There's an interesting diary on the rec list right now about how states shift the tax burden downward by relying on fees and consumption taxes. In a similar vein, I want to quickly note that the so-called "Owner's Equivalent Rent" is a very large (about 30%) component of the core CPI.
I mention this because, the official policy of the Federal Government is to jack it up more. This is a short diary on the similarly regressive nature of this peculiar choice.
The hook comes from the Times:
SAN FRANCISCO — In January, Mike Rowland was so broke that he had to raid his retirement savings to move here from Boston.
A week ago, he and a couple of buddies bought a two-unit apartment building for nearly a million dollars. They had only a little cash to bring to the table but, with the federal government insuring the transaction, a large down payment was not necessary.
Aside from the fact that the accompanying picture makes me think I've already seen this movie, the salient fact is that these guys–two employed, one "freelancing"–bought about $1M worth of real estate with only around $30k down in a transaction entirely supported by the federal government.
Whether or not this ends in foreclosure–and with this thin of an equity layer, they can't sell without appreciation–it's unclear to me how this helps the city. For quite some time, lack of affordable housing for all kinds of people who work in our urban cores has been a big problem. Providing leverage to speculators isn't going to create robust, mixed income urban landscapes.
Returning to the NYT:
Some F.H.A. borrowers here say they have the cash for a full down payment but would rather invest it in the stock market or use it for remodeling. Others, like Mr. Rowland and his friends, simply do not have the money required by private lenders — which would have been nearly $200,000, in their case.
What's not being said in this article is that the FHA's bringing back exotic house financing is a backdoor foreclosure reduction program, and a backdoor bailout of the states. HAMP (a.k.a. makinghomeAFFORDABLE.gov huh?) "mods" are largely worthless (see also my diary for a few more links), and importantly for the discussion at hand, do nothing to stop the slide in property tax revenue.
On the other hand, inflating house prices lets more underwater house buyers off the hook if they have cashflow problems and helps out the local government's tax receipts. This comes at a cost, though, which is squeezing consumers, especially those at the bottom who rent. Since this policy seems to have been passed with no serious discussion at all, I hope policy makers know what they are doing and can thread the needle without causing a disaster.
The Times article concludes with this:
A few weeks ago, Congress extended the higher lending limits for another year. Representative Barney Frank, the Massachusetts Democrat who is chairman of the House Financial Services Committee, said in an interview that he planned to introduce legislation next year raising the maximum F.H.A. loan by $100,000, to $839,750.
His bill would make the new limits permanent.
I take it to mean the Dems are all in on house prices and cars going into the midterms. Let's hope that it wouldn't have been smarter to maybe look at generating jobs or something.
UPDATE: To answer a question from the comments, the point of this diary is not to warn that the FHA will bust. The point is that an agency created to support affordable housing is being used explicitly to raise house prices above what people can pay from their income.
The original intent of these programs was to help people with steady jobs but limited generational wealth buy houses when PITI was less than rent. This makes sense (and is very low risk to insure). It's very different when the interest alone is typically higher than rent for the government to set an even higher target price.
UPDATE x2: For all you 1099ers out there, I put "freelancing" in quotes, since the article said this deal didn't actually involve Mr. Rowland clearly documenting what his cash flow looks like over time. Maybe he does very well or maybe not, but the FHA didn't go over the top trying to figure it out. No knock on freelancing as a career choice was intended.
UPDATE x3: shanikka has a very good comment about the low end of the market, which, for the reasons noted above, is outside the urban core. The problems are different there.