We find ourselves today in a crisis of our own making. Well-intentioned politicians on both sides of the aisle looked at the distribution of wealth in our country and realized that not only did home ownership represent a large portion of individual wealth, but that it made up a disproportionate amount of the difference in average family net worth between white America and the rest of the country. To address this difference, policymakers (again, on both sides of the aisle) pushed for programs that would make obtaining mortgages easier. Mortgage lenders were pressured to lower their standards, and they pressed back for government protection from the increased risk of default. Enter Fannie Mae and Freddie Mac, who insured many of these “sub-prime loans” and the financial world who further reduced the risk to lenders by “securitizing” the mortgages—eventually reaching a point in which there was no asset to back the debt. Heavy marketing of these new mortgage vehicles attracted speculators and middle class customers, many of whom improperly assessed their own risk tolerance as they took on more debt than their previously sufficient cash flows could handle. Government regulators looked the other way or improperly assessed risk, all in hopes of fueling the policy ends of increased home ownership and economic growth. Upon a predictable decline in housing prices, the whole house of cards (pun intended) fell in on itself helping to cause our current situation.
Here are a few truths about American wealth. Americans have one of the lowest savings rates in the industrialized world. Compared to other individual investment vehicles, a disproportionate percentage of America’s net worth is bound up in houses, causing many to view their house (and future payoff from its sale) as their retirement plan. Our tax code heavily favors those who carry mortgages over those who rent. This tax advantage aids and enables the disproportionate emphasis and importance Americans place on home ownership, to the detriment of more balanced and diversified investment portfolios. Although real estate has proven in the past to be a relatively safe investment, it is not risk free and housing prices can decline as well as increase.
As policymakers flail about seeking ways to alleviate current economic woe by further reducing risk to this already ennobled class of investors (home owners), little is being done to address the underlying cause; that our entire system fosters and encourages an unhealthy concentration of individual wealth in one class of investment. The over the top efforts at mitigating risk to homeowners have gotten so bad that I have begun to hear reports of people looking to elected officials for relief from the horrific burden of being “upside down” on their mortgage—that is, owing more than the house is worth. While this is unfortunate from an investment standpoint, it is meaningless from a shelter standpoint. As long as someone is not looking to place their house on the market, its day to day value is somewhat less important than its value in taming the elements.
What is to be done? We should eliminate the home mortgage interest deduction, and instead, redistribute the aggregate savings to a decrease in the capital gains and simple interest taxes(such as that gained in savings accounts and CD’s). Houses would still be sought after as an attractive part of any individual investment portfolio, but not more so than 401K’s, stocks, mutual funds, bonds, T-bills, gold, art or any other investment vehicle.
What would be the impact of this change? There are several. First, it would create a market-based incentive for the investing public to limit its own risk through more diversified portfolios. Second, it would encourage savings. Third, it would more quickly create a “level playing field” between whites and minorities with respect to wealth creation than wrong-headed policies designed to increase home-ownership.
What would be the downside? Entrenched interests (construction, labor, finance, legal) would howl. We would hear “this is the end of the American dream of home ownership” and “there will never be a new home built in this country” and many other Cassandra-like statements of this nature. I’m not convinced. People will still buy houses—new and previously owned—based on the new risk calculation of whether or not it will increase in price, and not on the certainty that it will reduce income tax liability. Builders will still build dwellings—whether they are then rented or mortgaged should not ultimately make a difference to them. The financial industry, while perhaps dealing with the fall-out from a reduced mortgage market, would have access to whole new sources of capital for their other investment vehicles flowing from individuals who previously would have invested in their house looking for new places for their money to go.
In the end, this plan would create additional stability in our financial system, increase the national savings rate and lessen our national risk to financial meltdown. Let me know what you think.