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Ask Auntie Pinko
April 29, 2004

Dear Auntie Pinko,

The current administration has mentioned several times that increasing home values and record home ownership is evidence that our economy is strong, and average folks are benefiting. I purchased a house about 4 years ago, and the value has risen. It seems to me that really isn't money in my pocket. I can't spend that money unless I sell, and of course if I sell, I'll have to buy another house (unless I choose to rent, and thus lose some of my freedom).

Despite the fact that much of my money is going into the banker's pocket, and (because of deductions) not as much to the government who could use it for the general good, I still feel fortunate. I feel fortunate, but also feel like a pawn. It seems to me that the ones who are getting shafted are the ones who don't own a house. It's getting more and more difficult to afford one. It seems to me that the divide between the 'rich' and the 'poor' is getting wider and wider. My question: In your opinion, are 'average folks' benefiting from the housing boom?

Concerned for my son,

Dan,
Anywhere


Dear Dan,

The increased value of your home is very much money in your pocket! The fact that it is not cash flow doesn't mean you are not benefiting very substantially from that rise. Auntie Pinko is not a financial advisor or expert, and can't explain these things as well as such an individual could, but there are a good many places you can get information in detail about the advantages of home ownership to the average American family, and the effects of rising home values on increasing family asset values. Home ownership benefits go far beyond cash value.

For many families, the value of the mortgage interest deduction is the single biggest tax break they experience each year, and enables them to use the value of that deduction to invest in education, transportation, retirement savings, and other important projects. The fact that your equity in the home is increasing much faster than it would if the value remained static and you simply made your payments gives you a much more substantial asset, against which you can borrow (at low, tax-deductible interest rates) to invest in a small business, improve your home and increase its value further, or otherwise grow your assets and your net worth.

There is absolutely no question that the single most important public policy contribution to the expansion of America's middle class during the 20th Century was the government's conscious effort to encourage home ownership through subsidized mortgage rates and mortgage insurance, mortgage interest deductions, etc. For many families, the largest portion of their net worth is that home equity. It's a "savings plan" that pays far more than any certificate of deposit.

However, you have put your finger on the sore spot: it is getting harder and harder for low- and moderate-income individuals to enter the housing market for their first home. One thing contributing to this problem is the declining stock of "starter" homes - smaller homes offering modest amenities, available at modest prices. The trend in home building is to larger, more luxurious houses - and the older stock of modest housing is often bulldozed to make way for new 5,000 square foot "McMansions" that make bigger profits for builders and developers.

Even older housing in the inner-ring suburbs around large cities is often priced out of the first homebuyer market due to growing urban sprawl/gridlock problems and escalating commute issues. And zoning policies often mandate low-density land uses that require developers and builders to build more expensive, high-profit homes to recoup their investments.

Few developers and builders are willing to accept the lower profits they could make building 2,000 square foot houses without "great rooms," "master suites," Jacuzzi baths, "mud rooms," etc. - the sort of houses in which a great many people of Auntie Pinko's generation spent comfortable childhoods. The sort of houses that many young people in their 20s and 30s today could afford, and the sort of houses that many new Americans would be thrilled to be able to buy to invest in the American Dream.

If our elected representatives want to preserve the real middle class - the backbone of America's strength and prosperity - they will start thinking about new public policy incentives to maintain home ownership rates and encourage home ownership among the young people and new immigrants to America. You make an excellent point, Dan, and thanks for asking Auntie Pinko!


Bonus Question...


Dear Auntie Pinko,

Some time ago John DiIulio described the Bush administration as concentrating almost entirely on politics rather than policy. I was telling this to a friend the other day, but got stuck on explaining the difference between politics and policy. Could you help?

Thanks,

Rob,
Raleigh, NC


Dear Rob,

No problem. Policy is what you do to govern responsibly; politics is what you do to get re-elected.


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