How will the Election Affect Homeowners?

The nation’s 75 million homeowners have handed control of Congress to Democrats.

American Homeowners are not only one of the nation’s largest voting blocks, homeowners are also among the most likely to vote (91% said they would in a previous pre-election poll). In the 2000 election exit polls they were divided evenly in political affiliation – 1/3 Republican, 1/3 Democrat, and 1/3 Independent.

This year a dramatic shift in the Independent vote gave absolute control of the House to Democrats. Because of the power of the filibuster threat, it gave virtual parity to the Democrats in the Senate regardless of the final outcome. A 2006national exit poll revealed that the swing of Independent votes to Democrats in this election was a huge factor in the outcome – Democrats had a 20 point margin of support among Independents in 2006. In 2002 the two parties split the Independent vote.

“This means that the shift in votes among this significant share of the large number of American homeowners probably decided the outcome of the 2006 elections”, noted Bruce Hahn, President of the American Homeowners Grassroots Alliance. The election results may result in a long term realignment of political power in the U.S. that will impact the outlook for many policy issues that significantly impact homeowners and home ownership. “What will be interesting is whether Democrats will be able to maintain the support of the majority of American Homeowners going into the 2008 elections”, Hahn added.

We will see how the new makeup will play out in terms of the resolution of policy issues. Given the negative tone of the election and the existing ill will between the leadership of the two parties, the early going in the next Congress will very likely be contentious. We could easily see little progress on the issues, with both parties blaming each other for lack of success on a variety of policy fronts. Stalemates and showdowns on emotional policy issues (funding for the war in Iraq being an obvious likely example) will be very likely in the early going.

The real question will be whether or not the two parties can work out accommodations with each other that allow them to pass legislation on important policy issues. If they can’t find a means of resolving differences on at least some of the important issues, the new Congress and the President will be ineffectual. Not only will we all suffer as a result, it will portend a very nasty 2008 federal election campaign.

Time will tell, but in the meantime there are some early indicators of how the focus on issues of significant impact on homeowners might change based on the new makeup in the House of Representatives. Several of the legislative goals in the Democrats’ “Six for 06” policy platform should play particularly well with the nation’s 75 million predominantly moderate homeowners. Rapidly escalating healthcare costs are a serious and growing problem for homeowners as well as other consumers. Family health insurance costs are up 70% (to $4,500 per family) since 2000, and 6 million more have become uninsured since then. Homeowners will benefit if the Democrats can come up with cost-effective improvements to the Medicare prescription drug program, negotiate lower drug prices for government sponsored programs, and end wasteful previous concessions to drug companies and HMOs.

Legislative initiatives to reduce dependence on foreign oil and create a cleaner environment, with more research funding for energy-efficient technologies and domestic alternatives such as biofuels, are also potential winners with homeowners, who are increasingly pressed by increases in home energy costs, automotive fuel costs and the impact of growing energy costs on the products and services they buy. Another escalating cost for homeowners is the price of their children’s college tuition. A “Six for 06” proposal to make college tuition deductible from taxes, permanently, cut student loan interest rates, and expand Pell Grants will also likely be greeted favorably by homeowners.

There will be other new Democratic policy initiatives of interest to homeowners as well. Charles Rangel (D – NY 15) will likely take over the powerful tax-writing Ways and Means Committee, replacing retiring William Thomas (R – CA 22). Rangel is the author of the five billion dollar Federal Empowerment Zone demonstration project aimed at revitalizing urban neighborhoods. He's also the author of the Low Income Housing Tax Credit, which is responsible for financing ninety percent of the affordable housing built in the U.S. Expect more attention to expanding low income home ownership through a variety of measures under the new Democratic leadership.

An early beneficiary of the new makeup might be pending bipartisan Senate legislation which would allow homeowners with incomes of $100,000 or less to deduct the cost of private mortgage insurance, just as they currently deduct mortgage interest. The American Homeowners Grassroots Alliance (AHGA) strongly supports this measure, which has been opposed by Congressman Thomas. The legislation could pass in the lame duck session, and Republican leaders would be wise to make sure that happens so their party can still get the credit.

Many energy conservation tax incentives will expire in 2007. While these too have previously received bipartisan support, we expect that the House Democrats should have little problem supporting the extension of tax credits for investments to make homes more energy efficient, the construction of energy efficient new homes, and possibly new approaches, such as tax credits to encourage teleworking.

