Though America’s mortgage system subsidizes homebuyers, its dysfunction has cost all taxpayers dearly. Few constituencies with much clout are pushing for change. But the nation’s 39 million rental households – often an afterthought in the housing debate – ought to be up in arms. They might find unlikely allies, too.
Renters may be the only big group in the United States that isn’t invested in the status quo. Homeowners, realtors, homebuilders and banks all benefit from the government’s hand in housing, exercised through Fannie Mae and Freddie Mac, which buy and guarantee mortgages, through other federal vehicles, and through tax rules that subsidize mortgage interest.
This makes home financing cheaper and, usually, more liquid, which in turn makes homes of any given price more affordable and potentially easier to sell on. Banks and investors, meanwhile, are wedded to the security a government guarantee brings to their respective loans and bond investments. And politicians, who have long extolled the virtues of homeownership, are loath to do anything that would make it more difficult for voters to achieve their idea of the American Dream. The trouble is, that’s what would happen if reforms are introduced that reduce or scrap the role of the government’s money and policy objectives in the market.
But rent-payers ought to like that idea. They miss out on the huge tax deductions mortgage interest payers get. And their savings bring in more return when the Federal Reserve hikes interest rates, in contrast to households with equity in homes that in theory go up in value when the Fed pushes lending rates lower and lower. Meanwhile, renters have been hurt by fallout from the housing bust. As taxpayers, they are set to suffer the costs of the government’s attempts to shore up housing – more than $150 billion and counting in losses at Fannie and Freddie alone. And as struggling homeowners hit the rental market, rents are going up too.
At the same time, the ranks of renters are filling up with younger Americans who have witnessed the nightmare of homeownership rather than the dream espoused by older generations. The 44-and-under crowd has been hard hit, with their homeownership rate falling by more than seven percentage points since 2005 to 62.3 percent, according to the U.S. Census Bureau. This matters since they will tell their tales for years to come, potentially undermining the belief that homeownership is part and parcel of American prosperity.
Meanwhile, borrowers who owe more than their home is worth are weakening a key supposed advantage of homeownership: that mortgage deeds bring good deeds to a neighborhood. That probably still applies when someone has a chunky equity stake in their home. But more than a quarter of homeowners now do not. This group is much less likely to fork over, say, $20,000 to fix a leaky roof if it’ll only help the bank’s bottom line rather than their own. Underwater homeowners look a lot like renters with giant mortgage millstones hanging around their necks.
Despite all this, and the likelihood that mortgage reform would save the government money, the policy debate is still aimed at restoring the idea of homeownership to its inflated pre-crisis glory. That has delayed efforts to even consider dismantling the likes of Fannie and Freddie, and diluted the potential for moves like slashing mortgage tax breaks.
A rhetorical uprising of renters could refocus and reinvigorate this discussion. They lack the artificial aura of maturity and material success that seems to attach to owning a home in the United States. But that perception of renting could change. Just look at Germany. It’s an economic powerhouse, even now in troubled Europe, and less than half of its households own a home, against 66 percent in the United States.
The renter lobby may even find friends in strange places. Wealthier or older homeowners who have paid off their mortgages can’t be happy about the likelihood of forking over higher taxes to pay for the last decade’s excesses. Of the 75 million homeowning American households, roughly a third don’t have a mortgage, if the findings from a 2009 American Housing Survey still hold.
In addition, market-friendly conservatives, at least in better economic times, have long advocated the demise of Fannie and Freddie in favor of freer markets for homes and the loans needed to buy them. It might seem a slightly odd coalition. But if renters, retirees and red-staters got together, they could become a force to be reckoned with in the housing debate.