BROWSE BY:TOPICSINDUSTRIESGEOGRAPHY

Browse By FacultyAbout UsNewsletter Sign-UpRSS

29 APR 2013 RESEARCH & IDEAS

Are First-Time Buyers LeftOut of Real EstatesRebound?

Real estate is again on the move in the United States. Nicolas P. Retsinasexamines the impact on home buyers, renters, and policymakers.

The United States housing market is no longer the boat anchor draggingdown economic growth. Data from the S&P/Case-Shiller Home Price Indicesshow that average home prices in an assortment of American cities havebeen on the upswing, increasing by almost 7 percent across the country in2012. Recent reports that sales of new single-family homes rose in Marchare proof points that "the housing market recovery remains on track."

We asked Nicolas P. Retsinas to reflect on the re-emergence of the housingindustry, what it means to the rental market, and the future of the mortgageinterest tax deduction. Retsinas is a senior lecturer in real estate at HarvardBusiness School, director emeritus of Harvard University's Joint Center forHousing Studies, and former Federal Housing Commissioner.

Q: What factors have been contributing to the housing recovery?

Nicolas Retsinas: Several factors are generating a tailwind for the recovery,although it varies from market to market. In large measure it has to do withimprovement in the economy as a whole, household formation (that is,children moving out of their parents' home in an improving job market), andabnormally low interest rates. Supply and demand, of course, always havean impact, with an additional element in select markets such as Phoenix,Las Vegas, and Southern California, where prices fell by half or more afterthe downturn and where financial firms like The Blackstone Group havebeen buying large numbers of single-family detached homes that they thenrent, hoping to eventually sell them as an exit to their investment. This kindof institutional buying, however, is not happening as much in markets likeBoston and New York, where prices did not fall so far and where there arenot large numbers of foreclosed single-family homes. But all thingsconsidered, there is evidence that we may have turned the corner.

Q: How successful have been the Obama Administration's efforts to loosencredit for individual homebuyers?

MOST POPULAR

19 AUG 2015 RESEARCH & IDEASCODEACADEMYSDELICATE WORK OFADDING MONETIZATIONWITHOUT CRUSHINGMISSION19 APR 2004 RESEARCH & IDEASBIRTH OF THE AMERICANSALESMAN14 AUG 2015 WORKING PAPERARE BETTER IDEASMORE LIKELY TOSUCCEED? AN EMPIRICALANALYSIS OF STARTUPEVALUATION05 AUG 2015 WHAT DO YOUTHINK?WHAT HAPPENED TO THEINNOVATION,DISRUPTION,TECHNOLOGY DIVIDEND?17 AUG 2015 RESEARCH & IDEASWHO IS BOSS IN THESHARING ECONOMY?

NICOLAS P. RETSINAS

Nicolas P. Retsinas isSenior Lecturer of BusinessAdministration (Leave ofAbsence) at HarvardBusiness School.

CONTACTSend an email

Comments 2 Email Print Share 112Recommend Share

A: It is, of course, much more difficult for individuals and families today toobtain credit than it was at the height of the housing boom. Now you needsurprise, surprisedocumentation. Now you need to be employed. Nowyou need to have a down payment. All those things were absent during thehousing boom. So we have tightened credit dramatically, which hascontributed to the reality that this recovery has not been as robust as thosein the past.

There are some mixed messages coming out of Washington as well.President Obama wants to accelerate the housing recovery, because it issuch an important part of our economy and would help with the overalleconomic recovery. However, in the mortgage market today, ninety-fivepercent of all mortgage loans are guaranteed, insured, or securitized by theUS government, which is obsessed with not losing money on theseguarantees. And the way the government does not lose money is by makingthe requirements even more stringent for borrowers. So on the one hand,the political policy is to extend credit; on the other, the government-ownedenterprises (Fannie and Freddie Mac) are trying to narrow the credit boxbecause they so afraid of incurring a loss.

Q: Tax reform is high on the public agenda these days. What's your take onthe viability of the mortgage interest deduction in the midst of calls toincrease revenues and decrease loopholes?

A: First, let us put the mortgage interest deduction in historical context. Itcame about when the federal income tax became permanent in 1913. Atthat time, everything was deductible, including mortgage interest, adeduction that came to be accepted as a means to helping people achievethe "American dream" of owning a home. In 1986, however, that conceptbegan to run into some opposition, when President Reagan put forth someproposals to simplify the tax codeeliminate deductions and just submityour income on the back of a postcard.

