cfpb, consumer financial protection bureau, dodd-frank, economics, economy, elizabeth warren, fannie mae, federal housing administration, fha, freddie mac, housing, lending, mortgages, Obama, politics, underwriting
“A house is not an investment.”
It’s a common lament that I hear from some economists and finance professionals. Yet, if anything, it’s a sentiment that is wrong-headed in every way. A home is absolutely an investment, and one that often has greater risks and rewards than your average stock or corporate bond. America’s great mistake was not treating housing as an investment, but rather pretending that it could be anything other than one.
This flawed mindset has caused us to make many terrible public policy choices over the past eight decades, with the move by the Consumer Financial Protection Bureau (“CFPB”) to tighten mortgage underwriting standards being the most recent example. These new standards by the CFPB have the potential to adversely impact our economy, exacerbate wealth disparities, and increase the risks of a future bubble.
Before we dive into the CFPB’s latest prescription for our banking woes, it’s first necessary to understand risk in the housing market. In a simple example, let’s say we buy a $100,000 home with a 5% down payment. For simplicity’s sake, let’s say this is an interest-only loan for the next three years and we sell the home at the end of that period.
If the price of the home were to increase 20% over that three years, we would make a profit of 400% on our equity position. That’s more impressive than the returns for nearly every three year run in the entire history of the US stock market! On the flip side, if the price of the home were to fall 20%, we’d lose 400% and be left with a negative $15,000 equity position, putting us significantly “underwater.”