I guess it’s just the American way. Always have your hand out for the next government subsidy and the politicians in Washington are always too willing to cooperate in response to powerful lobbying organizations. The National Association of Realtors (NAR) is no exception when it comes to begging for government housing market subsidies. With around 1,000,000 members the NAR is the world’s largest professional organization and has approximately a $155 MM budget. And look how much of that budget goes towards influencing the government to subsidize home ownership:
- Approximately $40 MM to “targeted state and local real estate and homeownership advocacy”
- Approximately $28 MM to “Government Affairs, Political Affairs, Economics & Research, Regulatory Affairs, RPAC, Public Affairs”
- And another $35 MM doesn’t really go directly to government lobbying but does go towards “advocating for REALTORS® and homeownership” – mostly through advertising
As a real estate agent you really have no choice but to join the NAR and pay their dues. So whether or not you believe in their causes you are supporting them. In addition to these amounts they also collect extra donations from realtors to support their pet causes.
Recently the NAR has had their underwear in a knot over two issues that they believe affects their livelihood.
Homeowner Flood Insurance Affordability Act
First the NAR issued a Call To Action for their members regarding the Homeowner Flood Insurance Affordability Act, which seeks to delay implementation of rate increases for the national flood insurance program (a government run program). As the name implies this legislation aims to keep flood insurance affordable. But that’s not how insurance is supposed to work. It’s not supposed to be affordable any more than gravity is supposed to be gentle on people prone to falling down. Insurance is supposed to reflect the risk that is being taken by the insurance buyer and spread that risk around all the people in a similar risk pool. Everyone pays into the pool the expected long term cost of living in a high risk area instead of being subject to periodic catastrophic costs.
The national flood insurance program is currently $24 B in the hole due to the fact that the government has been underpricing the risk of living in flood prone areas – essentially subsidizing homeownership in these areas. Nothing like encouraging people to take inadvisable risks. And let’s not forget that some of these subsidized homeowners are rich people with ocean front properties that cry in front of the TV cameras when their multi-million dollar home is destroyed by a hurricane. Like….you didn’t see that coming?
We didn’t need to see the government go into the hole on this program to know that it was underpriced. The very fact that the government needs to provide this type of insurance, and private insurers won’t offer it, is proof enough that the government’s policies are underpriced. Well, the government can only give away money for so long. And so there are price increases scheduled to kick in under the 2012 Biggert-Waters Act (ironic name huh?) and that act is the target of the NAR and the Homeowner Flood Insurance Affordability Act.
While appropriately risk adjusted rates will hit current homeowners pretty hard, in the long run it won’t affect the total affordability of living in these high risk areas because home prices will adjust accordingly. Unfortunately the current homeowners were incentivized to overpay for their homes in exchange for a government subsidy, which is now being pulled out from under them, so they are going to take a huge hit. Either they will have to sell their homes at a discount or they will have to incur higher costs going forward.
That’s the problem with any government subsidy. Every time, without exception, always, and 100% of the time, it creates a permanent class of people who are dependent upon that subsidy and when that subsidy is removed, as it inevitably must be, those people are devastated. The only way to avoid this problem is to never offer the subsidy in the first place.
FHA Loan Limits
The Federal Housing Administration, one of several government programs set up to subsidize homeownership, was created in 1934 to get the housing market back on its feet by insuring mortgages, thus reducing the risk to mortgage lenders and increasing the availability of homeownership to more people. As recently as 2005, in the heat of the housing bubble, they were insuring only 2.6% of all the new home purchases. However, in the aftermath of the bursting of the housing bubble their share of the market soared to 32.2% in the second quarter of 2010 as lenders became more cautious and homeowners had less money to put down towards buying a home. Since then FHA’s share of the mortgage market has scaled back to only 17.2% in the third quarter of 2013.
FHA was never intended to insure all the mortgages out there – just those of people needing an extra bit of help – people with lower down payments (as low as 3.5% vs. 10 – 20% normally), shopping at the lower end of the price range. In order to control their involvement in the housing market the FHA set loan limits on the homes they would help people buy and these loan limits were temporarily raised during the housing crisis in order to help the housing market recover.
As with most government programs that subsidize anything the FHA has been losing money lately. In fact, for the first time ever it had to ask the Treasury for $1.7 B to support them. And since the housing recovery is well on its way the FHA is in a position to try to scale back their operations and recover some of their losses. So they are raising their insurance rates (the homebuyer pays this) and lowering their loan limits again effective January 1.
The loan limits are set differently for different areas of the country depending upon housing costs. Chicago had been allowed loan limits of $410,000 for single family homes but that is being scaled back to $365,700. The loan limits on 2, 3, and 4 flat buildings are also being reduced.
No surprise the NAR is troubled by these actions so they joined with a special interest coalition in sending a letter to the FHA “urging them to reconsider these changes and asking for more transparency in the process of determining the limits”. The letter includes the usual appeals about the American dream of homeownership and the fragility of the economic recovery.
I guess this is just how Democracy works.
If you want to keep up to date on the Chicago real estate market, get an insider’s view of the seamy underbelly of the real estate industry, or you just think I’m the next Kurt Vonnegut you can Subscribe to Getting Real by Email. Please be sure to verify your email address when you receive the verification notice.