Home Ownership and The American Dream

February 22, 2011

Despite the hit it took in the wake of the downturn, ownership remains good for individuals and society. And, yes, Americans still long for a home of their own.
By Brian Summerfield | February 2011 by Realtor Mag

In a special Forbes magazine report in 2007, the publication asked dozens of prominent cultural, political, and economic figures to offer their definition of the phrase “American Dream.” As one might expect, the answers were wide-ranging in content and tone. For some, the concept had evolved, and not necessarily for the better: Filmmaker Mel Brooks said that during his childhood, it referred to home and car ownership, yet today it means winning “American Idol.” Astronaut Buzz Aldrin said it “used to be achieving one’s goals in your field of choice” but added that he thought it had “morphed into the pursuit of money.”

One of the most resonant and thoughtful answers came from media personality Martha Stewart. She quoted Samuel Johnson, “To be happy at home is the ultimate result of all ambition,” and expanded on that sentiment in her explanation of the American dream: “Our families and our homes are the center of American life. And everything we do is to make those homes—and the lives in them—more beautiful, more comfortable, more functional, and more full of life and light and joy for those we love. At the end of the day, that is the American Dream. All the rest is window dressing.”

It’s true: Home is the one place where we create an environment that’s all our own. It’s also where we establish traditions, mold our family’s values, and form our identity. But does it matter whether we own the home or not? In the past several months, as the country has worked to sort through the wreckage of the financial crisis, that question has been hotly debated, with some critics saying that too much emphasis has been placed on the virtues of home ownership.

“The conversation is appropriate,” said NATIONAL ASSOCIATION OF REALTORS® President Ronald L. Phipps in an op-ed piece published in the Washington Times Dec. 21. “The cost excesses of the past decade cannot be ignored or minimized. That said, they should not be amplified to the extent that we forget or ignore the true value of home ownership to our great nation.”

For Realtors®, there’s no more urgent business in 2011 than debunking the notion that home ownership is no longer part of the American dream. It’s a premise stated most famously in a September 2010 Time magazine cover story. Writer Barbara Kiviat said Americans had made buying a house into a “fetish,” responsible for a litany of ills ranging from lingering economic stagnation to suburban sprawl. In the same month, Daniel Indiviglio of The Atlantic said that while it can be “great in many situations,” home ownership probably “shouldn’t be considered to be a part of the American dream.”

NAR leaders have been countering such commentaries with a large-scale campaign that includes national advertising, regular communications to Realtors® and the media, outreach to consumers, and advocacy on Capitol Hill. Their message to the public and politicos alike: Home ownership matters—to people, to communities, and to America. At stake, they say, is not just the health of the real estate brokerage industry but the very values upon which the country was built.

“The people of the United States have believed for 234 years that property ownership is a core value for this country,” Phipps wrote in his op-ed. “To say that America should no longer invest in home ownership, to say that we should stop encouraging people to own a home because the system failed them, is to forget who we are as a nation.”

The message is getting through. NAR began tracking “media impressions” on topics related to the campaign last fall, categorizing them as positive, negative, or neutral. In a recent week, including the Phipps op-ed piece, NAR counted 11.7 million positive impressions about home ownership. Impressions have been running 2:1 in support of NAR’s view.

Spread the Word: Data Tells the Story

Both past research and a recent poll conducted by NAR and Harris Interactive back NAR’s assertion that ownership remains a dream of Americans and makes a positive difference in people’s family relationships, their finances, and their feelings of connectedness to their community.

Respondents to the NAR-Harris poll—both owners and renters—cited financial security as the most important factor in achieving the American dream. Asked if owning a home was a better financial decision than renting, an overwhelming number of home owners, 96 percent, said it was—and 71 percent of renters agreed. Even in the midst of an economic crisis, both groups see home ownership as a smart financial move, a means to achieving financial security.

