Opportunities and Challenges

The glut of housing inventory will likely take several years to deplete and reach an adjusted equilibrium between supply and demand. But for those who haven't been scared off by the steep price declines over the last few years, there is a silver lining: buying a home is more affordable now than at any time in the recent past. And historically low mortgage rates further enhance affordability for home-ownership. So why aren't American consumers rushing to buy a house?

One reason could be apprehension of further declines in property values. In addition, many applicants can't get approval for a home loan, given the tough new standards—such as larger down payments and high FICO credit scores—that have been implemented by lending institutions since the subprime mortgage scandal. In some instances, even if a loan applicant passes muster, the home might be appraised at a lower value than the negotiated purchase price.

Difficulty in obtaining mortgage loans has fueled a booming rental market, but as that market tightens, rent prices increase, making homeownership look more appealing.

Eliminating the Mortgage Interest Deduction

One common theme throughout almost every federal deficit reduction plan is the elimination of most tax breaks—including the mortgage interest deduction. According to the Tax Foundation, only 25% of U. S. taxpayers actually claim this deduction. But this statistic can be misleading; the elimination of the mortgage interest deduction would adversely impact more than just those who claim it, and the implications would spread far beyond the adverse effect it would have on homeowners' property values.

For example, the recent decline in household wealth due to the fall in real estate values eroded confidence in the future, and it changed the public's attitudes on spending, saving, and home buying. Even if the impact on property values is short-term, as some economists suggest, the housing market and our national economy can't withstand another blow to homeownership demand in this already fragile recovery.

Future Outlook

Our legislators face difficult fiscal choices in their attempts to rein in the growing national debt. The challenge will be to accomplish this task without throwing our economy back into another recession.

The boom days for real estate may be nothing more than a distant memory, and the housing recovery will likely be slow. Unlike equity or debt securities, however, homeownership not only represents a long-term investment, but it also serves a functional purpose. There aren't many other investments that are both useful for today and provide potential capital appreciation for the future.

As always, I welcome your comments.