The Ways and Means Committee also has oversight responsibilities for many areas of healthcare, a growing cost for most homeowners. Support of health savings accounts has been broad-based and bipartisan, but Representative Rangel will undoubtedly look for additional ways to help the many economically disadvantaged who are unable to save or whose income is so low that tax incentives to save for health care (or home down payments) are either not applicable or so low as to be ineffective. And while Mr. Rangel will likely support many of the recent tax enforcement recommendations of the Joint Tax Committee, AHGA hopes that he will share some of the concerns the Alliance expressed in its recent letter to Senators Grassley and Baucus (see separate Home Base article on that subject).

Like Mr. Rangel, Congressman Barney Frank is a strong supporter of efforts to expand home ownership among the economically disadvantaged and a protector of their rights in the home ownership arena. As the likely future Chairman of the House Financial Services Committee, he too can be expected to pursue efforts to expand affordable housing programs. Mr. Frank has been a champion of requiring Fannie Mae and Freddie Mac to devote a portion of their profits to affordable housing programs, and this could come to fruition in the lame duck session of Congress. He will also seek to root out many predatory mortgage lending and insurance practices that are problems for homeowners at all economic levels. Unfortunately the retirement of former Financial Services Committee Chairman Mike Oxley (R – OH 4) is a loss for homeowners in many respects. Mr. Oxley has been a major supporter of efforts to expose some of the glaring anticompetitive practices in the real estate services sector. Fortunately the worthy efforts of the Bush Administration’s Justice Department and Federal Trade Commission to stop those abuses of homeowners’ rights by national and state real estate trade associations and Multiple Listing Services will continue.

Other areas of growing interest to homeowners is energy and communications policy. The likely replacement on the Energy and Commerce Committee of Joe Barton (R TX – 6) by John Dingell (D – MI 15) is likely to result in support for greater federal funding of alternative energy research and greater funding for home weatherization for low income homeowners. Consumer protections in the Internet and telecommunications arenas will probably be expanded under his leadership. Conversely, federal efforts to pass legislation to allow more competition to cable TV monopolies have gotten bogged down in this Congress and their future Congressional outlook is uncertain. This legislation, which can save homeowners as much as $360 annually, will likely see greater focus at the state and local level next year, where the debate has been both less partisan and more successful.

The outlook is hazier on the federal budget deficit. The economy was one of the key issues in this year’s exit polls. Homeowners generally support fiscal responsibility and oppose tax increases. Historically Republicans have a much more consistent record of support for tighter budgets and tax reduction. However a major reason for the growing budget deficit under this Administration is the spiraling cost of the war in Iraq. It’s a good bet that Congressional Democrats will try to reduce funding for the war effort, and some of those savings may find themselves transferred to the support of tax cuts and/or program funding that can benefit homeowners and home ownership. It’s way too early to tell how that battle will play out.

No doubt more trends on issues that impact homeowners will emerge in the next two years. In the end it will be both the benefits and the costs of new Democratic proposals that determines if and how much homeowners benefit from the changes in Congress, and how homeowners will vote in 2008.

Local Focus Improving Home Energy Efficiency

Many of the advances in home energy efficiency are occurring at the local level, according to a report in the October 16 Wall Street Journal.

The efficiency of many of the appliances and other manufactured products used in a home have already improved substantially because of national standards such as the voluntary federal “Energy Star” standard. It identifies energy efficient appliances such as refrigerators, hot water heaters, dishwashers, furnaces and other appliances. This is largely because many manufacturers have been able to bring many of their products up to energy star standards relatively cost effectively, and manufactured products like appliances are typically sold nationally.

There is also an Energy Star standard for overall energy efficiency of new homes. To achieve that status the homes must be at least 15% more energy-efficient than homes meeting the International Energy Conservation Code. There’s also a federal tax credit available to new home builders that provides up to $2,000 for homes that surpass 2004 international code standards by 50%.

Unfortunately voluntary participation in these programs varies tremendously from state to state. Among the states with the most new homes qualifying for Energy Star status are Nevada (43%), New Jersey (36%), Arizona (21%) and Texas (31%). Several states (Texas and New Jersey) offer additional incentives beyond federal tax credits to participating builders, but in the state with the highest builder participation (Nevada) the reason for home builders' support seems to be a combination of the effective marketing of the benefits of home energy efficiency and home buyer response to that benefit.