And they’re right. Data from the Federal Reserve shows a very real and extreme disparity in wealth between home owners and renters. In 2007, the median net worth of home owning families was $234,200 compared with $5,100 for renting families, according to a Federal Reserve Board report on household finances.

Before you dismiss that gap as a product of the housing boom, consider that in 1998, prior to the real estate market heating up, home owning families’ median net worth was $168,200, while net worth for renters was just $5,400. (Figures from both years are calculated in 2007 dollars.)

Newer Fed data, which was collected in 2010 but likely won’t be released until 2012, will likely reflect the decline in home values but show a continued wide gap between owners and renters.

Moreover, when comparing median net worth to median earnings, home owning families come out ahead: Using the Federal Reserve’s numbers again, owners’ net worth comes out to about two to three times their before-tax income. On the other hand, the net worth of renters amounts to only about 20 to 25 percent of their before-tax income.

If financial stability is a cornerstone of the American dream, ownership offers a clear advantage, says David K. Stark, president of Stark Co., Realtors®, in Fitchburg, Wis., and author of the South Central Wisconsin Real Estate Blog, which focuses on national and local real estate market trends.

“Home ownership is perhaps the surest way to accumulate net worth that there is, and it is often the largest and most important part of the total portfolio of many middle-income Americans,” Stark says. “The beauty of home ownership in this regard is that it tends to be a slow, almost inexorable wealth builder. In many ways, it operates more like a savings account than an investment. Each mortgage payment is like making a savings deposit, slowly building equity.”

There are benefits for society as well. According to a 2001 report from Harvard University’s Joint Center for Housing Studies, students from families that owned houses scored much higher on Peabody Individual Achievement Tests for math and reading than those from families who rent.

And owners are often the glue that holds a community together. More than half of home owning respondents to the NAR-Harris Interactive poll felt “connected” and “committed” to their communities, whereas fewer than 40 percent of renters acknowledged similar feelings. Owners were more likely to say they felt safe in their neighborhood, and it’s no wonder: They’ve lived in their home longer and are more likely to know their neighbors extremely or very well. For the same reasons, a majority of both renters and owners said ownership strengthens a community.

While the Harris analysis made clear that no causal relationship could be established, it concluded that there’s a “strong correlation” between owning a home and:

•Community satisfaction
•High quality of community life
•A community connection
•Civic engagement
•Volunteerism among civic organizations and parent/teacher organizations

The MID and its Malcontents

Given the correlation between home ownership and community involvement, it’s not hard to see why the government would have established policies such as the mortgage interest deduction to support home ownership. For most Realtors® the deduction is sacrosanct. Nearly 80 percent in a recent poll said they agreed with NAR’s position that the MID should be maintained in its current form. But with the federal deficit ballooning to accommodate economic stimulus efforts, calls to change or even eliminate this long-standing incentive have grown louder and more intense.

A tax-reform proposal announced in December 2010 by Alan Simpson and Erskine Bowles—cochairs of the bipartisan National Commission on Fiscal Responsibility and Reform appointed by President Obama—offered just such a change. Simpson, a former Republican senator from Wyoming, and Bowles, a White House chief of staff under President Clinton, proposed addressing the federal government’s shortfall by—among other things—converting the mortgage interest deduction to a 12 percent nonrefundable tax credit, capping the mortgage amount at $500,000, and eliminating credits for second residences and home equity.

Although the plan fell short of the 14 votes from the 18-member commission needed to formally recommend it to Congress, it did get 11 votes, prompting Simpson and Bowles to predict that parts of their proposal would make it into future legislation. Another recommendation from the commission was to eliminate most or all tax expenditures, which would remove the $250,000/$500,000 capital gains exclusion on the sale of a principal residence, thus putting many home sellers in a higher tax bracket the year they sell their houses.

