KENNEDY: Millennial mortgage shortage

Romney needs market-friendly housing plan

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Voters in the swing states are unemployed or underwater or both. The 2012 average home price in all-important Florida has fallen 48 percent off its peak and 61 percent of mortgage holders in Nevada are underwater. Since most Americans’ wealth is in their homes, American net worth has tumbled 40 percent since the recession hit. If Mitt Romney wants to reach these voters, he needs to offer a serious policy alternative to the housing market’s grim status quo.

Most young Americans still think the American Dream starts with a home purchase. Right now, the Republican presidential choice can only expect support from about 30 percent of the 18-29 year old age group — about what John McCain received in 2008. These young people are not yet out of reach for Mr. Romney: Ronald Reagan left office with an 85 percent approval rating among young voters because he inspired them to believe in the future.

More than 80 percent of 18-34 year-olds hope to buy a home, according to a TD Bank poll in May. The recession has taken a severe toll on a generation much more likely to be unemployed or underemployed than previous generations at this stage in life. Worse, 1 in 4 millennials lives with his parents, unable to find remunerative employment, finance his debts or live in his own home.

When these millennials do get on their feet, their wages are depressed and life goals are delayed. They marry and have children later and rent instead of buy homes. They want to buy but cannot afford to, primarily because the housing market is stacked against first-time homebuyers. Banks are wise not to loan to this generation with low incomes, little credit history (aside from student loans), and no access to collateral.

The meltdown of Fannie Mae, Freddie Mac and the derivatives market was largely due to the government giving banks and borrowers perverse incentives to sell and buy mortgages neither could afford without subsidies. Down payments of 3.5 percent meant that buyers had little stake in their expensive homes, and with a mortgage interest tax deduction, banks profited from the invisibility of high mortgage costs.

Young people are paying for the sins of their irresponsible parents and Uncle Sam. Mitt Romney, who promises an “ownership society,” should let young people buy into the country’s future with a home purchase. Just as Uncle Sam encourages retirement, college and health care purchases with tax incentives and special accounts, the government can encourage responsible savings for homes and reduce its own deficit in the long term.

The solution is not complicated but takes congressional foresight, which, unfortunately, is in short supply on Capitol Hill these days. Mr. Romney can show leadership by proposing Home Ownership Savings Accounts (HOSAs) that would allow prospective buyers to divert a percentage of their gross income, tax-free, into an account earmarked for a down payment on a home. The saver could accumulate the amount needed to put real equity into a home. The accounts would work just like a 401(k), with a small amount of gross income flowing into an account every month up to a pre-determined cap based on home prices or income, only to be withdrawn at point of sale on a primary residence. The difference between a 5 percent and a 20 percent down payment is enormous, for both the borrower and the tax man. For example, a family with a 15-year $250,000 mortgage would save almost $5,000 a year in payments — much more than the mortgage interest deduction.

In the long term, this approach could be deficit-neutral as buyers who opt for the HOSA waive the mortgage interest deduction. This would allow the tax exemption to be grandfathered without hurting current mortgage holders. The government would benefit from the full tax liability on rising incomes over time which would more than compensate for the lost revenue in the savings period.

For home buyers, sellers and banks, this system would be a huge boon. Banks with 20 percent down on every mortgage would see the risk of default fall as purchasers would have a huge equity stake in the mortgaged home. For borrowers, the amount of interest paid on a home over time would fall drastically along with their monthly mortgage liability. Sellers would also see the market bounce back as more young people enter the home market to launch their American Dream.

Communities and American democracy would win, too, as these new homeowners gain a real stake in their home and community. County and municipal tax revenue would rise and civic involvement would increase when these new families participate in local schools, organizations and government.

An ownership society, from retirement to health care, starts at home. Mitt Romney should give millennials a chance to own their homes rather than promote risky subsidies to irresponsible buyers.

Sean Kennedy is a visiting fellow at the Maryland Public Policy Institute.

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