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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.

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Presentation on theme: "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."— Presentation transcript:

1 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 license.

2 8-2 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 8-2

3 8-3 Owner-Occupied vs. Renter-Occupied 8-3

4 8-4 Home Ownership Rates by Race and Ethnicity 8-4

5 8-5 Median Asking Sales Price Relative to Income 8-5

6 8-6 Median Asking Rent Relative to Income 8-6

7 8-7 Characteristics of Housing 8-7

8 8-8 Factors Influencing the Affordability of Housing Elements that must be considered in analyzing affordability of home ownership are: 1.Down payment 2.Monthly mortgage payments 3.Buyers income and debt 8-8

9 8-9 The Down Payment Amount of home buyers 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 8-9

10 8-10 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 8-10

11 8-11 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 8-11

12 8-12 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 owners insurance are sometimes part of monthly payment –Property taxes Levied by local governments to fund services such as education and police protection –Home owners insurance Covers replacement cost of house and its contents 8-12

13 8-13 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 8-13

14 8-14 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 borrowers 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 8-14

15 8-15 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 8-15

16 8-16 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 8-16

17 8-17 The Supply and Demand of Low-Cost Rental Housing (cont.) 8-17

18 8-18 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 8-18

19 8-19 The Effects of Rental Ceilings Rental ceilings are attractive on surface, but cause shortages and deteriorating stock of affordable housing 8-19

20 8-20 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 8-20

21 8-21 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 tenants rent is then set at 30 percent of tenants income –Government pays subsidy equal to difference between fair market rent and actual rent paid by tenant to landlord 8-21

22 8-22 Housing (Rent) Vouchers Housing subsidies in amount of difference between fair market rent and 30 percent of poor familys 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 8-22

23 8-23 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 8-23

24 8-24 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 8-24

25 8-25 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 8-25

26 8-26 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 8-26

27 8-27 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 8-27

28 8-28 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 governments 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 8-28

29 8-29 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 8-29

30 8-30 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 8-30

31 8-31 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) 8-31

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