Kiviat’s article was well-timed to throw fire on the MID debate: “Washington throws more than $100 billion a year in tax breaks and subsidies at buyers through the mortgage-interest and property-tax deductions. … None of this is particularly fair: there are no blanket subsidies for the tens of millions of American families that rent either because they choose to or because they have to. Nor are these tax breaks efficient economic policy.”And Kiviat wasn’t the only writer to take a stab at the MID: John Tamny, writing for Forbes.com, said in November 2010, “[W]hy should those of us who choose not to own houses subsidize those who do? That the mortgage interest deduction is landlocking individuals at a time when they need to be highly mobile in pursuit of work is yet another reason to abolish a tax-code provision that the property-less must cover.”

The curious thing about this line of reasoning? A large majority of renters support the MID. According to the NAR-Harris poll, about two-thirds of renters—along with three-fourths of home owners—said the mortgage interest deduction was “extremely” or “very” important to them.

If the tax system is so unfairly tilted toward home ownership, why would so many renters say it’s so critical? Although the question wasn’t asked, one could extrapolate the reason: They believe in the American dream, and see home ownership as a means to it.

Home Ownership’s Defenders

Many commentators, politicians, and organizations have stepped up to defend the institution of home ownership and federal tax incentives for owners. In addition to NAR, which rolled out its Home Ownership Matters campaign in the fall, the National Association of Home Builders has launched a consumer Web site and a variety of other groups have signed on to the principles of NAR’s campaign. Among them are the National Community Reinvestment Coalition, Habitat for Humanity International, and the Center for Responsible Lending.

National figures such as Democratic political strategist Donna Brazile and Linda Chavez, author of An Unlikely Conservative: The Transformation of an Ex-Liberal, have written commentaries warning against using the current financial crisis as an excuse to end home ownership incentives. “We’re living in a cynical time,” Brazile wrote. “Americans are cynical about the economy, about the role of government and about their children’s prospects for the future. The one thing that Americans aren’t cynical about is the promise of the American Dream and of home ownership’s role in that dream.”

With the release of the Simpson-Bowles tax reform proposal, Phipps vowed that NAR would remain “vigilant” against any proposals that would fundamentally change the MID. In December, NAR issued two calls for action, each intended to emphasize the importance of the MID to Congress. The first, which targeted the U.S. House of Representatives, was launched Dec. 1, the day the Simpson-Bowles Commission was scheduled to vote on the reform plan (though the vote was delayed two days). The second, focused on the Senate, was issued the following week.

At the Home Ownership Matters page on REALTOR.org, NAR provides links to breaking news, key research, online tools, and resources for associations and members who want to help spread the word about the importance of this key institution. To stay up to date on important home ownership news and events, visit REALTOR.org/homeownership.

The fight to preserve and protect home ownership is just getting under way and will likely rage until there’s a turnaround in economic conditions. Will real estate practitioners step into the fray and make the case for home ownership to consumers? NAR is counting on it. N

Young People Want to Own, Too

One thing that’s clear from the 2010 NAR-Harris poll: Young adults are just as committed to becoming home owners as their parents and grandparents before them.

Of the 798 young adults (ages 18–29) who participated in the poll, about three in four say owning a home provides a healthy, stable environment for raising a family, and more than two-thirds say owning contributes to their long-term financial goals. More than eight in 10 said that over a period of several years, it makes more sense to own a home.

At the same time, young adults believe it has become more difficult to achieve the American dream. Seventy-one percent say it is more or much more difficult than it was for their parents’ generation, and 72 percent predict it will be even more difficult for the next generation.

This difficulty would almost certainly be exacerbated by the elimination or reduction of incentives such as the mortgage interest deduction, says Fitchburg, Wis., practitioner David Stark: “The MID has been with us since the early part of the 20th century and is deeply embedded in the economics of our housing industry. While I’m sure the housing market, over a period of many years, could eventually adapt to the loss of the MID, it would be a painful process to go through.

“If you want to prolong the recession by another few years, keep talking about eliminating the MID,” Stark says. “On the other hand, if you’re interested in seeing the recession end and employment pick up, then don’t even think about eliminating it, and pursue policies that will build a floor under housing values and restore consumers’ confidence in the value of their home.”

