If you’re like me the dream of one day buying a home is still a long way off.
Sure, homeownership doesn’t exactly make sense for most college students. Better to find some roommates, dig up a cheap apartment, and hope you don’t do anything to lose the security deposit. But, for recent graduates and other young professionals renting is becoming the new norm.
The most recent census data reveals that the effects of the economic downturn are rippling through younger generations in a number of ways. We’re delaying life decisions like getting married and starting a family, but it’s also reducing homeownership rates as more young people decide to rent or move back in with mom and dad.
According to the census, homeownership has dropped most substantially among young people. Indeed, only 38 percent of those under-35 years old own a home. And even that number is skewed dramatically towards the upper end of the broad age group.
But just because we don’t own a home doesn’t mean that President Obama’s latest housing programs won’t impact us.
In case you missed it, Obama has spent the past few weeks attempting to sell a new plan to help get the housing market back on its feet. The plan calls for three parts. First, he proposes using the Federal Housing Administration, a government-run mortgage insurer, to refinance some underwater homeowners (those who owe more than their house is worth). Second, it calls for Fannie Mae and Freddie Mac to write down some mortgage principals, meaning that homeowners would suddenly owe much less on their homes. And third, the cost would be partially offset by a new tax on financial firms.
It makes for pretty clever politics. Housing is one of the key problem spots for some important swing states like Nevada and Florida, so appearing to have a plan can only help in those areas. Moreover, the bulk of the plan is being run through the FHA an easy way to keep Fannie and Freddie, which have been the subject of much ire, out of the news. And even if none of this goes into effect it allows the President to amplify two synergistic messaging themes he’s used to perfection in recent weeks: (1) Obama is doing everything he can, (2) but he’s trapped by a do-nothing Congress.
While it may be good politics there is no doubt it is bad policy, especially for young adults.
In essence, the plan is a massive wealth transfer from renters (many of whom are young adults or people who can’t afford homes) to homeowners. As Senator Bachus (R-AL) recently wrote in the USA Today, “[Obama] means well, but . . . it shifts the risk for borrowers who owe more than their home is worth from banks to taxpayers through Federal Housing Administration loans with a 100% government guarantee.”
Such a policy simply doesn’t make sense with so many young adults struggling relative to older age groups. A new Pew Research poll finds that far more older adults would rate their personal financial situation “excellent” or “good” compared to young adults – a gap that did not exist as recently as 2004.
Moreover, it is not as if the FHA is in great fiscal shape as it is. According to a recent report by the agency’s auditor there is nearly a 50 percent chance that the FHA will need a bailout within the next year, especially if the housing market deteriorates any further. As it stands the FHA only has $2.6 billion in reserves against a $1.1 trillion mortgage portfolio. That’s the equivalent of being levered 423 to 1 not long after banks failed left and right because they were overleveraged at 30 to 1.
So if the program works as planned taxpayers take on new debt, if something goes wrong at the FHA it could cost billions of dollars more.
Obama’s plan does include a small pay-for in the way of a new tax on financial firms, but this would only make the problem worse. The real problem that is holding back the housing market, and therefore the economy, is the lack of available credit. Having learned from the previous crisis and faced with much regulatory uncertainty, banks have enacted stringent requirements on just who they will lend to.
And yet, Obama’s plan would enact a new tax on these banks, likely causing lending standards to tighten even further as banks struggle to amass enough reserves. The result is a double whammy for young adults – not only are they forced to pick up the tab for some homeowners, but should they like to become a homeowner themselves they will struggle to find a loan.
If Obama’s housing plans succeed, college student’s and other young adult’s dreams of one day becoming homeowner may be pushed further into the future.