Friday, February 18, 2011

A Shift in Washington's Attitude Toward Home Ownership?

-- Posted by Neil H. Buchanan

Early in the financial crisis, I wrote a series of FindLaw columns and Dorf on Law posts discussing and decrying the strong preference in the United States for people to own their own homes. (The most recent DoL post is here. That post includes links to my earlier writings on the subject.) The short version of my argument is that home ownership concentrates families' financial risk in entirely inappropriate (and often disastrous) ways, and that all of the supposed advantages of owning can be achieved in a world of renting.

Even as I argued that Americans' universal preference for home ownership was based on fundamental misunderstandings of the nature of owning versus renting, I acknowledged in nearly everything I wrote on the subject that changing people's attitudes about such a deeply-held ideal would be a nearly impossible task, best left to those (like tenured professors) whose job security should not be threatened by making unpopular proposals. I never imagined that any politicians -- and certainly not the hyper-cautious politicians in the Obama administration -- would push in this direction.

To my surprise, however, a report from Treasury and HUD was released earlier this week, in which the administration proposes to get the government out of the business of guaranteeing home mortgages (which it has long done, mostly through Fannie Mae and Freddie Mac). The response has been surprisingly muted, given that one news article described the report's broad message as: "Better to help some people rent." Pretty radical stuff in DC.

Unfortunately, my initial sense that this was a refreshing case of boldness on the part of the administration was undermined by the news that the proposal is most strongly opposed by some of President Obama's most reliable backers, and supported mostly by his opponents. (" 'Gutting Fannie and Freddie is the most irresponsible housing proposal yet from this administration,' said Representative Dennis Cardoza, a Democrat from the Central Valley in California. 'How is Joe Six-Pack ever going to be able to afford a home?' ") As a broad political matter, therefore, this is merely more triangulation from the neo-Clintonites.

While I understand why liberal groups have generally supported home ownership initiatives, however, I think that they are ultimately wrong. (Meanwhile, the reasons that most conservatives oppose Fanny and Freddie are even more wrong.)

The major impetus behind this proposal is, of course, the cost of the Fannie/Freddie bailouts to the public Treasury. An editorial in yesterday's New York Times, for example, assessed the report's three alternative proposals to reduce or remove federal mortgage guarantees, focusing its analysis entirely (and, in the context of the Great Recession, appropriately) on how likely each proposal would be to lead to future financial crises and public bailouts. Notably, however, the Times's editors expressed concern that "moderate-income communities could still be left behind," leaving unchallenged the idea that "getting ahead" must mean increasing access to home ownership.

The Treasury-HUD report also suggested that it might be time to reassess the tax preference for mortgage interest, which at least opens up the broader set of policies (far beyond the mortgage guarantee giants) that artificially push people to own homes. This raises the question of what an owner/renter neutral world would look like, and what kind of legal regime (aka regulation!) would be required to make it work. (Actually, I think that we should adopt policies to affirmatively discourage individual home ownership, because of the problem of risk concentration. I will, however, leave that aside for now. One enormous step at a time.)

The conservatives who clamor for the end of Fannie and Freddie do so, I suspect, in the belief that a new world of non-guaranteed loans would leave "the free market" to decide who lives in a house and who lives in an apartment. My assertion that rental markets can work reasonably well, however, is based on having lived in rental housing that is well-managed and well-maintained. I know, from having rented as an upper-middle class professional in Manhattan and DC/Maryland, that it is possible to have corporate-owned housing that is not a nightmare. By contrast, I vividly recall my days as a graduate student in the Boston area, left to the tender mercies of a low-end rental market that left my permanently low-income neighbors living in apartments with frequent (and sometimes disgusting) interruptions in power, water, sewage, and so on.

The preference among liberal advocates for increased home ownership among the poor and lower-middle-class, therefore, is based on the bitter reality that landlords have every incentive to take advantage of their tenants. Among many other problems, the costs of moving make it more difficult for renters to move away from bad landlords (even assuming that better ones exist), making the market adjustment process imperfect, at best. Even higher-income people need to rely on access to courts and regulators to enforce recalcitrant landlords to fulfill their obligations. After being scarred by uncounted horrible experiences with renting, it is understandable that people would view home ownership as an escape, finally liberating them from having to deal with rapacious and unresponsive property owners.

This means that the new world of more widespread renting -- including, as it must, the renting of single-family homes, not just apartments in multi-unit buildings -- would have to be accompanied by careful regulations to protect renters (and, to be fair, honest landlords) from abuses by the other side of the rental relationship. "Getting the government out of housing" must not mean simply allowing existing contract laws to govern the rental market. It would have to involve a very deliberately chosen set of policies that would correct the severe market failures that are fundamental to the housing market, especially for lower-income people.

Even if we could create those rules -- and, given my increasingly deep skepticism about "behavioral" remedies as opposed to "structural" remedies, I am not saying that the result would be ideal -- an even more difficult question is what would happen during a transition from the current regime to the neutral regime. What to do about all of those people who bought their piece of the American Dream? What will happen to them? I will address that question in a future Dorf on Law post.