Home ownership is the American dream. For many years, the government has been doing what it can to make it possible for most Americans to own their own homes. This is a worthy goal, but the way we’ve been going about it is flawed. It only works if home prices increase forever. To understand what went wrong, you have to look at some history.

In the very distant past, only the rich were land owners. Everyone else rented or leased in some form. Part of the rise of the middle class was that more people could afford their own homes. Buying a home meant that you had made it. It was security for the future, and something of value to pass on to your children. If someone didn’t buy a home, it was because they couldn’t get the down payment together or make mortgage payments.

Enter the federal government. To help people make that transition from poor to middle class, the government instituted tax incentives for home ownership. For most people, mortgage interest and property taxes are deductible. That makes a huge difference in a family’s budget. For many years, if a person could scrape together a 20% down payment and prove that they could make the monthly mortgage payments, they bought a house.

This increased demand, which of course, increased prices. In many cities, family sized homes became too expensive for a young family just getting started. So the idea of starting small and moving up was born. An individual or couple purchased a condominium to get their foot in the real estate door. In a few years, they could sell the condo, using the increase in value as a down payment on a larger home. This changed the landscape in a couple of important ways. First, a person would incur the costs of buying and selling a home a couple of times over their lifetime. That eats into the savings. Second, and more important, this model only works if home values increase at greater than the rate of inflation over time. If home prices remained stable over the long run, it would be better to save up until a person could buy the home they’ll need for their family. The tax incentives exacerbated the problem. Since you can save money on taxes each year that you own a home, it’s better to buy something – anything – as soon as you can.

The increasing home values had a down-side though. It became more difficult to get the 20% necessary for a down payment. So programs were instituted to allow buyers to get a loan with lower down payments. Although this greatly reduced a major hurdle, it also reduced the stake that a homeowner has in his own home. If you buy a home with 3.5% down, then values decrease, you’re better off to walk away from the home. Selling costs alone are about 10% of a home’s value. If prices increase over time, things are still good. The whole market relied on ever-increasing home prices.

But there were still people who couldn’t afford a home because they couldn’t prove to the lender that they could make the mortgage payments. Enter the stated income loan. You just tell the lender what they want to hear, start with a teaser rate, and by the time the payment increases, the value of the home will have increased enough to allow a refinance. Now you’re not only counting on ever-increasing home prices – you’re counting on the value of every home to go up fairly significantly in two years time.

Of course that can’t happen consistently. As soon as the two year mark passed on all these stated income loans, things started crashing in.

Buying a home is still a good idea for many people. Potential home buyers, and the government, should assume that home prices will remain stable (consistent with overall inflation) in the long run, but that they might fluctuate more in the short term. Government programs and incentives should assist would-be home buyers if it’s a good decision to buy under these assumptions. Then what is good for the individual home buyer will coincide with what’s good for the housing market.

Author Bio: Written by Hannah Valez New Homes Chula Vista San Diego New Homes New Homes Carlsbad

Category: Real Estate
Keywords: real estate economics, home ownership, incentives to buy a home