How Congress Should Address the Foreclosure Crisis

A paper by the Center for Economic Policy Research and the National Low Income Housing Coalition provides recommendations for how Congress address the foreclosure crisis. (Sorry about the length.)

This paper compares ownership and rental costs in twenty major metropolitan areas. It shows that in many areas, ownership and rental costs are more or less in balance. This means that it might be practical and desirable to craft policies for these cities that are focused on keeping homeowners in their homes as owners.

However, the paper also shows that in many cities homeownership costs are greatly out of line with rental costs. These are cities, mostly on the two coasts, that have seen an extraordinary run-up in house sale prices over the last decade that have not been matched by any comparable increase in rents. In these markets, homeownership costs could easily be double, and even close to triple, the cost of renting comparable units. Paying these inflated ownership costs will take away money that might otherwise be used to pay for health care, child care or other necessary expenses. Similarly, a government that intervenes at these prices will have less money for other needs.

Furthermore, because prices are now falling rapidly in many of these markets, homeowners are unlikely to accumulate equity. In fact, it is likely that many homeowners will end up selling their homes for less than their outstanding mortgage, even if new mortgages are issued with substantial write-downs from the original mortgage. In these bubble markets, government efforts to support homeownership are likely to do little to help homeowners and could leave taxpayers with a substantial bill in cases where homeowners leave their houses with negative equity.

The paper notes that in these markets, a policy of ensuring suitable rental options is likely to be more helpful to many current homeowners. This policy can encourage the rapid conversion of vacant and abandoned units to rental properties, as well as policies that facilitate the conversion of ownership units to rental units for the same households.

In addition, the paper also notes that many of the properties facing foreclosure are already rental properties. In these cases, foreclosures often result in the displacement of the current tenants. Congress should recognize this problem and consider policies that provide greater security to tenants in such situations....

The analysis shows that for several cities with bubble inflated house prices such as Los Angeles, Boston, and Washington the cost of homeownership is likely to be two or even three times as high as the cost of renting a comparable unit. Furthermore, since house prices are likely to continue declining towards long-term trend levels, homeowners in these markets are unlikely to ever accumulate equity in their homes.

In these markets, encouraging people to remain as homeowners, even with substantial write-downs from their original mortgage terms, is likely to lead to situations in which they pay far more of their income in housing costs than necessary. The result could be that these families forego health care insurance for their kids or quality child care, since they will be forced to continue to make extra sacrifices to remain homeowners, with considerably less likelihood of a long term financial benefit relative to renting.

By contrast, in markets where house prices do not appear to be inflated, such as Atlanta, Cleveland, and Detroit, there is not a serious imbalance between the cost of renting and the cost of owning. In these markets, it is reasonable to implement policies that attempt to keep people in their houses as homeowners and stabilize house prices.