8-1 COPYRIGHT © 2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under.

8-1COPYRIGHT © 2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license.

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Housing Market• Homes in areas with healthy economies and growing populations tend to

gain in value over time, whereas value of houses in depressed regions with declining populations goes down

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Owner-Occupied vs. Renter-Occupied

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Home Ownership Rates by Race and Ethnicity

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Median Asking Sales Price Relative to Income

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Median Asking Rent Relative to Income

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Characteristics of Housing

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Factors Influencing theAffordability of Housing

• Elements that must be considered in analyzing affordability of home ownership are:

1. Down payment

2. Monthly mortgage payments

3. Buyer’s income and debt

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The Down Payment

• Amount of home buyer’s own money required by lender for purchase of home– Standard mortgage often requires 20 percent

down payment• Some new homes are sold with only five percent

down payments– As general rule, lenders require buyers who pay lower

than normal percentages down to purchase mortgage insurance

» Insurance that pays off mortgage if borrower defaults

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The Down Payment (cont.)• In addition to down payment, buyer must make

other payments at time of purchase, including mortgage points– Fees charged by lender at time it grants mortgage

• Like interest in that they are a charge for borrowing money

– Lenders typically use both interest rate and points to establish charges for lending money• Lenders might be willing to give lower interest rate if you pay

more points, or they might charge more points if you make smaller down payment

– In some localities, usury laws have been passed that establish legal maximum interest rate above which financial institution is legally prohibited from charging

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Closing Costs• Expenses paid at time loan is finalized and

title is conveyed to buyer• Include:

– Down payment– Loan application fees– Points– Title search fees– Title insurance– Attorneys’ fees– Appraisal fees

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Monthly Mortgage Payments• Made up of payments on principal (unpaid

balance) of loan plus interest payments

• Mortgage payment increases with amount borrowed and with interest rate charged by lender

• Property taxes and home owner’s insurance are sometimes part of monthly payment– Property taxes

• Levied by local governments to fund services such as education and police protection

– Home owner’s insurance• Covers replacement cost of house and its contents

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Monthly Mortgage Payments (cont.)

• For most of life of loan, more of monthly payment goes to pay interest charges than to repay principal – Amount of interest paid over life of loan is extremely sensitive to length

of loan

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The Income and Debt of the Buyer

• Most lenders require that prospective borrowers satisfy affordability guidelines– Most common criterion is that monthly

mortgage payments not exceed a particular percent of borrower’s before-tax income

– Total monthly installment payments such as auto loans and charge card payments cannot exceed some percent of before-tax income

– Credit cards “maxed out” or other consumer debts may prevent buyer from meeting mortgage lenders’ guidelines

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Government Policy Toward Home Ownership

• Number of state and federal policies promote home ownership– Federal Housing Administration (FHA) insures some

home loans that allow mortgage applicants to spend higher percentage of income on housing and debt payments than conventional mortgage guidelines require• Applicants can finance part of closing costs, including points

and mortgage insurance premium, which otherwise is not permitted

– Tax policy promotes home ownership by permitting deduction of mortgage interest payments from income before personal income taxes are calculated

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The Supply and Demand of Low-Cost Rental Housing

• Factors that have reduced supply of low-cost rental housing:– Development of superhighways– Urban renewal– Gentrification

• Conversion of low-cost apartments into middle- and upper-middle-class housing

– Conversion of apartment buildings into condominiums– Disintegration

• Factors that have increased demand of low-cost rental housing:– Population growth– Unequal income distribution

• Increase in number of poor and near-poor families

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The Supply and Demand ofLow-Cost Rental Housing (cont.)

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Rental Ceilings• Legally imposed maximum rents on rental

housing

• Rental ceilings are specific example of price ceilings

• Rental ceilings are intended to help poor– In the end, however, poor are probably group harmed

most by rent controls• Because rental ceilings do not benefit poor households for

which intended, but instead benefit higher-income people, rental ceilings are very inefficient method of providing affordable rental housing to low-income families

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The Effects of Rental Ceilings• Rental ceilings are attractive on surface, but cause shortages and

deteriorating stock of affordable housing

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Public Housing• Housing units owned and operated by a local public

housing authority but federally subsidized and often federally regulated

• Over a million American live in public housing• Criticisms:

– Tends to concentrate poor and distressed populations in particular areas

– May also segregate people both racially and by income level– Several studies have shown that public housing is expensive

method to house poor• Public housing units cost more than either new private housing units

or used low-income housing– Some economists argue that public housing displaces private

housing• Causes latter to be abandoned or converted to other purposes

because supply of public housing units causes market price of available private housing units to fall