Six Reasons You Should Google Your Address

February 16, 2011

By Tara-Nicholle Nelson, A Broker in San Francisco, CA

It seems almost negligent these days to go meet with a prospective employer, set your kid up on a sleep-over or even add an old friend on Facebook without first running the company’s name, your kid’s pal’s parents or your old college chum through Google — just to see. But it’s nowhere near as common (yet) to Google or otherwise do an internet search for your home’s address.

There are at least six compelling reasons it makes sense to do so, though — especially if it’s an address you’re thinking of renting, buying or selling. Smart homeowners would do well to search for their addresses, too, and here’s why:

#1. To See If Megan’s Law Registrants Live Nearby.

Safety first, folks. Megan’s law requires law-enforcement authorities to make information available to the public regarding registered sex offenders in their neighborhoods. Nearly every state that has a Megan’s law-type sex offender registry has an online version that serves up the names, addresses, sex-offense history, and even photos in many cases, of convicted sex offenders who are registered as living at a certain address. Googling your address and “Megan’s law” — or even your city or zip code and “Megan’s law” — will turn up a quick list of nearby registrants. Alarmism is not a good look — ever, but many homebuyers with young children highly value this information, especially while they are still in their contingency or objection period, before their home purchase is finalized.

#2. To Find Crime Reports and Data for Your Home and Environs

Cities, counties and state law enforcement agencies all post crime data online, but a Google search for your address or city and “crime reports” is most likely to turn up your local police or sheriff’s office’s crime map. Or, you can check out the crime stats around a specific property on Trulia’s Map & Nearby tab on the detailed page for your home’s address. In my town, for example, you can see a crime map of recent incident reports for the whole city, by zip code, by neighborhood or by address. You can zoom in and out, and the map is in color and letter-coded with little icons representing different types of crimes: red is for violent, blue is for drug crimes, green is for property crimes; and the most common specific offenses reported get their own two-letter code. Whether you own or rent your home, if you hear a siren and wonder what happened, Google might be a good place to look.

This is also a good strategy for home buyers to leverage. In fact, when new homeowners Robert Quigley and Jennifer Friberg started developing headaches and other strange physical symptoms after moving into their first home, a neighbor dropped the informational bomb that the home’s previous resident had been cooking methamphetamine in the home. In a panicky effort to suss out the truth, they Googled their address and – yikes! – found it listed on the Drug Enforcement Administration’s database of meth labs! If you’re considering buying a home, or moving to a neighborhood with which you are not completely familiar, doing a quick address search on Trulia or Google holds the potential to reveal some disturbing or comforting crime activity information.

#3. To Detect Scammers Trying to Rent or Sell Your House.

In one of those if-only-they-would-use-their-powers-for-good-not-evil scenarios, Internet scammers have taken to ripping off home information and putting together fake listings offering other people’s homes for rent or, often, lease-to-own. They often list the home on extremely cheap and easy terms, then ask the would-be-buyer or tenant to please wire or send the deposit money overseas, where the faux-seller can get it while they’re traveling in — you guessed it — Nigeria. (And, BTW, I have friends from Nigeria who even distrust emails they get purporting to be from Nigeria!)

These scams come to light, most often, only after the homeowner or current resident notices all the bargain-hunting wanna-be tenants start peering in the windows and tramping through the backyard, checking the place out. If you are getting an inordinate amount of street or foot traffic to your home, or someone knocks on the door asking if they can see the place, you may want to Google your address. If you find a fraudulent listing, contact us, identify yourself as the home’s rightful resident and ask us to take the scam posting down – stat!

