There have been numerous articles discussing various proposals that are ostensibly designed to help homeowners with subprime mortgages. Almost none of these articles have bothered to examine whether these families are likely to actually benefit from these measures. This actually is not a difficult task. There are two questions that will determine whether these homeowners will benefit. First, whether they will accumulate equity and second, how much they will pay in housing costs in their current home as opposed to renting elsewhere. The numbers imply that most homeowners are almost certain to lose from the bailouts that are supposed to help them. House prices are falling rapidly due to a deflating housing bubble. Since most moderate income homeowners will only be in their home a relatively short period of time, it is very unlikely that they will be there long enough to pay down enough of their mortgage to offset the plunge in prices. In other words, most of the subprime mortgage holders are likely to sell their home owing money to the bank. The second issue is their annual cost of owning compared to renting a comparable unit. As a result of the unprecedented run-up in house sale prices (rents have increased only slightly more than inflation), the ratio of house prices to rents on comparable units (e.g. different houses in the same development) is about 20 to 1. If a homeowner gets a 6 percent mortgage, and has to pay 1 percent of the value in property taxes and another percent in annual maintenance costs, then the cost of owning is 8 percent of the sales prices. This compares to being able to rent at 5 percent of the sales prices. In this scenario, ownership costs are 60 percent more than the cost of renting. (This is likely a conservative estimate, since subprime mortgage holders are not likely to get a 6 percent mortgage.) For the population as a whole ownership/rent take up 30 percent of their income. The share is higher for low and moderate income families, but even this 30 percent figure would imply that the 60 percent excess housing costs associated with ownership implies paying an amount equal to 16 percent of family income. In other words, keeping moderate income families as owners given current house prices is equivalent to imposing a 16 percentae point surtax on their income. This is not likely to help their financial situation or their ability to move into the middle class. It would be helpful if reporters occasionally included some simple analysis of this sort in discussing the various bailout proposals being put forward. This would make it clearer to readers who these proposals are likely to benefit.
--Dean Baker
