June 03, 2015
The NYT ran a column on helping low income homeowners by Elysse Cherry, the chief executive of Boston Community Capital. The piece includes various proposals designed to help low income homeowners who were hit by the collapse of the housing bubble, but it also includes the bizarre complaint:
“In many areas, housing prices are stuck below their inflated pre-bubble levels. Until we deal with this fact, entire communities will continue to struggle with high foreclosure rates and a lack of economic mobility. ….
“However, the poorest fifth of Americans already spend more than 40 percent of their income on housing, compared with less than 31 percent for the upper fifth, according to government data. Meanwhile, real wages for most Americans have been flat or falling for decades. Absent an extraordinary increase in income for low-income families, home prices in low-income areas aren’t going anywhere.
“This disparity between high- and low-income neighborhoods is evident in the numbers. The Standard & Poor’s/Case-Shiller National Home Price Index for March was over the March 2004 index, and national median home prices, according to the real estate website Zillow, are just over what they were 10 years ago.”
There are two problems with this complaint. First, it is factually wrong, or at least misleading. The weak price performance of lower cost homes depends very much on the time window being considered. If homeowners bought near the peak of the bubble, which disproportionately affected lower income neighborhoods, then their prices would still be depressed, however if they bought before the bubble they would be doing quite well.
In most of the cities covered in the Case-Shiller tiered price indexes, which show price changes for the lower, middle, and high tiers of the housing market, homes in the lower tier have seen the greatest price appreciation since 2000. For example, in New York house prices for the bottom tier have risen by 91.3 percent since 2000 compared to 79.5 percent overall. In Los Angeles home prices in the bottom tier rose by 148.4 percent, compared to 133.7 percent overall. In Boston home prices in the bottom tier have risen by 106.0 percent compared to 80.6 percent overall. So unless a lower income homeowner bought their home near the peak of the bubble, they are doing relatively well with their house price.
The second and more important problem is that it is bizarre to note that low-income people spend a disproportionate share of their money on housing and then complain about low house prices. If price of homes in lower income neighborhoods rise, then future buyers would have to spend an even larger share of their income on housing. This would be a good story for current homeowners, but a very bad story for young people looking to buy in the future.
It is remarkable that this generational aspect to house prices is almost never discussed in the media, for example in contrast to the generational aspects of government debt. High house prices are direct transfer from future generations of homeowners to the current generation. (It’s the same story with high stock prices.) There is no obvious reason that we should want to see this transfer, which has far greater consequences for the well-being of the young than any remotely plausible story about the government debt. (Ask your favorite news outlet that covers what the Peter Peterson crowd has to say why they never talk about the generational impact of high housing prices.) Anyhow, if we care about lower income people being able to become homeowners we should be glad that they don’t have to pay bubble-inflated prices for their homes.
Having said that, Cherry is absolutely right to complain about the inadequate help provided for those homeowners who were caught in the bubble. Former Treasury Secretary Timothy Geithner made the Obama administration’s attitude on this issue very clear in his autobiography. In the book he repeatedly declares that he was committed to do whatever was necessary in terms of government handouts and support to save the big banks. He derided the critics of this policy as “old testament” types who wanted punishment for the banks’ irresponsible and possible criminal behavior.
In contrast, when it came to underwater homeowners Geithner commented that many people had bought homes that were bigger and/or more expensive than they could afford. In other words, he thought it appropriate that the government protect the big banks from the consequences of their behavior, but felt it appropriate that low and moderate income homeowners pay the cost of behavior he viewed as irresponsible. The Obama administration’s policy certainly reflected this attitude.
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