# 4. To See What Your Neighbor’s Place Sold for and Possibly Lower Your Property Taxes.

In real estate, the value of your home is largely driven by what similar, nearby homes have recently sold for (“comparable sales,” or “comps” for short). That gives every homeowner a valid reason for wanting to know what the neighbor’s place sold for (on top of your purely voyeuristic need to know). If you search your address, Trulia will first surface some sort of image of your home, a map, the basic property details from the public records (see No. 5, below), and recent sales data for your own home before listing out the comps — homes with similar numbers of bedrooms, bathrooms and square feet as yours, near yours, and what they recently sold for. Googling your address, in this instance, does double duty — letting you satisfy your cat-killing curiosity to know what your new neighbor paid for their place, and track the value of your own home at the same time!

And as an added bonus, if you see a pattern of homes selling for lower than your home’s assessed value, you can use those comps to petition your County to lower your own property taxes!

Three birds, one stone – you get the picture.

#5. To See Your Home’s Property Records.

It’s a story as old as homes — well, at least as old as websites that display home records and listings. Your home’s records online are populated from the public records about your home, which are either so old they don’t include the upgrades and additions that have been done over time, or they’re just flat out wrong for a number of reasons. My last home, while large, certainly did not have the 25 bedrooms one site listed it as having. On the other hand, it also was not a boarding house, which is what that site listed as the property’s County-designated use. If you Google your address, or search for it on Trulia, and find that your home’s description is riddled with errors, contact us or your County public record agency to correct them; this is particularly important if you’re planning to sell your home anytime soon.

#6. To See Your Home’s Google Street Views.

When you’re selling your home, it’s especially critical to see everything that prospective home buyers will see. That means checking out how your home’s listing looks on all the online real estate sites (yes, even on Trulia), checking out the flier – even stopping by to check out any staging your broker or agent did if you’ve already moved out. One thing even most savvy sellers don’t check out is the way Google Maps Street Views depicts your home. If you’re unfamiliar, Google actually hitches up cameras to cars and sends them up and down public streets worldwide, so that Google Maps users can go from an overhead view of a street via satellite to seeing panoramic pics from the street from curb level with one click.

Trust me, home buyers know this, and do this. They often use Street Views as a shortcut for seeing whether a home’s photos are just fuzzy, or whether it’s next door to the local hoarder’s house. Here’s the problem: Sometimes, the street views can be outdated. I did a major remodel on my home a few years ago, and the photo was clearly taken mid-construction: with dumpster in front, unpainted siding and all. If you’re about to sell your home, and you notice that the street view is outdated, mention it to your agent, and ask them to make a note of that fact in the listing information.

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FICOs and FHA: 2 big lenders loosen up

February 15, 2011

Wells Fargo, Quicken Loans revise credit, down payment requirements
By Ken Harney, Monday, January 31, 2011.
Inman News™

Here’s some unexpected good news for anybody working to get buyers into houses, especially first-timers who don’t have much down payment cash on hand: The door to an FHA-insured mortgage just opened a little wider.

With no fanfare or public announcements, two of the largest FHA-approved lenders have backed off their controversial “overlay” requirements on FICO scores (lender overlays are qualification requirements that can be more stringent than FHA’s own requirements).

Both Wells Fargo and Quicken Loans confirmed to me last week that they will now lend to applicants with 580 FICOs and 3.5 percent down payments.

Their revised standards conform in most respects to FHA’s own minimums, and open the agency’s financing to large numbers of buyers whose credit scores have sagged during the recession. Wells Fargo is the largest originator of FHA-insured mortgages; Quicken ranks third, according to industry data.

Along with most other major lenders, both companies previously had insisted on minimum FICOs of 620 for otherwise qualified borrowers seeking 3.5 percent down payment loans. If your score came in even slightly lower, they wouldn’t even look at your application.

An estimated one third of Americans now have FICO scores below 620, according to one consumer group’s estimate.

The lending industry’s rationale for imposing a higher bar than FHA’s own: They need an extra cushion of protection against potential defaults by borrowers with subpar credit scores. Many of those defaults, they said, could prompt indemnification demands by the Federal Housing Administration — essentially punitive repayments for insured loans that go belly up.

