Should The Poor Make A Profit?
Owning a home is a wonderful thing, in part because real estate offers the potential to rise in value. Why then does government discourage home ownership by limiting profits for the poor?
There is no end to the news releases and announcements from government officials at every level explaining that they want to see the highest possible levels of home ownership. In 2007, as an example, HUD explained that “homeownership in America is at a historical level – nearly 70 percent of Americans own their home. For individuals and families, homeownership is the key to financial independence and wealth creation. And for our nation as a whole, the housing sector has been vital to the health of the U.S. economy and the stability and vibrancy of our communities.”
But such glowing news should raise a question: Is there a better way to increase ownership levels?
If we agree that Adam Smith was right and that the “invisible hand” of self-interest is a core motivating force, why then do we deny the right of the poor to make a profit when they buy homes with federal assistance?
For example, FHA is considering a ban on seller-assisted home purchases through non-profit groups, the logic being that such arrangements increase local housing prices as well as the potential for foreclosures. (Such a ban was actually passed in the 2008 FHA reform bill.)
The main victim, should such a ruling come to pass, is the Nehemiah program, an effort which has created thousands owner-occupant households.
“Under FHA guidelines,” explains Nehemiah, “it is inappropriate for a seller to contribute money towards a down payment for a buyer to purchase the seller’s property.”
Instead, Nehemiah provides a gift equal to 3 percent of the purchase price to the party that conducts the closing. The result is that qualified buyers get assistance within the rules — rules that FHA now wants to change.
In other words, we have a large pool of buyers who can afford monthly payments but have trouble raising an up-front down-payment. FHA argues that the down payment must come from the buyer’s own funds — even though so-called “seller contributions” of 3 to 9 percent are routinely allowed under various conventional loan programs and 34 percent of all first-time buyers received help from relatives and friends, or an inheritance, according to a 2007 study by the National Association of Realtors.
There are several issues here:
First, Nehemiah, Habitat for Humanity, Rebuilding Together, and like groups are all doing what the government should be doing. The catch is that such groups are succeeding without massive funding, huge bureaucracies, and reams of self-congratulatory press releases — indeed, cynics might argue that if volunteer groups continue with their successes, we won’t need either FHA or HUD or the tax bills they represent….
Second, once people have ownership, foreclosure rates are remarkably low. Given that property values tend to rise over time in most markets and at levels above the rate of inflation, ownership by and of itself is one way for households to create wealth. By denying seller contributions to buyers who can make monthly payments, FHA would effectively exclude many households from the potential for realty profits if it adopts the policy it now proposes.
Third, since when has making a profit when dealing with the government been a sin? Washington has more lobbyists than cherry trees, all looking for favorable deals, rules, and laws so that clients can pocket big dollars. Surely what’s good enough for big business, big labor, and big interests should also be available to the poor.
A number of progressive groups are providing services and opportunities which the government should support, especially given public and repeated pronouncements which laud volunteer efforts. FHA has now raised a policy idea, and the time has come to place it back in the dust-bin where it belongs.
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Published originally by Realty Times on Oct. 12, 1999 and posted with permission.
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