If the Great Recession has one common thread that links the U.S, much of the E.U (Ireland, Spain, the U.K), and the rest of the world, it's our common mistake of treating housing as a speculative commodity whose purpose is to create profits for investors, rather than structures that serve a basic human need for shelter and sanctuary. Even those nations which avoided a housing bubble themselves (like France or Germany) got themselves involved through their banking industries, who lent and speculated into the housing bubbles.
If we want to get out of our current economic stagnation and avoid future housing bubbles, the logical place to start is to de-commodify housing.
Housing Is Not a (Good) Speculative Investment:
Housing is such a ubiquitous form of investment - the most common form of wealth in America - that we don't really think about some of the basic problems with the way that we treat housing as a speculative commodity. As Dean Baker points out, real housing prices haven't done more than just grow at the rate of inflation for the past century and then suddenly diverged from this trend a decade or so ago.
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The housing crash of 2007 was only the most recent and most severe in a line of housing bubbles that crop up in the absence of regulation - the deregulation of Savings and Loan companies in 1980 led to a massive crash in the late 80s, the 1920s saw a massive housing bubble (especially in Florida) before the introduction of New Deal regulations, and so on.
Bubbles are only one aspect of the market failure in housing - another major problem is a failure of supply and demand to respond smoothly, especially to the lower end of the market. According to Habitat For Humanity, 16.5% of American households spend more than 50% of their income on housing, and another 2.4% are either homeless or living in severely substandard conditions. Despite this enormous pent-up demand for affordable housing, the U.S actually lost 1.2 million affordable rental housing units between 2001-2007. It's not surprising therefore, that there is not a single county in the U.S where a full-time minimum wage worker can afford a one-bedroom apartment at fair market rates and that one has to earn more than two-and-a-half times the minimum wage to afford a two-bedroom apartment (and that it's getting worse):
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All this at the same time that 11.4% of housing units in the U.S lie vacant. The picture of a basic market failure is stark indeed - and the sad thing is that it's one we used to understand but have deliberately forgotten in the last fifty years.
This fundamental flaw in the housing market should make us rethink the current U.S policy of supporting housing prices and home-ownership as a mechanism for democratizing wealth. Rather, public policy should be based on the goal of ensuring that people are housed affordably and comfortably in ways that bolster other objectives (sustainable development, labor mobility, infrastructure development, etc.).
The difficult question is how we go about making the transition between these two policy regimes.
Ending the Crisis:
If nothing else, the political response to the housing crisis has been an excellent primer in the power of entrenched interests and conventional wisdom. Trillions of dollars and loans and hundreds of billions in direct bailout money went to the banking and insurance industry and sweeping authority was granted to the Treasury Department.
Instead of cramdown, which would have drawn a line under the crisis, we got HAMP. The Home Affordable Modification Program is a voluntary system that relies on incentive payments to lenders to participate in the program. As many observers have noted, HAMP is fundamentally flawed:
* HAMP puts the lender’s interests ahead of homeowners by allowing participating lenders to foreclose if they’d lose more money modifying the loan than otherwise, and to choose whether they’ll offer permanent modifications (which might actually keep people in their homes) or temporary or in-house modifications (which are much more likely to end in foreclosure).
* HAMP also makes modification of the principle of the loan a last step after interest rate or term modifications. Given the massive decline in housing prices and the likelihood of returning to the long-term trend, this means that people will still owe more than the home is worth, which means they’ll be making unsustainably high payments on their mortgages and be more likely to default.
Unsurprisingly, only 500,000 homeowners have received permanent modifications of their mortgages, not the 3-4 million originally hoped (keep in mind that more than five and a half million foreclosures have occurred since 2007). As Dean Baker notes, some analysts predict that 60% of homeowners who receive permanent modifications will end up losing their homes anyway.
The first step to ending the crisis therefore is to admit that HAMP doesn’t work, and replace it with something significant. There are several things that could be done right now without requiring any kind of Federal outlays, given our current attack of magical austerity thinking. The U.S government owns Fannie Mae and Freddie Mac outright, and together they account for about half of all mortgages in the U.S – including five and a half million underwater mortgages and another 242,000 foreclosed units (about one-third of current foreclosures). It could, if it wished, directly "cramdown" the principle and terms of these mortgages and at a stroke cut the ongoing ulcer of the housing bubble in half.
It could also, through Fannie Mae, Freddie Mac, and those loans guaranteed, insured, or otherwise supported by a number of government agencies require any mortgage so protected (which is the overwhelming majority of them) to allow the resident of any foreclosed and previously underwater unit the right to rent their former property, and to apply their rent payments against their previous mortgages - thereby allowing them to remain in their homes and giving them a chance to reclaim them.
Finally, the Federal government or state governments could slap a tax on foreclosed properties in order both to recover the invisible costs of blight created by numerous vacancies in a neighborhood and to incentivize compromise over eviction.
While this would probably go a long way towards ending the immediate foreclosure crisis, and make the next crisis less damaging if many of the main features were maintained, it wouldn't stop another crisis from coming.
Restraining the financial sector would be a major step forward, but this would still leave the problem that home-ownership would be privileged by our national policy, an incentive for speculation in any case. De-commodifying housing should start by equalizing our treatment of renting and owning. This would reduce a major source of inequality and refocus our policy on housing as shelter:
Unified Housing Credit - at the moment, our major support for housing is the mortgage interest deduction, a highly regressive tax benefit that provides a bigger benefit to richer households with more expensive mortgages (and thus provides an incentive to construct large, expensive homes whose purchasers are more richly subsidized); as the Center for American Progress points out, households at the median income gain about $523 dollars from the credit on average, while households in the top 1.5% gain more than $5,000. Establishing a flat housing credit for renters and homeowners alike at $3000 a year would greatly benefit both ordinary homeowners and renters - renters especially would benefit from money that could be applied to savings vehicles allowing renters to accumulate savings in the same way that owners do.
Right to Sell/Right to Rent-to-Own- another way that public policy could equalize ownership and renting is to give owners the right to sell their equity and remain in their homes as renters, and give renters the right to rent to own (with safeguards to protect renters from a sudden loss in equity). This would allow a fluid transition between renting and owning, rather than the stark division that exists now.
Housing Insurance - as I've talked about before, one major source of insecurity that is largely unprotected against in the U.S is the sudden loss in income turning into a loss of one's home - foreclosure insurance is rare and rather expensive, and renter's insurance usually only protects against the loss of personal property not against the loss of one's home. The Federal government could easily establish an affordable social insurance program through the existing UI system to provide assistance to keep people who've lost their jobs in their homes. And as with the benefits above, one of the advantages to constructing policies that treat ownership and renting equally is that not only do you further de-commodify housing, but you also create a community of interest between renters and owners.
Affordable Housing Fund - given the long-term market failure in affordable housing, one major step in de-commodifying housing as shelter is to begin again to invest in the public provision of housing for sale and rent - if we learn from our past mistakes by building mixed income units and avoiding design mistakes. Either as a Fund within the proposed Infrastructure Bank or as its own such establishment, an investment of $10 billion a year could generate as much as 800,000 new affordable units per year, putting the U.S onto a sustainable path of affordable housing growth.