Michael D. Berman, chairman of the Mortgage Bankers Association, said last week that lenders have adopted FICO score minimums and other overlays that add to the costs of getting a loan because they “are just afraid. We are not going to play out on the edge if we’re going to get stuck” with buybacks or indemnification demands.”

Similarly, FHA lenders want to avoid the costs of servicing nonperforming defaulted mortgages.

FHA commissioner David Stevens says he understands the lenders’ concerns, but that many applicants with 580 scores have solid incomes and generally good credit histories. Their current scores are depressed, he argues, because “they went through the recession and suffered some damage, such as short-term loss of income,” which caused them to be late on some payments.

If lenders look hard at the causes of their problems and underwrite carefully, such borrowers “do not present excessive risks of default,” he says, which is why FHA set the FICO score bar for 3.5 percent down payment loans at 580.

The mortgage industry’s overlay policies have prompted criticism from Realtors, builders and consumer groups. The National Community Reinvestment Coalition filed complaints against 23 lenders — Wells and Quicken were not among the targets — charging that setting tougher credit standards than required by FHA discriminates against minorities and violates federal fair lending and equal opportunity statutes.

Wells’ newly revised policy actually dips the FICO score cutoff line well below 580 — all the way down to deep subprime 500 — but also sets strict underwriting hoops and snares to weed out unqualified applicants.

For example, borrowers with scores between 500-579 will need a 10 percent down payment from their personal resources. They will not be able to use gift money from relatives, friends or a charitable down payment assistance program to meet the 10 percent upfront equity test.

Home buyers with scores of 580-599 will need 5 percent down payments, and will be prohibited from supplementing their own cash with gifts. Borrowers with FICOs above 600 will qualify for 3.5 percent down payment FHA deals, but will be allowed to use gift money.

Contributions from home sellers to defray buyers’ closing or loan origination costs will be limited to 3 percent. Debt-to-income ratios will be tight: 31 percent for monthly housing-related expenses, and 43 percent for total household debt service.

The expanded program will only be available through Wells’ retail lending channel, not through third-party brokers or correspondent lenders.

Tom Goyda, a Wells vice president and spokesman, told me that “these requirements are designed to ensure that we lend to customers who we believe will be able to manage their finances, given the anticipated ongoing challenges in the economy.”

Bob Walters, Quicken’s vice president for capital markets and chief economist, said his firm will now accept FICO scores down to 580, but no lower. Quicken also insists on key underwriting restrictions on debt-to-income ratios and limits on gift funds.

Walters would not disclose the specifics, but said they are “very close” to Wells’ 31 percent and 43 percent requirements, and that all borrowers with low FICOs must be able to demonstrate that their down payments are from their own funds.

In a phone interview last week, FHA’s Stevens told me that the Wells approach “is well thought out and could serve as a model” for other large lenders to consider in the coming weeks.

He would not identify other major companies that may abandon their 620-640 FICO minimums, but said he hopes that many more will take a hard look and follow suit.

“The idea is not to have habitual late-payers” get FHA-insured mortgages to purchase houses, Stevens said, but rather to provide homeownership opportunities to genuinely qualified buyers who simply have temporarily depressed credit scores.

“Anybody who is lending” during the current environment of falling home prices and high unemployment “has to be extremely careful about making policy changes that add to their risks, but we also need not to exclude qualified families from access to homeownership,” Stevens said.

If the mortgage industry adopts the Wells and Quicken guidelines in some form, tens of thousands of consumers — along with the real estate professionals assisting them — could be beneficiaries in the weeks immediately ahead.

But keep this in mind: You may need to reach out to loan officers to inquire about any policy changes. So far, nobody’s been on the rooftops shouting about the good news.

Ken Harney writes an award-winning, nationally syndicated column, “The Nation’s Housing,” and is the author of two books on real estate and mortgage finance.

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