If the residential real estate industry wants to survive, it had better stop telling us how many people can't afford to buy a median-priced home and start telling our political leaders what they can do to increase home ownership.
If legislative measures are not enacted soon, the current affordability gap will become a much deeper economic and political chasm, one that could lead to a voter revolt the likes of which haven't been seen since Proposition 13 was passed.
Politicians should consider the following six homeownership relief measures, which could be easily legislated and funded by various governmental agencies and then marketed in the private sector primarily through traditional financial institutions.
1--Tax-free Individual Downpayment Account (IDA).
Modeled after the popular Individual Retirement Account (IRA), this would allow new home buyers to make pretax contributions for down payments under federal government guidelines specifications for IRAs. No tax liability would result when the money was withdrawn if used as a down payment by a first-time home buyers.
Not only would this make financial sense, it would paint a sympathetic and compassionate picture of the IRS.
2--Corporate Incentive Programs.
Under this proposal, corporations would be encouraged to use funds from employee pension funds to provide or guarantee higher-leverage or lower-rate home mortgages and equity loans for its employees. Certain corporate tax incentives would be included with such a program.
Many employes, if polled on this issue, would welcome the support from their employers.
3--Zero-down, Interest Holiday Loans.
This proposal calls for the creation of a financial instrument (such as a 31-year mortgage) that would apply all or a portion of the first year's mortgage payments toward a down payment on the home with no interest to accrue during this "interest holiday."
Similar to retail financing programs that advertise "no payments for 90 days," the lender would defer collection of mortgage payments for up to 12 months. During this period all payments made would represent down payment installments.
Lenders would maintain their yield by collecting higher-than-standard payments over a specified amortization period once the holiday is over.
This program would require a Veterans Administration-type federal government guarantee against default or prepayment and would also need a secondary market. Borrowers would also be subject to a prepayment penalty.
4--First-time Home buyer Tax Shelter.
By allowing first-time home buyers to recognize $2 of tax deduction for every $1 paid in mortgage interest over a limited period of time, more potential home buyers could qualify for home loans.
For example, assuming a 28% tax rate, the approximate after-tax cost of a $1,000-per-month mortgage payment is $720. If a double deduction were allowed, the after-tax cost could be reduced to $440.
This program should be accompanied by revised underwriting guidelines, which would permit lenders to qualify buyers based upon the after-tax housing costs. Such a program could be financed by imposing an upper limit on interest deductions for expensive homes in the $750,000 to $1 million range.
5--Shared Appreciation Mortgage Tax Option.
Popular only among cash-rich investors who don't need the tax deduction and down payment-poor buyers, this option could grow even more appealing if the government would allow the investor a shelter for a portion of his income upon sale of the home.
Currently, when the home is sold or refinanced at a mutually agreed upon time, the investor's proceeds are taxed as income. This could also increase in popularity if a secondary market were created for SAMs.
Institutionalizing SAMs also would help spur this option, and could make them available through corporations and other institutions.
6--Corporate Tax Incentives.
Because taxes are a powerful motivator to most corporations, the federal government should create tax shelters and reductions in corporate liabilities on earnings if they participate in government-sponsored loan programs for employees and in the development of affordable housing for employees.
Most major corporations own unused property holdings that could be developed into such housing.
These measures should be heralded by lawmakers as positive steps they can take to help this growing and increasingly frustrated portion of their constituencies. At the same time, the savings and loan industry also can use its support of this back-to-basics approach to help spruce up its battered public image.
In addition, a much more aggressive public stance must be taken by corporations, which need to assume a leadership role in providing entry-level housing for their working young, much like Japan and other nations are doing.
Areas such as San Bernardino and Riverside counties, which have provided a haven for entry-level buyers during the latter part of the 1980s, have lost much of their price advantage and are becoming out of reach for first-time buyers. And it is these markets that are likely to be the hardest hit by the affordability crisis.
When that happens, legislators and others will find that what they thought was only an economic issue--housing affordability--has become a volatile political issue as those priced out of all housing markets express their frustration at the ballot box.