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Benjamin Knelman
Housing plays a vital role in people's lives, as everyone needs a roof over his or her head. Questions arise, however, when families have difficulty finding housing they can afford. In this year's Minneapolis Fed essay contest, high school students were asked to use their economics knowledge to analyze the housing market and determine the appropriate role of government. Essays were received from students in all six Ninth District states; the winning essay is printed here. The strength of a nation lies in the homes of its people. The housing market today presents the question: Does a housing shortage currently exist? Yes and no. In the purest or perhaps most simplified sense, a shortage is “the amount by which the quantity demanded exceeds the quantity supplied at a particular (below-equilibrium) price.”4 Under that definition, the housing market outside government price controls contains no shortage. It has simply followed the instructions of supply and demand, and has reached equilibrium(s) at the current prices of housing. However, at today's equilibrium price many families are without access to affordable housing.5 What about these people? Wouldn't there be some benefit if they also had housing? In fact there is. Beyond a moral imperative, achieving affordable housing for those with a housing need is economically beneficial because of externalities in the market. The externalities in this case—spillover benefits—are the economic and social benefits to society created each time a family has housing.6 These “free” benefits resulting from housing include economic growth and stability, reduced crime and abuse, increased literacy and job training, and improved public health.7 The market demand curve, displaying only private benefits, fails to recognize these spillover benefits. This understatement of total benefits causes an underallocation of resources to the product—housing.8 In this way, there exists a failure of the housing market that government should correct in order to restore a true market equilibrium. Today many of the government's most prominent and costly policies to correct this housing shortage involve the encouragement of rental housing for low-income citizens. This policy is carried out largely through programs like the federal Section 8, which subsidizes both low-income housing providers and tenants.9 Unfortunately, policies concentrating on rental properties have serious flaws. By subsidizing landlords who provide low-income housing, the government must essentially set price levels, disturbing the free market and giving landlords either excessive profits or inadequate income below the market value of the housing.10 In addition, rental systems often result in the degradation of the housing, as neither the tenant nor the owner (who wishes to avoid repair costs that eat into the already small profits from low-income rent) has self-interest to maintain the property.
In the future, the federal government should move away from The U.S. Department of Housing and Development (HUD) should take several important steps. First, FHA-insured loans and other similar loan insurance programs should be streamlined and expanded. Many families can afford a mortgage's monthly payments, but would have to wait decades to save around $20,000 for a traditional down payment. The FHA loan's extremely low down payment eliminates this obstacle to homeownership 11 and raises the value of the home that households can afford.12 Second, HUD-Insured Reverse Mortgages for Elderly Homeowners, which will be especially significant as America's population ages, should also be extended. These mortgages allow the elderly to retain ownership of their homes; they are able to borrow against their home equity for needed income, which is later repaid when the owner sells the home or passes away.13 Finally, HUD and the government should continue to encourage Fannie Mae and Freddie Mac to increase the stability, liquidity and volume of the mortgage market. These two government-sponsored enterprises have tremendously expanded the availability of loans for those with housing needs, especially since 2001, when new housing goals set by HUD further increased their lending to moderate and low-income families.14 The expansion and encouragement of these programs would dramatically increase the affordability of mortgages for those with housing needs. This advance, coupled with the knowledge of the responsibilities that homeownership entails, would allow thousands of families to buy and retain their own homes. Of course, homeownership is not a balanced housing solution for everyone in need. However, it would be invaluable to many, especially to the 22 percent of all households with severe housing needs that are moderate-income working families.15 The benefits from increased homeownership are immense. Households buying a home not only finally achieve affordable housing, but also take a huge step toward financial strength and independence. Homeownership is the primary and fundamental means of an American household's accumulation of wealth, with home equity on average making up just over half of the total equity of a household.16 Americans currently renting are those who most acutely need to take this step toward savings and wealth. According to the U.S. Census Bureau in 1999, of the families renting apartments in buildings with five or more units, 73.8 percent had incomes under $40,000; 37.5 percent had incomes under $20,000.17 George Karvel, professor at the University of St. Thomas, explains the benefits of ownership over renting: “If you buy a home, you pay each month, and in 35 years or so, you own a home. If you rent, you pay each month, and at the end of 35 years, you are only left with a stack of rent receipts.18 Further increasing the economic benefits of homeownership, mortgage interest and real estate taxes on houses and condominiums are tax-deductible, whereas rent is not. Additionally, due to exploding rent prices, many working families with severe housing needs today would pay less for mortgage payments than they currently pay for rent.19 Homeownership also bestows tremendous intangible benefits upon communities. By owning a home, Americans are able to realize an enduring element of the American dream. They have a vested interest in improving their home and community, which greatly advances civic pride and participation in the local and state community.20 As Charles Dickens said, “In love of home, love of country has its rise.”21 Since the founding of our nation, homeownership has been one of the foundations of the American dream. Thomas Jefferson bought the Louisiana Purchase with the vision of a country based upon independent citizens with their own land and homes; 60 years later, the 1862 Homestead Act continued these ideals.22 Millions of immigrants, leaving behind countries where land ownership was largely a prerogative of the aristocracy, have come to America to realize their dreams of someday owning homes themselves. America has always been a land of change, but the American dream of homeownership continues to endure. Today, our government should support policy to continue this dream and expand its reality to more Americans. Doing so would not only help resolve our nation's housing problem but would also provide for the increased prosperity and improved condition of its citizens and the continued affirmation of American ideals. Endnotes 1 Homeownership:
Strength of the Nation. National Association of Homebuilders. 8
March 2002. |
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Annual Report
