A Nation of Renters: Should We Be Worried That Fewer Americans Own Homes?

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Big Wall Street banks and consumer-advocacy groups like the Center for Responsible Lending don’t agree on much. But recently, these strange bedfellows have been brought together by their opposition to new rules governing mortgage-underwriting standards that have already been issued or are set to be issued by the Consumer Financial Protection Bureau (CFPB) in the coming months.

Ever since the Dodd-Frank financial-reform legislation was passed in 2010, these once-and-future foes have been fighting the so-called “qualified mortgage” (finalized in January) and “qualified residential mortgage” (soon to be finalized) rules. Basically, these rules say that if the loans they make don’t fit a certain profile — 20% down and a debt-to-income ratio of no more than 43% — the banks won’t get certain legal protections from borrower lawsuits, and they’ll have to retain at least 5% of the loan on their books.
The logic here is pretty simple: One of the main causes of the 2008 financial crisis was that mortgage originators made loans with little regard for those loans’ quality because they quickly repackaged them and sold them to investors. So if these banks want to keep issuing loans without keeping some of the value on their books, those loans have to meet certain requirements.

(MORE: Will Reform of Fannie and Freddie Kill the 30-Year Mortgage?)

The mortgage industry doesn’t like these rules because it doesn’t want restrictions on its business decisions. Consumer groups, meanwhile, are afraid that the rules will restrict lending to lower-income home buyers. Of course, that’s the whole point of having mortgage standards in the first place: some people aren’t going to be able to get mortgages.

And that’s not necessarily a bad thing. Ever since the financial crisis, the news media have been filled with negative-sounding headlines describing the state of homeownership in America, which has recently fallen to nearly 20-year lows. More recently, we’ve heard tales of first-time buyers’ getting outbid by cash-rich investors looking to take advantage of cheap real estate.

Some may interpret these stories as further evidence of rising income inequality or another example of the middle class’s being shut out of a wealth-building opportunity. This is the argument that the Center for Responsible Lending has taken up in the past. And of course it is perfectly legitimate to be concerned about income inequality and the inability of lower-income Americans to build wealth. But loosening lending standards to allow those only marginally qualified to purchase a home isn’t the best way to do it.

First of all, even though the qualified mortgage rules may set the tone for what it takes to get a mortgage, banks will still be able to lend to those with high debt-to-income ratios or those with less than 20% down. They’ll just have to accept some of the risk of such loans by holding a piece of those mortgages on their own books. And in the long run, mortgage lenders will do what is profitable, even if it means issuing nonqualifying loans that leave them a little more at risk.

(MORE: Selling Your House? Choose Your Words Carefully)

Furthermore, as housing economist Robert Shiller has pointed out time and again, in the long run real estate just isn’t that great an investment. Writes Shiller: “Home prices look remarkably stable when corrected for inflation. Over the 100 years ending in 1990 — before the recent housing boom — real home prices rose only 0.2 percent a year, on average.”

Certainly there are plenty of good reasons to buy a house. Owning a home can be a great way to force yourself to build savings. Those who opt to rent for less than what they would spend in mortgage payments, taxes and maintenance may not have the discipline to funnel the extra cash into a higher-yielding investment. And depending on where real estate prices are in a certain area, buying can turn out to be a savvy investment, especially when you factor in the tax-deductibility of mortgage interest.

That being said, the reason Dodd-Frank included the risk-retention rule is to prevent the next financial crisis. If we just scrap these rules, or weaken them beyond recognition, then we could be inviting the sort of real estate bubble that laid waste to the economy just five years ago. And whom did that crisis hurt the most? You got it — the same low- and middle-income folks we’re talking about now.

Income inequality and low levels of economic mobility are real problems in this country. But responding to those problems with lax regulation may only make those problems worse.

MORE: Financial Independence? Today’s Young People Don’t Expect It Anytime Soon

17 comments
BeeFarms
BeeFarms

removing more & more liquidity and credit from the home real estate market GUARANTEES a weak weak weak economy for a very very very long time. 

