and a sense of obligation to attend to its survival. That means not gambling with it. It should be treated as such by homeowners and the people underwriting them.