By David M. Kinchen
In the wake of my column on students renting foreclosed or underwater McMansions in the Central California city of Merced(Link: www.huntingtonnews.net › Editorial) I came across a press release from the National Association of Realtors stating that the “U.S. Will Remain a Nation of Homeowners” (link:www.realestaterama.com/…/u-s-will-remain-a-nation-of-homeowners).
I wasn’t surprised to find that the NAR quickly came to the conclusion that homeowners are better off financially owning a house rather than renting. What would surprise me — after more than 40 years of real estate journalism coverage — would be a release saying that renters are better off than homeowners! After all, Realtors don’t get a commission from renters. They do get a hefty commission for selling a house.
I Googled and found a variety of views on the subject. Those who say that homeownership is a way of building wealth rather than a stack of rent receipts are countered by renters who say that with housing prices falling in most parts of the country, owning a house is a good way to become bankrupt.
To those who make financial comparisons, renters say the mortgage payment is only the start. A Boston blogger said that a $2,000 per month mortgage payment doesn’t take into account condo or association dues, property taxes and maintenance that can jack that payment up to $3,000 a month or more.
You can deduct the mortgage interest and property taxes on federal income tax returns, but for most taxpayers the standard deduction is preferable. I found this out in a season of tax preparation for a large national firm. Very few of the homeowners whose taxes I prepared benefited from interest and property tax deductions; most took the standard deduction after I did the taxes both ways on the computer.
If you can afford it, have a job that pays enough and won’t disappear in a New York minute and plan to stay in one place for more than a few years, homeownership might be the better choice. There are a lot of “IFs”, though. If you live in a state where prices are declining, say in Merced, Las Vegas,Phoenix or many towns in Florida, I think being a renter is a better choice. Of course, if you own your house free and clear, renting doesn’t make much sense.
We were homeowners from 1977 to 2008 in California and West Virginia. We’ve been renting since mid-2008 in an affordable area of Texas — most of the state is fairly affordable — and I see no reason to buy a house. We’re both in our 70s and we can live with $725 a month rent for a nice two-bedroom townhouse apartment with a fenced patio and two parking spaces. The electric bill in this all-electric apartment is well within our means, far below our natural gas bills in West Virginia.
I’ve checked with a number of homeowner friends and was shocked to find out how high property taxes are in Texas, not to mention homeowner insurance in a coastal area where hurricanes are not uncommon.
A couple of paragraphs from the NAR release mystified me, but I just took Econ 101 in college, not the advanced courses. Here they are:
“An analysis over a 31-year period across 23 metropolitan areas compared the ownership benefits in terms of appreciation and interest deductibility and the costs homeowners incur with downpayment, taxes, insurance and maintenance. When it was assumed that renters reinvested any savings in rent (versus a higher monthly mortgage payment), maintenance and downpayment, renters had a greater portfolio than buyers in 91 percent of the areas examined. However, when the model allowed renters to spend any savings rather than reinvest those savings, 84 percent of buyers came out ahead.”
My comment: Renters had a “greater portfolio than buyers in 91 percent of the areas examined.” Stop, this is all I need to know! I’m saving by not being a homeowner, based on anecdotal evidence from talking with real estate agents, banks and friends. Thanks but no thanks to home owning in this area!
“We knew that homeowners, on average, accumulate more wealth than renters,” said Ken Johnson, editor, Journal of Housing Research at Florida International University. Johnson spoke at the session and conducted the analysis with Eli Beracha. “These findings indicate that homeownership is a self-imposed savings plan. Not everyone should own a home, but from a financial perspective, people who are planning to stay in a property over the long term can benefit from buying.”
This makes zero sense to me, as I see house prices decline and more and more homeowners being underwater. There are plenty of nice cars and trucks in our apartment complex parking lot and I know many of the people here make good money working in the chemical plants in our area, Monsanto, Alcoa, Dow, Union Carbide, etc.
I know one group of people who benefit from homeownership: Fannie Mae and Freddie Mac executives who defended their huge bonuses Tuesday, Nov. 15 before Congress (link: http://money.cnn.com/2011/11/15/news/economy/fannie_freddie).