Americans love these many rules & regulations --- safe, protected, regulated, licensed, insured, don't smoke, wear your helmet, your seatbelt -- where is your permit? your license? --- AMERICANS TRULY HATE  freedom.

Leftcoastrocky
Leftcoastrocky

"So if these banks want to keep issuing loans without keeping some of the value on their books, those loans have to meet certain requirements."

Makes sense to me.



BenD
BenD

"Consumer groups, meanwhile, are afraid that these rules will restrict lending to lower-income home buyers."

Can the author provide some evidence for this? The article provides neither citation nor elaboration.

The CRL is indeed wary of the safe harbor provided for prime qualified mortgages ("[i]deally, the new rules would have allowed any borrower with a qualified mortgage to challenge a lender who failed to evaluate if the borrower could afford the loan") but does not suggest that it will necessarily prevent higher-income borrowers from obtaining mortgages. 


ronmendel
ronmendel

Did all those people with no down payment, 100% loans really "own" their homes?  Of course not!

ToddGilbert
ToddGilbert

They don't want the rules on lending but they want the bailout of their bad loans. 

antonmarq
antonmarq

Dahhh, shouldn't we be worried less about renting a home and more as to why there aren't enough jobs to build some cash to buy a home? Not only will home creation, and supporting industries, suffer, but also the an entire economies that rely on people with JOBS to function. We need to get rid of ALL THOSE AIMLESS PILITICIANS who are not working to making this country great again. 

DixieSwanson1
DixieSwanson1

Home ownership is an individual thing. 

It is a serious financial commitment, one that you can't dump at the first sign of a down tick in the market. That's why it is a good "long-term" investment. BUT. There are taxes to pay, episodic HUMONGOUS repairs that can't be put off. A house without a roof is way worse than a day without sunshine. And home maintenance is not a fun way to spend your precious weekends. 

I've owned and rented, made and lost money on house sales, so there is no one right way. You are largely at the mercy of the economy. If your neighborhood tanks, so does your house.  If your neighborhood goes up in value, you can do quite well. 

If you buy, buy the least expensive house in the best neighborhood you can afford.  And keep putting money aside for those repairs. They will come, usually after you've just spent a wad of money on an non-refundable vacation.   

Dixie Swanson


bryanfred1
bryanfred1

Funny, after the real estate bubble burst the articles were all about why more renters is a good thing, since many people who bought houses were locked into obligatinos they couldn't really afford and renting provided much more flexilibity.  Somewhere along the line ewe decided that home ownership was something more than a symptom of personal financial stability; it was a right.  The results were predictable to anyone not working in government. 

Now thanks to the Fed keeping rates artificially low we're in another bubble.  There's no other rationale for housing prices to be increasing by double-digits when employment and GDP are still stagnant, other than declining interest rates.  A $200k house bought today with 20% down at 3.5% implies a $718 monthly payment before taxes and insurance; when the Fed eventually has to let rates increase to market to, say, 6% (a very reasonable long-term figure) that $718 buys $150k of house.  In other words, the market for homes will have to appreicate by a third to cover the value that will be lost by rates returning to a normal level.  Buyer beware right now unless you plan to be in that house for a long, long time.

piter
piter

I read this article with a lot of interest because I am currently reading a very interesting book on Goodreads called THE 5-STAR BUSINESS NETWORKS by Vivek Sood which argues similar points in a much more forceful and coherent manner. Thinking and learning, the kind that makes you more powerful in your life, is not something you do passively. The more engaged your mind is, the better. Watching video or listening to audio to learn is nothing compared to having your mind absorbed with the structure of a book and the process of piecing together ideas and concepts from words and sentences. I will encourage the journalist to talk to the author of the above book to get deeper insights into the material he is covering. <a href="http://www.goodreads.com/book/show/17727283-the-5-star-business-network">THE 5-STAR BUSINESS NETWORKS </a>

andYouandI
andYouandI

Direct result of the concentration of wealth in this country.

