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March 28, 2012

Individual mandates and housing

by Dan Krell © 2012
DanKrell.com

This week, the Supreme Court (SCOTUS) heard arguments for and against issues surrounding the Patient Protection and Affordable Care Act of 2010 (PPACA). The arguments don’t have much of anything to do with providing healthcare, but rather the arguments are about certain elements of PPACA and the Constitution. In fact, Tuesday’s arguments about the individual mandate could be applied to anything – even the housing market.

The individual mandate portion of the PPACA basically requires certain individuals to purchase healthcare insurance or pay a penalty. Individual mandates are not new, and have been enacted in the past. For example, military drafts and income tax have been mandated (the initial enactment of an income tax was found unconstitutional- so the Constitution was amended which resulted in the sixteenth amendment).

I’m not an attorney, and I’m sure that I don’t begin to scratch the surface of the issue; however, the arguments for and against the individual mandate can basically be summed up as follows: Those that oppose the PPACA individual mandate argue that this mandate is different from others such that it regulates commercial inactivity (e.g., levying a fine when a product or service is not purchased); while those in support of the mandate argue it is not a fine for non-participation, but rather a tax.

Regardless, which way you approach the mandate, some contend that a mandate is only one way to have the public engage in commerce. In an editorial that appeared in the New England Journal of Medicine, Einer Elhauge, J.D. described the individual mandate as an alternative to providing subsidies (Elhauge, E (2012). The Irrelevance of the Broccoli Argument against the Insurance Mandate. The New England Journal of Medicine 366, e1. published on December 21, 2011). Putting aside Elhauge’s reasoning and opinion of the SCOTUS case; he points out that the Government has many ways to affect industries and commerce. Typically, the Government attempts to persuade us to engage in specific businesses industries by providing incentives and subsidies, such as tax credits to industry participants or purchasers of specific products. However, rather than persuading economic activity, the PPACA individual mandate is historic in that it requires participation and fines those who do not participate.

Like other industries, the housing industry is subsidized to encourage participation; home ownership is encouraged through the mortgage interest tax deduction and low interest rate mortgage programs (and for a brief time- first time home buyer tax credits). However, it is not implausible to think that if SCOTUS upholds the individual mandate, Congress could require people to make home a purchase, renovate, or retrofit their homes with green technologies (in an effort to increase economic activity in those industries).

There are some that argue that subsidies are bad enough for the housing market; one argument is that the mortgage interest deduction has artificially elevated home prices. However, some subsidies may only influence the timing of purchases rather than value: recent data suggests that the brief first time home buyer tax credit created short-term spikes of home sales that would have likely occurred over a period of time.

On the face of it, the housing market has little to do with health care. However, this week, housing and other industries may be affected by the SCOTUS decision regarding the healthcare individual mandate. Subsidies verses mandates- it may ultimately be about semantics and interpretation.

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This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of March 26, 2012. Using this article without permission is a violation of copyright laws. Copyright © 2012 Dan Krell.

June 23, 2009November 23, 2021

What are the risks of owning a home?

Accepting the Risks of Home Ownership
by Dan Krell © 2009
www.DanKrell.com
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For many, owning a home is part of their long term financial and personal plan. Unfortunately for some, the responsibilities and risks of home ownership are not well thought out; many first time home owners are unprepared. The benefits of home ownership are often presented to first time home buyers, how about the risks?

During the recent real estate market boon, it seemed as if there were no risks to home ownership. Homeowners, who felt that their home was too much of a financial burden, were able to sell their home quickly and sometimes made a profit. However, when home values began to depreciate, it become all too clear that there are inherent risks to being a home owner, which include decreasing property values, increasing home related expenses, and poor home maintenance.

The real estate market, like other financial markets, is cyclical. There have been escalating market cycles, like the recent “seller’s” market; and there have been depreciating market cycles, some down cycles being much like what we are currently experiencing. Many first time home buyers, who bought homes as a commodity often analyzing their purchases as if it were a mutual fund, are now finding that (unlike mutual funds) selling a home may not be as easy as previously thought. Selling a home in a down market has many considerations, such as an increased marketing time and the possibility of owing more on a mortgage than the value of the home.

During an escalating market, it is easy for people to talk about home value appreciation as one of the benefits of home ownership. Unfortunately, in the recent boon market, many home buyers were caught up in the exuberance of rapid appreciation such that they believed that home value appreciation is guaranteed- no matter the type or condition of the home. Some home buyers are now lamenting their purchases because they bought homes they did not much care to live in but rather for the perceived “investment” value.

Many first time home buyers are also not prepared for increasing monthly housing expenses. Keep in mind that a first time home buyer’s monthly mortgage payment is already more than their monthly rent. Because of rising property tax and increasing utility costs, home buyers need to consider that the associated cost of home ownership will most likely increase over time. Although some of the initial increase may be offset by an interest tax deduction, the increases often add more to monthly expenses than the savings of the deduction.

Maintenance is an ongoing expense that is often overlooked by home buyers; all homes, including new homes need regular maintenance. Lack of home maintenance becomes a threat to anyone’s home leaving the home’s systems, walls, and foundation vulnerable to the elements, which can erode the home’s value.

Be prepared to take on the risks of home ownership. Take into account the reasons for owning a home as well as the financial responsibility you place upon yourself. Although long term home ownership has proved to be a good investment for many, value appreciation is not guaranteed. Additionally, the cost of home ownership along with future increases should be anticipated. You can get more information about the benefits and risks of home ownership by visiting HUD (HUD.gov), Fannie Mae (FannieMae.com) and Freddie Mac (FreddieMac.com).