All this was met with a barrage of criticisms, primarily from two groups:charities concerned that it would undermine giving, and Realtors, homebuilders, and mortgage bankers, who were afraid that removing themortgage interest deduction would lessen the incentive for buying a home.Bottom line, the deduction remained, but with one change. Instead ofbeing unlimited, it was capped at a million dollars. As we look back at whathappened with the housing market implosion, I think it's fair to say we over-encouraged and over-supported home ownership. A tax subsidy like themortgage interest deduction, which reduces the amount of money availableto the federal government by $100 billion a year, is understandably at risktoday because of our concern with deficit reduction. To put this hugenumber in context, the total budget of the US Department of Housing andUrban Development, the primary agency for dealing with affordable housingin this country, is about $35 billion.

Realtors say the sky will fall if we end the mortgage interest deductionthat it would adversely affect the market and undermine home prices overtime, but the evidence says that if one did this slowly, maybe lowered thecap, and changed it in a way that would be more supportive of first-time

FIND RELATED ARTICLES

CONSTRUCTION ECONOMICSGOVERNMENT & POLITICS

NORTH & CENTRAL AMERICA

REAL ESTATE

More Articles

home buyers and those below a certain income, people would adjust. Themortgage interest deduction is a sacred cow, but I think that in an era wheneverybody is trying to look at the budget, there is some question as towhether the wealthy should continue to have a bite of that cow.

Q: Do you think more people these days are content to rent?

A: There have been a variety of surveys on the rent versus own question. Arecent MacArthur Foundation survey said that more people regard rentingas an acceptable option. But I saw another survey recently that concludedthat two-thirds of American families preferred to own. I edited a book 15years ago, Low income Home Ownership: Examining the Unexamined Goal,that supports the second finding. I found that the desire to own a home waspart of the psyche of just about everyone I studied, no matter where theylived. The only exception was a nomadic tribe in North Africa that notedthat "homes were graveyards for the living." But every other culture andcountry I looked at had a least nominal support for owning a home for thesake of things like family stability and the opportunity to pass onesomething of value to one's children.

With tightened credit in the mortgage market, renting has now become adesirable option, and for many young families, it is the only option, sincethey don't have the wherewithal for a down payment. But as rents go up inthe face of increased demand, the difference between renting and owningwill decrease. When that equilibrium happens, I suspect there will be areturn to ownership as the preferred long-term option. Again, the questionis: Can we design a system that will extend credit to young first-timehomebuyers while not incurring too much risk. That is our challenge.

COMMENTSJ KNIGHT REALTOR, PILKERTON REALTORS, BRENTWOOD TNThe conclusions in the interview style article are well composed, and present a good summary ofthe history of the issue targeted, and the current status - a rise in home ownership rates. Theconsistent desire of the typical American is to own their home, and other property. Propertyownership, especially real property, has always been an essential piece of why the United Statesexists.....Life, Liberty and the Pursuit of Happiness is an extension of principles of propertyownership, free from interference, especially interference of the government/state. There will be arise in home ownership as a percent of the population when the labor market improves. Familieswill sacrifice much in order to own their own home.

DAWN REALTOR?, AVERY REALTY GROUPGreat article and pretty spot on. Here in Dallas area market (East of Dallas Kaufman and RockwallCounties) definitely see the investor buying and the price uptick. This has caused a resurgence ofthe multiple offer situations- and purchase prices above list prices- a good 'new' problem to have.As for the renters- many are simply in a position where they need to rent for now- they got burnedduring the housing mess and they are biding their time. The overwhelming majority of my personalrental clients all say the same thing- they plan to buy in the next 12-24 months,they are rebuildingcredit and this time they want the CASH for a downpayment and low monthly payments - not likethe previous home they purchased (in many cases with 0-minimal down). I'd say THAT is a WINWIN! Looking forward to the next 12-24 months continued upswing...with a few plateaus along theway....stay tuned..

Comments 2 Email Print Share 112Recommend Share

Site Map Jobs Harvard University Trademarks Privacy Policy Copyright President & Fellows of Harvard College

Harvard Business School WorkingKnowledgeBaker Library | Bloomberg CenterSoldiers FieldBoston, MA 02163Fax: 1.617.495.6791Email: Editor-in-Chief

Map & DirectionsMore Contact Information

All Social Media