The next president and Congress have a rare opportunity to remake the way Americans build, buy and sell houses. The current economic downturn is linked in large part to the boom, bubble and bust cycle of the housing sector. The government can and must take a strong hand in making new rules for this critical part of the economy, even if it means setting aside traditional beliefs about the role of the free market. After all, many whose faith lies in free market capitalism have accepted the heresy of the $700 billion bank bailout.
As a guide, federal housing regulatory policies should reflect two worthy goals: encouraging home ownership and discouraging speculation.
The first easy fix is to ensure stricter controls on lending practices as they relate to the income of those borrowing. Under current law, lenders must show borrowers what they could pay in an adjustable rate mortgage. A further step would be for lenders to show borrowers what percentage of their income would go toward the mortgage payment if the interest rate increased by 1 percent, 1.5 percent and 2 percent. A rule of thumb accepted among financial advisers is that a household should spend about 35 percent of aftertax income on housing. Lenders could be made to show potential borrowers that if their mortgage interest rate goes to, say, 7 percent, they would be paying 50 percent of their income.
Another fix would be to require lenders to more fully explain equity lines. Too many homeowners use what were once called second mortgages to pay for vacations, new vehicles, jewelry and other luxuries. A new law could mandate that equity loans are closed every five years, or that they can only be based on 90 percent of market value.
To discourage those who buy houses to merely sell or “flip” for a profit months later, amending the tax code could diminish such activity. While houses are typically safe investments, a tax policy that rewards ownership of two years or longer would mean the investor has to pay for insurance and property taxes on the real estate and must keep up with lighting and heating bills. That level of spending would nudge an owner toward renting the building rather than keeping it vacant until it can be “flipped.”
People become more productive and less reliant on society if they own their own homes. They take pride in their property and work to improve it, become good neighbors and get involved in their communities, and are more likely to stay employed at the same business. We all benefit from more people for whom a house is a home.
While government in the past has worked to lower the bar for home ownership, it must also work to ensure banks help consumers succeed in making those monthly payments. The government has a unique opportunity, given the current economic crisis, to effect such changes.