A Way to Help More People Buy Homes
ON Oct. 7, Washington, D.C. witnessed the ``Housing Now'' demonstration, which gave the clear message to Congress and the Bush administration that people are demanding action on housing for the homeless and for all Americans yearning for affordable homes. According to the Harvard Joint Center for Housing Studies report, ``The State of the Nation's Housing, 1989,'' only a privileged 1.28 million households out of 11.1 million renter households aged 25 to 34 had the resources to become homeowners.
While home prices climb annually at 6 percent to 15 percent, depending on location, salaries only increase at 4 percent to 5 percent (about even with general inflation). No wonder many young people have given up the hopeless chase to catch the ``home ownership train.''
One of the most enduring proposals to reverse this trend and enable young people to save enough for a home purchase is the Individual Housing Account (IHA). A new version of the IHA, called the Home Ownership Plan (HOP), will soon be drafted into a bill. The HOP would be a tax-deferred savings account for first-time home buyers. A key feature of this plan is that employees could have employers contribute what they would ordinarily put into pension plans, profit-sharing, or IRAs - into the HOP instead.
Employers would redirect between 4 percent and 12 percent of gross salary to the HOP, pay that would have ordinarily gone into pension or thrift savings plans. When the employee adds 6 percent to 10 percent, the HOP account grows rapidly at 10 percent to 22 percent of gross salary. Households can save for six to eight years and establish the first leg of their retirement plan with $25,000 to $55,000 of equity in their homes. Then, by age 35 or 40 they can enroll in the pension plan and still have 25 to 30 years to save for a pension.
If a couple keeps their house or reinvests it in another house or IRA, taxation is deferred. The HOP portion of the home equity is taxed only when the estate is settled or after the death of both spouses in the case of a married couple. It is critical that legislators understand that the US Treasury will not require a short-term ``recapture'' of lost revenue from deferred taxes, because the HOP will stimulate a windfall of revenue gains to the Treasury over the long term. The features of the HOP are designed to increase the number of participants, thereby increasing construction and a broad base of economic activity that is housing related. This in turn, will significantly increase revenues to the Treasury from individual income tax, corporate taxes, and Social Security payments.
In some IHA proposals, the federal government would defer taxes on savings, then turn around and impose taxes added onto annual income, which would recover the entire amount of lost revenue within five years. The result: Very few participants would use the IHA because no one would want to face the odious ``short-term recapture'' costs right after purchasing a home. The short-term recapture feature would reduce the number of participants so much that new construction would not be stimulated.
With an estimated 3.75 million households saving in the HOP each year, it is projected that single family housing production levels will increase by at least 650,000 units per year. This will generate approximately $12.8 billion per year in revenue. Because the HOP will provide a steady stream of home buyers even through national recessions, employment in housing and related industries (comprising 15 percent of the total labor force) will be stabilized. The savings to the Treasury from stabilized employment will average about $6 billion per year over a 15-20 year period. The cost of the HOP tax deferments is estimated at $6 to $7 billion per year. The Treasury will invest $7 billion and take in $18.8 billion for a net gain of roughly $11.8 billion per year once the program reaches maturity. Most investors who nearly double their money on a venture find it worthwhile.
There are people who fear that the tax exemption would cause a raid on the Treasury. In fact, the Treasury can't afford not to have this insurance policy. Congress can use the net gain in revenues to pay for housing programs for the homeless and lower income families ... with no new taxes.