These two agencies, ostensibly private but bailed out by U.S. taxpayers, contributed to the housing bubble and their executives had the unmitigated gall to defend huge bonuses and Mercedes-Benz salaries.
From the link:
“Executives at Fannie Mae and Freddie Mac need big pay packages to protect taxpayers from losing more of the billions spent to rescue the mortgage finance companies, according to the head of the agency that sets pay at the beleaguered firms.
“Taxpayers. . . would not be better off if we provoke a rapid turnover of senior management by further slashing compensation,” said Edward DeMarco, acting director of the Federal Housing Finance Agency, in testimony Tuesday before the Senate Banking Committee. He said pay cuts and senior management turn-over could “increase the risk of higher losses.”
Wow! And guess what we taxpayers forked over to bail out these two agencies that, in my opinion, and in the view of many others, should be abolished, leaving VA and FHA to guarantee home loans:
The net cost of the taxpayer bailout of Fannie Mae and Freddie Mac is about $124 billion — dwarfing bailouts to any other financial firm. Those firms bought up many of the bad and underwater mortgages fromWall Street banks — such as Bank of America (BAC,Fortune 500), Citigroup (C,Fortune 500) and Goldman Sachs (GS, Fortune 500) — during the height of the financial crisis.
And here’s an argument that only a lawyer or economist could come up with:
DeMarco added that executives who work at Fannie Mae and Freddie Mac, regardless of how well they perform their duties, “risk tarnish to their reputations” just by working at the firms.
Tell that to unemployed people or recent graduates looking for work!
Fannie Mae and Freddie Mac received the biggest federal bailout of the financial crisis, topping $124 billion. And $95 million of those tax dollars went to lucrative pay packages for top executives, filings show.
But wait, there’s more:
Reports on salary were made public by the companies earlier this year, but received little attention until a recent report by Politico, the political news website, which highlighted about $12.8 million in bonuses the executives received last year. Lawmakers in both parties are enraged.
While DeMarco was grilled in the Senate, the House Financial Services Committee passed a bill to suspend executive pay packages at Fannie Mae and Freddie Mac with an overwhelmingly bipartisan vote of 52-4.
“Never again should Americans be forced to send their hard-earned tax dollars to be wasted on multi-million dollar pay packages for Fannie and Freddie executives,” said that committee’s chief Rep. Spencer Bachus, an Alabama Republican.
The Federal Housing Finance Agency set executive pay at the firms in consultation with the Treasury Department. The agency talked to the executive compensation czar for bailed-out banks, Ken Feinberg, when setting pay.
DeMarco stressed that good pay is needed to keep and retain executives who can manage tens of thousands of employees and some $5 trillion worth of mortgage assets.
But lawmakers said they were unmoved by such arguments:
“There’s a big difference” between private financial firms and Fannie Mae and Freddie Mac, said Sen. Jon Tester, a Montana Democrat, criticizing the argument that mortgage finance firms compete with the likes of Wells Fargo (WFC, Fortune 500) for executives. “These companies (banks) are profitable and solvent, and they don’t rely on taxpayer funds to keep their lights on,” he said.
DeMarco said that executives didn’t get bonuses or incentives in 2008, when the federal government took over. But senior management has since turned over since then. He also said that pay had been cut by 40% in the years that the federal government had taken over the firms.
Fannie CEO Michael Williams and Freddie CEO Charles Halderman each received about $5.5 million in pay for last year, and they could receive more when their final deferred compensation for 2010 is set. All the executives receive a significant portion of their pay in the year or years after they earn it.
The CEOs’ pay targets for 2011 are about $6 million a piece — though Halderman might not get much of that money since he’s announced plans to leave Freddie sometime in 2012. He must still be at the company in order to receive the deferred compensation. His base pay for 2011 is $900,000, with most of the rest of his compensation coming in deferred payments.
Fannie and Freddie, along with the Federal Reserve, need to take long walks off short piers! Canadanever had the housing meltdown we did, nor did it have a foreclosure crisis, and it doesn’t have Fannie and Freddie. Plus, The Great White North has a homeownership rate higher than the U.S. — with no provision for mortgage interest and property tax deductions from Revenue Canada, their IRS.