This column is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of June 15, 2009. Copyright © 2009 Dan Krell.

June 20, 2008November 23, 2021

Buying vs. Renting

by Dan Krell
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Is buying a home right for you?

A home owner recently told me that he had no idea that he would be able to sell his home for more than double his purchase price. When he purchased his home eighteen years ago, he recalls having kept to a strict budget so he could afford his mortgage payments and other related housing costs. Now, he will have a sizeable profit from the sale to purchase his dream home. This home owner’s story is like many other home owners’ stories of wealth building through home ownership.

Unfortunately, due to recent market fluctuations, some home buyers have questioned the value of home ownership. Decreased consumer confidence along with almost daily stories of foreclosure might make you wonder if any homes are selling.

Additionally, some renters feel that home prices continue to be too expensive for them to make the jump into home ownership. Economic commentator, Barry Ritholtz (bigpicture.typepad.com), believes that too; although the rent to buy cost ratio for the Washington area has dropped significantly from an all time high of 21.4 to around 16.6 (according to Moody’s economy.com), he feels that home prices are still too high nationwide as compared to the rent to buy cost ratios of the 1980’s and 1990’s (when the average ratio ranged from 10-14). However, even with a decreased consumer confidence, many understand the benefits to home ownership.

Many analysts and commentators agree that owning a home is typically better than renting. For example, Suze Orman has stated in a Yahoo Finance exclusive (biz.yahoo.com/pfg/e10buyrent) that “there’s no better investment.” Although Ms. Orman does strongly suggest having your financial matters in order as well as making certain that you can afford all the housing related costs before you make a move, she does state that “home ownership is a great achievement and a terrific investment.”

Although the benefits of home ownership are touted by many in the industry, owning a home is not for everyone. Renting does offer limited maintenance and the flexibility if you need to move, but home ownership offers tax incentives (tax breaks and deductions) as well as a chance to build equity.

Before you buy your first home, you might consider how long you intend to live in it before selling. For example, the National Association of Realtors reports that the typical home owner intends to stay in their home for ten years (although the actual time of ownership varies). Financial and affordability factors to consider before buying a home include interest rates and market conditions. However, some considerations are not financial but emotional; for example, some renters are concerned about their security deposit as well as dealing with an obnoxious landlord or management company.

Freddie Mac (FreddieMac.com) offers the following benefits to homeownership: Owning a home can facilitate your participation within a community, the home can be passed through many generations as a source of security, the tax benefits typically offset the amount you might otherwise pay for rent, your monthly payment won’t increase if you have a fixed rate mortgage, and building equity through home ownership “is the single greatest source of financial security and independence for the majority of people who’ve taken this step.”

This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of June 16, 2008. Copyright © 2008 Dan Krell.

August 21, 2007October 5, 2019

Home Ownership Month

by Dan Krell

June is here! For many it means that summer is around the corner, school is ending, and trips to the beach. For Realtors and community groups, June is National Homeownership Month.

Since 2002, President Bush has declared June as National Homeownership Month. By doing so, the goal has been to increase minority home ownership to 5.5 million new home owners by the end of the decade. Despite a declining real estate market, home ownership is at record highs. The White House reports that there were 75 million American homeowners during the fourth quarter of 2006, while the homeownership rate was close to sixty-nine percent.

In keeping with the goal, the President and the Congress have passed a number of laws to promote home ownership including The American Dream Downpayment Act, HOME Investments Partnerships Program, and the Self-Help Homeownership Opportunity Program.

In 2003, The American Dream Downpayment Act was signed into law. The program was designed to offer down payment and closing cost assistance to low income home buyers. According to the White House, the program has helped over 21,000 families since its inception. Information for local participation and qualification can be obtained through the Montgomery County Department of Housing and Community Affairs.

The HOME Investment Partnerships Program, which was part of the Title II of the Cranston-Gonzalez National Affordable Housing Act, is a federal block grant that allocates almost $2 Billion annually to create affordable housing for low income families. This program has been so successful that it is reported that more than 143,000 families used this program to purchase a home during the 2006 fiscal year.

In keeping with the spirit of home ownership, the Self-Help Homeownership Opportunity Program was created. This program provides non profit organizations, such as the Habitat for Humanity (habitat.montgomery.md.us), the funds necessary to purchase home sites for the purpose of building or renovating by sweat equity and volunteer-based homeownership programs for low-income persons and families. Local programs, such as Habitat for Humanity, offer the resources to families to own affordable homes as well as retaining home ownership by making repairs that they could not otherwise make.

Looking ahead, the 2008 Federal budget includes funding for the “modernizing” of FHA (see my column from the week of May 17, 2007). The expansion of FHA will provide financing alternatives to sub-prime loans for home buyers while offering additional protection from and assistance for those in foreclosure.

Home ownership is the American dream. However for many families, it is still out of reach. Locally, the Maryland Association of Realtors, in conjunction with a coalition with home owners and those who want to be home owners, has created the League of Maryland Homeowners (leagueofmarylandhomeowners.com). The group is committed to making affordable housing available by searching and implementing solutions to the affordability crisis in housing.

There are many opportunities to assist others in their pursuit to home ownership. For example, the Tikvat Israel Congregation of Rockville is sending a contingent of high school students to New Orleans, LA later this month to assist the Habitat for Humanity effort in the still ravaged region.

Although we celebrate home ownership in June, we can make a difference year round from volunteering manual labor to as little as voicing your support for affordable housing initiatives.