Why you should care
Because it’s still too hard to get a home loan.
The mogul president’s name is synonymous with real estate. But as Donald Trump enthusiastically holds forth on America’s “crumbling” infrastructure, the “collapsing” Affordable Care Act or “witch hunt” investigations of his administration, housing talk has been conspicuously absent at a critical turning point.
According to a new Harvard University study, America’s housing market has finally eclipsed pre-crash levels, but homeownership has declined to its lowest level since the 1960s. Lingering lender caution from the 2008 housing catastrophe blocks many borrowers, swelling the rental market and squeezing families in high-cost cities.
A lobbying battle is escalating over the real estate implications of Trump’s proposal to simplify the tax code.
Fewer millennials are buying homes than prior generations — and not because they are splurging on lattes and avocado toast. Younger households are put off by high down payments, lingering student loan debt and tighter credit, with Black families particularly hard-hit. The Trump administration and congressional Republicans’ instincts to reduce the role of government could rattle boom times at the market’s high end without addressing the darker predicament for many families struggling to find affordable shelter.
The federal government’s role in the housing market swelled in the financial crash. With the federal takeover of Fannie Mae and Freddie Mac, plus existing government insurance programs, a 2014 report found that more than 70 percent of new residential mortgages were backed by the federal government. In fact, the Federal Housing Administration, which offers mortgages with down payments as low as 3.5 percent, is one of the few places where first-time homebuyers with less than pristine credit histories can turn.
Laurie Goodman, co-director of the Urban Institute’s Housing Finance Policy Center, says there are tweaks the government can make to encourage more private lending, such as backing off criminal prosecutions of banks under the False Claims Act for one small mistake in an 800-page loan application. It may be tough to dam that revenue stream: The government took in $7 billion in mortgage and housing claims from 2009 through 2016, including several large settlements with banks. One of Trump’s first actions in office was to tinker with the FHA, canceling a pending Obama administration decrease in the agency’s mortgage insurance rate — a move that kept private mortgage insurers from losing even more market share to the government.
Meanwhile, a lobbying battle is escalating over the real estate implications of Trump’s proposal to simplify the tax code. House Republicans propose to eliminate the ability to deduct state and local taxes, including property taxes, from federal returns. And proposals to jack up the standard deduction mean that fewer people will itemize their deductions — including the mortgage interest tax break. An analysis by property-data provider Trulia shows the mortgage interest break would become the exclusive province of the wealthy under the proposed tax plan — as filers would likely take the standard deduction unless they make $129,000-plus per year and have a $608,000-plus home loan. The industry argues that if fewer people take the break, it will reduce the incentive to buy a home and put a damper on prices.
Dave Stevens, the head of the Mortgage Bankers Association, says his group will be “closely watching” the tax reform process and making the case that “the biggest beneficiaries of the mortgage interest deduction are the middle class.” But the benefits of the break already skew to the rich, and even if it goes away entirely — a step neither the administration nor Congress has proposed — “your upper-end homes may go down a bit in price,” Goodman says. “But for the bulk of the market, it’s probably not a big deal.”
And Trump’s corporate tax-cut dreams already have developers rethinking low-income housing investments — at a time of dire need — as federal low-income housing tax credits would be less valuable with lower overall business tax rates.
On the horizon after the proposed tax changes are reforms to Fannie Mae and Freddie Mac, the giant mortgage companies that had an implicit federal government backing — until the feds took them over in 2008 during the financial crisis, when they were in precarious shape after guaranteeing too many risky loans. Since then, there’s been a lot of talk about how to take them private while still preventing a replay of pop goes the housing bubble.
With Washington now under all-Republican control, key decision-makers are eager to reduce the government footprint, but federally backed liquidity is critical to preserving the 30-year fixed-rate mortgage — an American standard rarely found in other parts of the world. Stevens has proposed a government guarantee for the vanilla side of Fannie’s and Freddie’s business to prop up the 30-year fixed-rate mortgage, while walling off the riskier types of investments that got the two lenders in trouble during the financial crisis. But a consensus solution is a long way off.
The government’s impact on the housing market sprawls across many agencies, with Trump’s reduced environmental and labor regulations cheered by homebuilders, for example. And much is out of the president’s hands: The Federal Reserve has been slightly increasing interest rates, which will make borrowing more expensive and less desirable.
The Trump administration is continuing to push the American Dream rhetoric about owning a home. At a recent forum, HUD Secretary Ben Carson, the former presidential candidate and neurosurgeon, spoke about how the Founding Fathers glorified property ownership. “It is the essence of freedom,” Carson said.
It’s a tough sell for many potential buyers. Laura Youngs, 33, rents a house with her husband in a gentrifying neighborhood in Washington, D.C. They have looked into buying, but exorbitant prices in the city mean they would have to come up with lots of cash. ”After watching the housing market collapse, it’s not a sure bet, and we would be on the hook for it depending where we go,” Youngs says. “I’m just not 100 percent convinced.”