Hope Street - Interesting But Needs A Little Work

Via the estimable Oxblog, I discover a bunch of new-thinkers right here in Los Angeles, the 'Hope Street Group'.

The Hope Street Group promotes principles and policies aimed at achieving an Opportunity Economy, in part by harnessing the skills, networks and resources of a new generation of business executives and professionals.

Sounds pretty good so far. They support what they call the 'opportunity economy', in which market incentives are created and market barriers lowered to ensure that everyone has a chance to participate. I definitely like the sound of that.

The details, however, need a bit of work.

They have several white papers available online. I'll make one key suggestion for them; following on the excellent usability work of Jakob Nielsen, I'll suggest that presenting multipage papers online only as pdf's is a Bad And Annoying Thing.

Let's look at one of the papers; the paper on housing. It's an area I know something about, having studied it in grad school, written some laws on the subject while working for the Jerry Brown administration, and worked as a consultant to developers of conventional and affordable housing (I have a couple of parallel careers, what can I say...).

Their paper is titled:

BUILDING A NATION OF HOMEOWNERS Making homes more affordable: downpayment assistance for first-time buyers

and suggests two basic policy changes:

Making homes more affordable: downpayment assistance for first-time buyers

Making homes more plentiful: a tax credit to spur affordable home construction

They propose to pay for this in large part by:

Adjusting the mortgage interest tax deduction

Limiting mortgage interest deductibility to mortgage principals below $300,000.

Although eliminating the tax deductibility of interest on mortgage principals between $300,000 and $1 million may seem drastic at first, that the reality is that only 7% of homes sell for more than $300,000, affecting just over one million homebuyers.

and

Eliminating the deductibility of interest on second/vacation home mortgages.

They admit one issue with their proposals:

"This proposal does not address local regulatory barriers or homeowner education programs, both of which make a crucial difference in promoting or hindering homeownership."

Response: There is no question that local regulatory barriers are a major obstacle to home building and therefore to home ownership. The local control that creates these barriers must be preserved. But the local challenges facing developers make federal intervention all the more important. Because the market incentives to build affordable homes are blunted, federal incentives are crucial. Tax breaks to developers of the sort proposed here are designed to let builders get back to building.

First, and foremost, the idea of expanding homeownership - as a financial and social anchor - is one that truly can work for many people. They are right on in their diagnosis, but the prescription leaves something to be desired.

Let's go through the points.

Downpayment assistance.

First, why? Why not revamp existing Federal mortgage programs to offer targeted insurance to homebuyers at 100% of the purchase price? The issue is that they will not have any stake in the purchase, and so you'll see a high rate of default. My answer would be to take a Grameen Bank approach, and do two things. First, create a pool of credit that can be used but must be repaid, in conjunction with the high LTV loans. Leverage existing institutions - local churches and some nonprofits that can accept people into training programs, peer them with a small group of eight to ten others, and when they graduate, make them eligible for the loans...and responsible for each other's performance - a key feature in Grameen Bank success stories. Have ongoing credit and homeownership training, and let them work toward either refinancing these 'silent seconds' out, or have them due on sale.

Second, the issue is typically the amount of overhead that goes into the government or nonprofit infrastructure in programs like this. By simply creating a new kind of FHA-insured home loan, you'll expand the pool of capital and the existing real estate markets will make use of it; you can then layer on the added availability of 'microcredit' loans with a much smaller investment in infrastructure, and with a revolving pool of capital that will be, to a large extent, self-replenishing.

In addition, there is a limited pool of affordable housing in most communities - buyer subsidies will typically wind up in the hands of the sellers as the market clears with the price of homes pushed upward by the new supply of buyers.

They propose to deal with it through tax credit subsidies to for-sale housing developers, essentially extending the existing programs that have applied to rental housing. Nice for the developers, but in a marketplace with an immense demand for housing like the ones we have now, unlikely to have a significant impact.

They touch on it when they mention that local regulatory barriers are an issue.

Folks, they are the issue. Some time I will do a long post on the inherently corrupt and disastrous state of zoning practice in most of the country with which I am familiar, For now, suffice it to say that in the City of Los Angeles, it takes a minimum of eighteen months to get a significant project approved, and typically (and I'm not talking Ahmanson Ranch scale projects) takes two years.

Modest 'affordable' homes require high density in urban areas, and both the modest scale of the houses and the densities required mean strong local opposition as homeowners are concerned about protecting their home values from being reduced by an influx of 'lesser' homes.

Affordable for-sale housing (which I would generously define as costing $270,000 or less in Los Angeles) returns modest profits to the developers, as opposed to lower-density, larger, more expensive market-rate housing.

Greater difficulty, lower profits...hmmm.

They will doubtless kick off some housing development with this, and some developers who would have done projects regardless will wind up benefiting, but the overall impact in urban areas will be low.

They propose to finance these subsidies with modifications to the mortgage deductibility of 'jumbo' mortgages and second homes.

Now I actually agree with them; I actually floated proposals a while ago (before the mortgage interest deduction was capped at mortgages of $1,000,000) that we limit the mortgage interest deduction to 3x the national average, and that we eliminate the vacation home deduction (which is often used for Winnebagoes and boats, anyway). But the political reality is that those proposals are DOA.

Good luck, have fun storming the castle, as they say. Actually, it's worse than that. Not only is their suggestion quixotic, but the current economy is in large part being kept afloat by high home prices combined with low-interest deductible mortgages.

These home prices are predicated on one thing - the ability to find new buyers who will pay as much or more. And if those buyers can't deduct the mortgage interest - if they have to start paying those high prices with after-tax dollars. Well, you say, it will only impact the expensive houses, which will become less expensive. Driving down the price of the less-expensive houses, and so on ad infinitum.

Now personally, I think we have far too much of our national wealth trapped in our houses. I think we overconsume housing both in quantity and cost, and that we'd be better off as a nation (even though I'd be broke) if house prices were substantially lower relative to incomes, and if more liquid equities in productive companies were relatively a more attractive investment.

I'll work through their other proposals in the next few days, and drop them a note and invite them to respond.

(edited to highlight quoted material)