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Subsidies to Developers• Government payments to landlords who build

housing for poor• Major federal program of this type is Section 8

project-based program– Pays landlords difference between rental payments

received from tenants and market rent that landlord would otherwise receive

• Fair market rent for each unit is established and guaranteed to landlord

– Fair market rent is determined by Department of Housing and Urban Development (HUD) to be reasonable rent for low-income housing in a given area

• Eligible tenant’s rent is then set at 30 percent of tenant’s income

– Government pays subsidy equal to difference between fair market rent and actual rent paid by tenant to landlord

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Housing (Rent) Vouchers

• Housing subsidies in amount of difference between fair market rent and 30 percent of poor family’s income

• Part of Section 8 housing program

• Recipients must occupy dwelling that meets minimum government standards

• Only serves modest fraction of eligible households because of underfunding

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Adequacy of Recent Programs and Policy

• Housing advocates maintain that funding for housing programs has been inadequate– Has been met with innovative policies:

• Department of Housing and Urban Development (HUD)– Converted hundreds of thousands of housing units owned by

government to low-income housing– Sold thousands of single-family homes to families of modest means– Sold hundreds of apartment buildings to public agencies and nonprofit

organizations that agree to rent minimum government-required percent of units to low-income families

– Provides housing counseling

• HOME Investment Partnerships Program– Funds activities that build, buy, and/or rehabilitate affordable housing

for rent or homeownership

• American Dream Down Payment Initiative (ADDI)– Assists low- and middle-income people with funds to help with down

payment costs of purchasing new homes

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Adequacy of Current and Future Programs and Policy

• Current budgets:– Although many U.S. families are helped by Section 8 programs,

housing activists maintain, and government officials acknowledge, that there is not enough money allocated to provide adequate housing for all ill-housed poor and near-poor families

• Many families eligible for housing assistance receive no aid because budget constraints do not permit assistance for all qualifying families

• Future budgets:– Center for Budget and Policy Priorities estimates that for rental

voucher program in particular, 70 percent of housing agencies will be underfunded in 2007

– In terms of overall housing and community development programs, president has proposed to cut total HUD funding in 2007 by 3.9 percent

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Housing and Segregation• Index of dissimilarity

– Measures extent of segregation within central cities

– Calculated by adding together differences between percentage of African Americans and percentage of whites living within each district of city and dividing sum by two

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Homelessness in the U.S.: Some Statistics

• 3.5 million people experience homelessness in a given year– Includes 1.35 million children

• People remain homeless an average of seven months• 14 percent of all requests for emergency shelter are unmet due to

insufficient number of shelters– For families in particular, share is 32 percent

• Families with children are among fastest-growing group of people without homes and are thought to represent at least 33 percent of homeless population

• 49 percent of homeless are African Americans• 35 percent of homeless are non-Hispanic whites• 2 percent of homeless are Native Americans• 1 percent of homeless are Asian Americans• 11 percent of homeless are veterans• 22 percent of homeless are mentally ill• 30 percent of homeless suffer from addiction disorders

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Government Policy Concerning the Homeless

• Homeless advocates argue that we have no coherent, long-run policy concerning the homeless– Instead, react in ad hoc way to emergencies

• Housing advocates, and some economists, argue that the country needs a comprehensive housing policy that includes both emergency shelters and permanent low-cost housing

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The Economic Left and the Economic Right

• THE ECONOMIC RIGHT (Conservative)– Feel that government

participation in housing markets should be eliminated, or at least minimized

– Encourage transfer of public housing units to private sector (private tenants or landlords) and eliminate subsidies to construction industry

– Favor measures such as rent vouchers

• THE ECONOMIC LEFT (Liberal)– Stress government’s role

in solving housing problems

– See homelessness as problem that government should treat by assuring permanent housing and in some cases providing temporary shelters

– Favor measures such as rent vouchers

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Appendix: A Price Ceiling on Football Tickets

• If the market were allowed to operate by itself, equilibrium would occur at price of $9 and quantity of 20,000

– School administration sets price of $5

• 30,000 fans demand $5 tickets

– Shortage of 10,000 tickets in market

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Appendix: A Price Ceiling on Gasoline

• When gasoline prices skyrocketed in 1973–1974 and again in 1979, price ceilings on petroleum and petroleum products became effective and encouraged suppliers to undersupply at same time they encouraged consumers to overdemand

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Appendix: A Price Ceiling on Interest Rates• Usury laws are price ceilings on interest rates (that is, interest rate ceilings)

– Often governments put interest rate ceilings into effect in order to prevent interest rates from rising too high

• Outcome is same as other price ceilings (i.e., football and gasoline examples)

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