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Tess Vigeland: Did you hear Jeff’s last line there, the part about supporting the American Dream? Well, why is owning your own home such a huge part of that dream and why should the government be so involved in helping people realize it? I put those questions to economist Dean Baker of the Center for Economic and Policy Research and Henry Cisneros, former secretary of Housing and Urban Development during the Clinton Administration.
I asked Mr. Cisneros for the basic argument in favor of government subsidies for home ownership.
Harry Cisneros: Well, there’s a lot of evidence that home ownership is good for families, it’s good for people, it’s good for the country. There is the economic evidence that suggests a ticket to the middle class for Americans is to become a home owner. So if we want to close the gap — not just in income, but in wealth in our country — then helping people become home owners is an important part of the economic rationale. Beyond that, there’s a lot of evidence that suggests that families tend to benefit from all of the things that we would call stability that comes from home ownership.
Vigeland: Mr. Baker, we brought you on because you’re in the opposite camp. Tell us why government should not be in this business.
Dean Baker: Well, I would say it’s a much more mixed picture than the secretary presented. That home ownership for many people is a good option, but we have to recognize that for many people it’s not. We should keep in mind that at any point in time, roughly a third of all households are renters. So to my mind, I think what we have to do is have a housing policy that’s more balanced, that gives people good ownership options, but also gives people good rental options. Now as far as accumulating wealth, we have to remember that home ownership tends to be a very heavily leveraged bet. People, even in the best of times, are buying a home with 20 percent down. And if you think of that, you know, you’re putting 20 percent down, if your house price falls by 20 percent, you’ve lost 100 percent of your asset. So that’s a really big deal and a lot of people, of course, that’s exactly what happened to with the collapse of the bubble.
Cisneros: What happened, unfortunately, post-2000 is a lot of the worst abuses that occur in a boom hijacked what I think was responsible governmental policy before that. We had whole companies come into existence, they didn’t care whether people could get into homes or not and they sold these no documentation, no stated income — all kinds of exotic things. And then you had Wall Street creating completely new vehicles in order to take that paper and push it off into the hunger that existed in the international markets — very, very, very tough time.
Vigeland: But even before 2000, during the Clinton Administration, under your reign at HUD, you had this program called the National Home Ownership Strategy. And through that, you actually changed policy so that lenders got to pick their own appraisers, which was something new and different, people only had to provide three-year’s worth of stable income instead of five. Any regrets about some of those changes that happened before 2000?
Cisneros: Here’s what we were confronting: Home ownership rate for white Americans when we began was about 64 percent; for African Americans and Latinos, it was 42 percent. So that’s what we were trying to do is to begin to close that gap. We did some, but there’s a national conundrum here as to whether or not home ownership is really going to be available across racial lines, and to all ethnic groups and to all Americans. I think it’s a goal worth pursuing, but obviously with balance.
Vigeland: Mr. Baker?
Baker: It’s true that for people to get into the middle class in this country it tends to be through home ownership. But I’d say that’s to a large extent because we’ve inadequate saving vehicles. So that if you don’t own a home, it’s not that easy — or at least for many people who aren’t very financially sophisticated — to accumulate savings through the stock market or whatever it might be. And that’s something that we should be addressing, so there is an issue about savings. Home ownership historically has been the way that most middle-income people were able to accumulate some wealth, but it’s not necessarily the best way.
Vigeland: There does seem to be within our culture now, that there have been so many decades of home ownership is the ideal, home ownership is where I have to be — and so when you are offered a mortgage that you probably can’t even afford, you think, “You know what, I’ve got to do that because that’s what I’m supposed to be doing.”
Baker: Sure. Most people aren’t in the real estate business, they’re not economists. And this is why I’m down on the people who are, my peers. I’m sort of going, what were you people doing? There was nothing more important for someone in economics/economic policy for them to be doing over these years, 2002-2007, warning of this housing bubble. And it wasn’t hard to see. What amazes me is we have all these people — there was a New York Times article on Sunday saying, well this is like detecting an earthquake. I’m going, no, this is like detecting that your house is on fire. It wasn’t hard. This was really an outrage and people should be absolutely furious that it was allowed to go on.
Vigeland: How did we get to the point in society where being a renter means that you are not part of the American Dream?
Cisneros: It is clear that there is a noble place for renting in the United States. But for a lot of people, there’s a common sense kind of calculation they make — “If I pay my mortgage, the money goes into kind of an enforced savings. Whereas if I pay rent. The rent, that money goes right out the window, it goes to somebody else’s account, the landlord’s account. And I have to keep working and my money goes out.” It’s not necessarily the right calculation, because for some, they’re just not in the position to be homeowners. So there should be no consensus in this country that we denigrate rental and deserves attention in our national policy.
Vigeland: What happens if we get rid of things like the mortgage interest tax credit? Or Fannie and Freddie for that matter? If we get government out of the business of putting people into homes. Mr. Baker, what does our economy look like then?
Baker: If we went back to the old-fashioned Fannie, where you had a government-owned, government-run company, and they held mortgages rather than securitized them, I think that would be helpful. If we can’t do that for political reasons or people don’t think that’s a good idea, I would just as soon get rid of them. In terms of the mortgage tax credit, tax deduction I should say because, of course, that’s what it is…
Baker: There is actually a lot of support across the board among economists to change it to a credit. The idea being that rather than the high-income people benefit the most, we may get a fixed amount for all homeowners, and you cap it at a middle-income house rather than having someone who can get the subsidy on a $900,000 mortgage as it stands now.
Cisneros: With respect to Fannie and Freddie, I would say we need to have the mechanism that makes it possible to create liquidity in the housing finance market. And the principal idea originally behind Fannie and Freddie was that they would buy mortgages and the local bank or the local lender, would then have new capital in order to make another round of loans and that they would securitize those and move them into the international and global markets. And that has worked very well. Whatever the retrenchment is — and there will be retrenchment in the restructuring of Fannie and Freddie — they must exist. With respect to the home mortgage deduction, my own sense is it also needs to be scaled back. It presently is applicable to second homes and to vacation homes and a lot of other things that were not the original intention. But as a practical feature of the American housing landscape, it’s going to be there. It’s one of those third rail things like Social Security that is probably impossible to eliminate.
Vigeland: Henry Cisneros served as HUD secretary under President Clinton. Dean Baker is the co-director of the Center for Economic and Policy Research in Washington. Gentlemen, thank you so much for the discussion.
Cisneros: Thank you.
Baker: Thanks for having me on.
Vigeland: And by the way, this week, Fannie Mae asked for another $1.5 billion in taxpayer bailout money.
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