hummingbird
hummingbird

We should be worried that this country is not as great as it used to be. There was a time (think of the 90s) when being middle class in America meant having a great economic life. Now you have to be a millionaire to have a great economic life in this country.

meddevguy
meddevguy

You idiots are missing the point -- our job is to improve the economy so everybody has a good enough job that rent or buy is a choice rather than an economic reality. Yes, having banks retain some interest in a loan they originate seems logical -- whole chains of people and banks had their hands out as at closing literally they "owned' the loan for three minutes. And those hands out were a big reason why house prices shot up so quickly ... and the reverse.

You're falling into the liberal trap that everybody deserves all the trappings of economic prosperity without providing economic prosperity. It gives us a government that is tuned to the immorality of creating enemies and giving what looks like prosperity away -- but only until the next election, so there is a reason to vote for them. If we really solve the economic issue, the Democrats will have to admit they lied about businesses that create jobs, and worse, the fix will be permanent so they can only get elected based on doing the best job for their constituents.

The voters decided in November 2012 that they specifically wanted to ignore the economy and concentrate on "social issues". The government heard them and will do exactly that until the voters decide that a family having a job is a top priority. There is zero chance of that happening until the morning of Friday, January 20, 2017.

lelandwi11iams
lelandwi11iams

The real estate bubble was partly caused by govt backed mortgages to people with demonstrated poor PAYBACK habits.  Recently, I learned a relative of mine has borrowd 250,000 in student loans and lives on the lake shore using those loans to sustain a high dollar life style while she goes to grad school.  We have raised a generation of welfare recipients who no longer feel shame at not paying the money back.

meddevguy
meddevguy

@hummingbird somewhat true. The choice is to blame somebody or do something. We are killing the middle class because we are courting (and building) "the poor" because they are easy to create enemies but there are a lot of them now, and they vote. Strangely, they vote for those who keep them poor!

NASA is a small, but telling point. From the 60's to the 90's NASA did exciting space adventures that convinced our own citizens and the rest of the world that they should buy techie stuff from us because we could "go to the moon". Now that agency is tasked with "outreach" -- a Disneyland display of what once was. Sure the unmanned rovers possibly are better science -- but even China and Russia understand that if you do the show business manned trips to the moon, your economy will improve and everybody can earn a house.

But again -- As long as the voters ask for a government that TALKS like they will give them something in return for their votes rather than actually doing it, yes only the really rich folks can get houses. Until I see really fixing the economy by helping employers employ, we're voting like it is a stupid reality show with no consequences.

Tonkaman
Tonkaman

@meddevguy @hummingbird You have a very flawed view of history.  NASA did exciting things in space from the 60s to 1972.  We have basically been in a holding pattern ever since Nixon killed Apollo, going in circles around our own planet.  Also, going to the moon had absolutely nothing to do with exploring or trying to advance our economy.  That was an unintentional side effect.  It had everything to do with the cold war and the fear that the USSR might take the high ground and be able to drop a nuke on us.  We didn't care about space until Sputnik, which people forget was an emptied out casing of an ICBM.  We went to the moon because we were at war, plain and simple.  When the USSR showed they didn't have the capability to do the same, we stopped going.  Nixon wanted to kill NASA outright, but he couldn't because politically it would give the impression that he thought our best days were behind us.  NASA has been limping along ever since.

Tonkaman
Tonkaman

@meddevguy @hummingbird Also, the rockets used in for then manned Mercury and Gemini programs  had perfect duplicates of those manned rockets sitting in missile silos across the country tipped with nuclear warheads.  It was a proxy war, that's all.  No different than Korea or Vietnam were.  The only reason the Apollo program wasn't killed after Kennedy's death like many in congress wanted was because Johnson made an appeal to the country to carry on in Kennedy's memory.