Highlights • Chapter 3  1

Chapter 3: HOME OWNERSHIP

Chapter Highlights

  1. Explain the National Housing Act.

The National Housing Act of 1949 established a national housing goal of a “decent home and a suitable living environment for every American.” The theory underlying such legislation is that home ownership results in an improved citizenry because it vests owners with a greater stake in the country.

  1. How has Congress encouraged home ownership?

One way that Congress has encouraged home ownership is through favorable provisions in the federal income tax code, such as the deductability of both mortgage interest and real property taxes in calculating one’s federal income tax liability. Congress also periodically comes up with additional tax breaks to help make home ownership more attainable. For example, in 1997, they passed legislation that allows first-time home buyers to make a penalty-free withdrawal of up to $10,000 from an Individual Retirement Account for the down payment on a home (normally a 10 percent penalty applies for early withdrawals from an IRA).

  1. What do SHFAs do?

State Housing Finance Agencies(SHFA) have been created in almost every state. They address a broad spectrum of housing needs through financing the development and preservation of affordable rental and ownership housing for lower-income citizens. These agencies help fund low- and moderate-income rental housing units and provide low-interest-rate home mortgages. SHFAs operate a number of programs, the most important for potential homeowners being the Mortgage Revenue Bond program. Under this program, the agencies periodically issue tax-exempt bonds and use the funds to make mortgages at below market interest rates to lower-income, first-time buyers of modestly priced homes. The interest rate on such loans can be as much as 2.5 percentage points below conventional rates, which can result in monthly savings of up to $100 on a typical mortgage.

  1. How does home ownership in the United States compare to that of other countries?

Mortgage payments for the typical American equal 30 percent of household income, while in Australia, mortgage payments amount to 44 percent of household income. Unlike the United States, most other countries do not allow tax deductions for mortgage interest. The Netherlands is one of the few other countries that share the view that the tax system should subsidize home ownership. The 68 percent rate of home ownership in the United States compares favorably with home ownership rates in other countries. In many countries, private ownership of real property is not allowed, and in others it is prohibitively expensive.

  1. What are some nonfinancial advantages to home ownership?

Nonfinancial advantages to home ownership include the owner’s right to modify the property to suit personal tastes, increased privacy, and the pride of ownership.

  1. What are some financial advantages to home ownership?

The financial advantages of home ownership are numerous. One advantage pertains to owners who employ a fixed-interest-rate mortgage loan. By doing so they lock in the major component of their monthly housing costs. Owners may also build equity in the property. Finally, homeowners accrue several tax advantages. For example, the federal government subsidizes homeowners by allowing them to deduct property tax payments and mortgage interest payments for federal income tax purposes (which effectively decreases the cost of housing for homeowners). And homeowners may avoid or postpone income taxes resulting from the sale of a home at a gain.

  1. Explain equity buildup.

Equitybuildupcan occur in one, or both, of two ways: by reducing the mortgage principal, or with increases in the value of the property. An owner’s net worth increases as equity buildup occurs and a homeowner may use this to his or her advantage. Equity may be used to secure additional debt, or it may result in increased purchasing power when the property is sold.

  1. What are some disadvantages to home ownership?

Home ownership disadvantages include the fact that owners tend to be less mobile than renters. Home ownership also requires one to be responsible. An owner is fully liable for things for which renters may be only partially responsible, such as: personal injuries suffered by others on the property, repairs, and maintenance. In addition, ownership carries the risk of loss. Judgments, liens, natural disasters, eminent domain condemnation, and many other hazards may threaten one’s continued ownership. For many people, financial constraints are another disadvantage of ownership. In financing the acquisition of a home, some people extend themselves to the point where they cannot afford to do much more than live in the home. Such owners are said to be house poor.

  1. What are the three obstacles to home ownership?

The three obstacles to potential home ownership are: lack of cash or other financial assets for the down payment and closing costs, insufficient income to make the mortgage payments, and other debt payments that reduce the amount of income available for the mortgage payment.

  1. How do you determine the maximum price one can afford to pay for a home?

The maximum price one can afford to pay for a home depends on a number of factors: the extent to which the purchaser will use borrowed funds, the loan terms, the purchaser’s income, wealth, and other obligations. A number of criteria have been developed regarding housing affordability. A traditional rule of thumb holds that if one is to avoid becoming house poor, the house price should not exceed 2.5 times annual gross household income.

  1. What is consumer surplus?

Consumer surplusis the difference between what one must pay for a property and the amount at which they value the property.

  1. What can be found at the County Auditor’s Office?

At the County Auditor’s Office, armed with the street address of a house, or in some cases a “key number” (which can be determined at the office), one can learn several potentially useful pieces of information, including: when the house was built; the current owner’s name; the legal description of the property; various property characteristics (e.g., lot size, number of rooms, etc.); and the property’s assessed value.

  1. What are the two important questions regarding the assessed value of a home?

Two important questions regarding the assessed value of a home include: does the assessed value represent the Assessor’s estimate of fair market value (FMV); and when was the assessment made? In many locations the assessed value represents only a fraction of what the Assessor thinks is FMV.

  1. What can be found at the Office of the Registrar of Deeds?

Using the legal description of the property obtained at the Assessor’s Office, you can obtain several additional pieces of information at the Office of the Registrar of Deeds (County Recorder), including: the ownership history of the property; the date the current owner acquired title; the type of deed held by the current owner; and the price the current owner paid. Although there may be other explanations, frequent ownership turnover could indicate a hidden problem with the property. The price the current owner paid for the property may be of particular importance in formulating a purchase offer, because research suggests that home owners with extended tenure in the property may be more willing to accept low offers.

  1. What else can be found at other public offices?

Inquiry at other public offices will result in additional pieces of useful information. The exact amount of property taxes for the previous tax year, and any delinquent property taxes, can be found at the County Treasurer’s Office. Again, a prospective purchaser can compare the tax bill to the information on the listing sheet; delinquent taxes are likely to indicate what people in the real estate industry refer to as a “motivated seller.” Any paperwork on work performed on the property that involves local codes can be discovered at the Building Inspector’s Office. In addition, it should be possible to determine the original cost to build the improvements to the property, which may be particularly useful if one is considering a new home. The Planning and Zoning Commission will provide information regarding any planned zoning, or other, changes (e.g., installation of sidewalks, sewer, or water-lines; and street-widening) that may negatively affect the value of the property or result in a special assessment being levied.

Finally, examination of the judgment rolls and lis pendens file at the County Courthouse will reveal whether the seller has any existing or pending obligations which, again, may indicate a motivated seller.

Larsen • Real Estate Principles and Practices