The actual value of homeownership is being questioned by a growing number of skeptics. Image from Wikimedia Commons.

One of the longest standing hallmarks of the “American Dream” is becoming a homeowner. However, a growing number of skeptics are beginning to question whether it is actually a good idea for people to buy a home at all. There is some evidence that could support home-ownership skeptics’ argument.

Housing prices may not perform that well as investments

There are a number of experts within the finance industry that are coming to seriously question the long-held assertion that owning a home is a good investment, according to USA Today. In 2000, highly influential Yale economist Robert Shiller, for whom the Case-Shiller Index is named, released a book in which he looked at home values from 1890 and 1990. After adjusting for inflation, Shiller found that home values had barely moved at all in terms of real value. Former Federal Reserve economist Jack Francis found that stocks on the Standard & Poor’s index yielded an average return of 11 percent, but real estate yielded only 6 percent. Given the fluctuations in real estate values during the past several years, it would seem plausible that not as many people are realizing that much of a profit.

Prices and equity plunging

Overall home prices have been plunging since 2008, and the decline has not slowed drastically as yet. Home sales and home prices both declined in February 2011, according to Reuters. Existing home sales declined four percent during February 2011, and home prices declined 5.2 percent between February 2010 and February 2011. A more disturbing, but less prominently disclosed statistic in the press is the amount of equity the average homeowner holds. In the most recent “Flow of Funds Accounts of the United States” release by the Federal Reserve, the average household was estimated to hold 39.5 percent equity in the family home as of September 2010.

Old model breaking down

A home paying off as an investment depends on a lot of assumptions that cannot necessarily be taken for granted. If a person buys a home with a 15 or 30 year fixed rate mortgage and pays the mortgage off, the homeowner has property free of encumbrances that is not costly to live in and can be sold to raise a retirement nest egg. However, few families occupy the same home long enough to accomplish that task. Also, if a person sells a home for a greater price than it was purchased for, that profit may actually be nullified. Costs such as home repairs, property taxes, real estate agent fees and closing costs can add up to thousands of dollars, and very quickly. Furthermore, a home can be repossessed or foreclosed on by the mortgage loan lender if the home owner defaults on the mortgage. In comparison, stocks, bonds and mutual funds only have to be kept until they appreciate in value.

Sources

USA Today

Reuters

Federal Reserve on household holdings (PDF – Requires Adobe Reader)

Federal Reserve Flow of Funds Accounts report

The Obama administration has released a long-awaited proposal for getting government out of the mortgage business. Image: TheTruthAbout/Flickr

The Obama administration submitted its plan for the future of Fannie Mae and Freddie Mac Friday. The report is a series of options to consider for getting the government out of the mortgage lending business. The Obama Fannie-Freddie plan proposes higher fees and down payments that could make it harder to get the 30-year fixed mortgage Americans have relied on for decades.

The Obama Fannie-Freddie plan

The Treasury Department offers three mortgage scenarios in which the government is involved on different levels. The Obama administration favors option number three — replacing Fannie and Freddie with private companies to offer mortgage insurance. The private companies would be required to buy reinsurance for the mortgages they guarantee. The government reinsurance would only pay out if the private company is in danger of going under, not if any particular mortgage goes bust. The administration said this option would preserve low-cost access to mortgage credit. However, the administration warned that lax oversight in this system would leave the housing market vulnerable to another crisis.

Fannie and Freddie, plans B and C

Other options in the Obama Fannie Freddie Plan include privatizing the system or replacing Fannie and Freddie with a system for low-income, rural and veteran homebuyers that could expand in the event of a crisis. Privatizing housing finance would get taxpayers off the hook, but would likely boost fees, down payments and interest rates to levels that would put a 30-year mortgage out of reach for many who can get one under the current system. The low-income-rural-veteran option would make private mortgage lenders accountable for risk but was described as problematic because it would have to be designed so that it could expand during a crisis and contract again afterward.

Fixing Fannie and Freddie without jeopardizing housing recovery

The administration has acknowledge that the government provided too much support for housing with too many incentives for investment in housing — primarily in the form of mortgage-backed securities. A huge part of the mortgage business had no regulation or oversight.The administration said that a strategy for the future can’t cut back on government support too much too fast, or the housing market will take even longer to recover. Treasury Secretary Tim Geithner said replacing Fannie and Freddie and fixing the mortgage lending system could take five to seven years.

Sources

Washington Post

Bloomberg

TIME