The Future of the Housing Finance System

The future of the housing finance system is a key issue for the housing industry as well as the economic makeup of the middle class, given the importance that housing wealth and access to rental housing plays in our economy. These factors and the policies that shape them are of such significant importance that this topic has been selected as a primary issue for NAHB’s 2014 legislative conference, “Bringing Housing Home,”which takes place March 17-21 as home builders and other members of the residential construction industry meet federal lawmakers. As part of this event, this week we have examined labor issues and housing-related tax policy. In this last post, we examine housing finance.

The housing Government Sponsored Enterprises (GSEs) — Fannie Mae, Freddie Mac and the Federal Home Loan Banks (FHLBanks) — have been, and remain, critical components of the U.S. housing finance system. They were created by Congress to support mortgage market liquidity and help address affordable housing needs.

With Fannie Mae and Freddie Mac still operating under conservatorship, serious housing finance reform policy discussions are underway in Congress. While many approaches exist that would determine the future of the system, nearly everyone agrees that reform is critical for housing and the economy. NAHB has made recommendations to Congress outlining a plan by which Fannie Mae and Freddie Mac would gradually be phased into a private-sector-oriented system, where the federal government’s role is clear, but its exposure is limited. Federal support should be limited to catastrophic situations where carefully selected levels of private capital and insurance reserves are depleted before any taxpayer funds are employed to shore up the mortgage market.

The future of housing and the middle class are at stake. For example, while significant declines for the nation’s homeownership rate – 65.1% for 2013 - may have ended, the impacts of the Great Recession on younger homebuyers is clear. The homeownership rate of those aged 35-44 today, a key group in terms of housing demand, has fallen below the overall homeownership rate. Today’s 35-44 cohort has a homeownership rate of 60.9% as of the fourth quarter of 2013, compared to approximately 65% for the overall population. And this marks a significant decline from the 70% rate for those aged 35-44 in 1982.

These trends are consistent with more recent housing data suggesting declines and delays of first-time homebuyer purchases. Rising interest rates have reduced affordability for some of these buyers, which means having to increase downpayments or alter home price budgets. Policy changes that would further increase the cost of purchasing a home would further set back these younger buyers, as well as have broader impacts for the overall housing market and the economy as a whole.

It is important to remember the importance that housing provides, not just as a source of shelter, but also a key component of household and national wealth. Housing is a capital good and part of the nation’s capital stock and infrastructure. And as prior NAHB research has demonstrated, primary residences represent the largest asset category on the balance sheets of households. At $20.7 trillion, primary residences accounted for almost one-third, 30%, of all assets held nationally by households in 2010. Policy changes that would harm the housing market would have significant impacts for the economy as a whole. It would take only a 6% decline in housing prices to eliminate $ 1 trillion in national wealth.

Primary residences represented 62% of the median homeowner’s total assets and 42% of the median home owner’s wealth. In addition, the median value of the primary residence across all households (including renters, so the median household is not the median owner-occupier) was $100,000. In contrast, the median values of financial assets and vehicles were only $17,000 and $12,200 respectively across all households.

Housing wealth is also a widely held asset. Two out of every three households, 67%, owned a primary residence in 2010 while just over half of households, 50%, held a retirement account. Meanwhile, 16% of households owned either stocks or bonds.

Equity in residential property tends to be a particularly important component of wealth for lower-income, older households. For 75+ households with incomes under $35,000, the median share of net worth held as equity in a primary residence is 60 percent.

For these reasons, the future of the federal housing finance system, and by extension homeownership, is a key issue going forward for housing and the residential construction sector.



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