Stories from Strapped: Housing

This is part 4 in the Stories from Strapped series. Previous posts in the series are:

• Stories from Strapped: College Education
• Stories from Strapped: Paycheck
• Stories from Strapped: Debt

Chapter 4 in Strapped: Why America’s 20- and 30-Somethings Can’t Get Ahead by Tamara Draut is The High Cost of Putting a Roof Over Your Head. No need to explain. The author says the younger generation can’t get ahead because housing is too expensive. I’m only interested in the stories.

Lori earns $97,000 a year but she still can’t afford to buy a home because she lives in a big city.

Ricardo and Salina, both immigrants from Mexico 18 years ago, can’t afford to buy a home either. They live in Bronx.

Irene, 33, returned to her parent’s home. She and her ex-husband Adam used to live in a studio apartment in Manhattan, paying $1,900 a month in rent. They could afford the rent because Adam worked in corporate law. She earned $54,000. They lived paycheck to paycheck and wedding expenses added to the financial strain. Adam kicked her out after they had an argument. She couldn’t afford to live in New York city on her own salary.

The author Ms. Draut didn’t say exactly where Lori lives but she mentioned Boston, San Francisco, Los Angeles, New York, and Washington, D.C. as expensive big cities. Is this Lori the same Lori in Manhattan from the last chapter who has $40,000 in student loan debt? $97,000 a year even in Manhattan isn’t too bad, is it? Some people like big cities. Some prefer smaller towns. Income and living expenses are different. Lifestyles are different. We can’t expect to earn a coastal big city salary and pay Midwest small town housing prices, can we? I don’t know what we are supposed to do to address this housing affordability problem. Put in price control like rent control in some cities? Housing prices don’t exist in a vacuum. They are high because other people are paying those high prices. They are your competition. You either have to compete with them head-on or refuse to play the same game with them. Rent, buy less desirable home, or go somewhere else.

The next story:

After working in San Francisco on a $41,000 a year salary as a teacher and paying $1,050 a month in rent, Tony moved to San Diego. His salary is lower, at $36,000 a year, but the rent is lower too, at $700 a month. It’s a little better but he still lived paycheck to paycheck. He had to borrow money from his parents five times in the last two years, usually for weddings and car repairs. He will have to find a girlfriend if he wants to buy a condo.

There we see weddings again. Perhaps it has become socially unacceptable if members of our 18-to-34 generation don’t attend their friends’ weddings even if they live thousands of miles away. Or perhaps our author Ms. Draut is really a fan of weddings. Going to weddings is perfectly fine. It’s all a matter of priority. I don’t see a problem with not being able to buy a condo on one income either. Is every single person expecting to buy a condo? Where does that expectation come from?

Another story:

Nancy and Ed earn $46,000 a year in a suburb near Cleveland. They pay $730 a month for rent. Their other big expenses were their car payments, which cost $700 a month. They drive a 2004 Chevy Cavalier and a 2003 Dodge Sebring (the book was written in 2005). They’d like to save $15,000 to $20,000 for a house down payment but they only saved $1,000 so far. Nancy explains why they are so far away from their goal — “Every time we try to put money in the bank to save, there’s no extra to put away. By the time we get done paying the bills, there’s always something else requiring an expenditure — a birthday, anniversary, or wedding — and so there’s nothing left.”

I’m starting to repeat myself. So I will just leave it like that. You tell me why Nancy and Ed can’t buy a house.

There is a fourth story about Robin and Jack. They make $160,000 a year. They bought a house in Norwalk, Connecticut for $487,000 with the help of their parents for down payment. The author laments that Robin and Jack live paycheck-to-paycheck because their mortgage costs them $2,500 a month.

What should we do about it? How do we make housing affordable? Ms. Draut recommends that the government should cap the mortgage interest deduction to $10,000 a year and make it refundable for families earning less than $50,000 a year. She said the government should use the extra revenue for a matched savings program (dollar for dollar for first-time home buyers earning less than $50k a year).

I’m OK with reducing or removing the mortgage interest deduction. That’s one reason why house prices are expensive. People already have a natural preference toward buying a house. I don’t think the government needs to put in an extra inducement. A subsidy creates more demand. More demand translates into higher prices. Let’s not reduce one subsidy and create another simultaneously. Canada for example does not give tax deduction for mortgage interest. They don’t exempt profits on home sales from taxes either. They also don’t have GSEs like Fannie Mae and Freddie Mac holding the mortgage interest rate down. Take a look at the mortgage rates at a random Canadian bank. Note there is no 30-year fixed rate refi-anytime mortgage. The longest you can have your rate fixed is 10 years. However according to Wikipedia, the home ownership rate in Canada is just as high as in the U.S. The neighborhoods and communities in Canada are just as strong, if not stronger.

Separately, a recent Newsweek column The Homeownership Obsession by Robert J. Samuelson said it much better than I can. Let’s stop being obsessed about pushing everybody into home ownership.