At the other extreme, relatively few builders in Gulf Coast states participate in the program (Louisiana has a 10% participation rate but Alabama and Mississippi are at under 3%). Economic, historic, and cultural factors all contribute to the lack of participation. In some states tight budgets result in a shortage of personnel needed to validate Energy Star status. While there are national minimum building code standards, it is up to state and local governments to decide if they want to adopt more stringent standards. In many states local governments are wary of new home energy efficiency standards.

There’s a lot that can be achieved through improved conservation, according to a 2005 report by the Alliance to Save Energy (ASE). It could help offset projected future home energy use increases that are resulting from the growing average size of new U.S. homes.

In some ways the fragmented approach to home energy efficiency is positive. It will take time for a national political consensus to evolve on the types and levels of new home energy standards. Meanwhile, working on their own, some states have already set new and higher standards that exceed current federal standards. These include California (rebates of $200 - $400 for highly efficient air conditioning and heating) and New York (low-interest loans for qualifying home energy efficiency improvements). And in some of the Gulf states massive rebuilding as a result of hurricane Katrina’s destruction of thousands of homes may be leading both to both stronger building construction standards and the state’s first standards for energy efficiency in home construction.

Since residential energy use is 22% of total U.S. energy consumption, there is much opportunity for further energy efficiency improvements to cut U.S. energy consumption, save homeowners money, and reduce the damage from energy consumption to the environment. ASE estimates that building energy efficiency can reduce residential energy use by 10 – 30% over the next decade, even as more homes are being built and their average size increases. How much success we achieve depends on both the support of American homeowners and politicians at the local, state and federal levels.

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End of Home Price Plunge May be Near

While some pundits are still predicting future home price declines of as much as 40%, there are some early signs that a turnaround is in sight.

Even as the inventory of unsold homes began to climb in 2005, the stories in the marketplace were almost all about the sellers' market. “Buy fast before the price goes up” the pundits said. Many buyers did, and in many parts of the country selling prices continued to go up.

But eventually reality caught up with realty. The burgeoning inventory of homes for sale exceeded the number of buyers, and buyers began to notice. As they did, and as the real estate slowdown became increasingly obvious, a combination of increasingly picky buyers and nervous sellers began to drive home selling prices down. The evidence of a real estate slowdown became overwhelming in 2006, and some real estate industry economists began predicting a “soft landing” ("soft landing" is apparently an economist’s equivalent to the use of the word “quaint” in a real estate listing – “quaint” often means the home is a wreck, and a “soft landing” apparently means your home’s value just dropped 10%.)
 
Now some economists are calling for even more dramatic declines in home values. Real estate guru and Yale professor Robert Shiller has predicted a housing market correction will result in price declines of 40 percent, and others see more big declines as well. An early October Moody's housing report predicted house prices are likely to decline more than 10 percent over the next few years in 20 metropolitan areas. Federal Reserve Board Chairman Ben Bernanke said that the housing slump is "one of the major drags causing the economy to slow now." He predicts a further "substantial correction" in housing which will reduce the nation’s economic growth by 1% in the second half of 2006.

In addition, consumer attitudes towards home-buying are at the lowest level since 1990, with consumers concerned over prospects of future home price decreases and mortgage interest rate increases, according to the University of Michigan's September monthly survey of consumers. Fear of further drops in home values, combined with the inability of homeowners to sell their current homes (or sell them for the price they needed), is causing growing numbers of pending new home buyers to walk away from substantial deposits, according to industry reports.

All this bad news is not necessarily bad news. A truism of the stock market is that when all the analysts agree that the market is going to hell, it’s a sure sign that a turnaround is imminent (and vice versa). There are early indications that this may be the case in residential real estate as well. If you look beyond the gloom and doom and the most negative data, there are a growing number of signs that the worst may already be over, which could pave the way for price stabilization in 2007. Among them:

● Inventories of unsold homes are beginning to fall. Inventories of unsold homes fell 1.9% to 557,000 in September. This is a 6.4-month supply – still way more than normal but a lot less than earlier in the year.
● The new home inventory is being worked off and new home construction has been cut back significantly.
● The federal government just announced that unemployment is near historic lows. In addition, thanks in part to past home appreciation, most homeowner’s own balance sheets are in good shape – relatively few have to sell their homes solely for financial reasons.
● Not only are there record numbers of homeowners, but homeowners’ real estate appetites continue to grow. A recent National Association of Realtors’ study of baby boomers showed an expansion in their purchases of second homes, investment properties, and/or land. Over 1/3 of high income (over $100,000) boomers plan to buy real estate in the next year.
● There appears to be no major looming economic factors that will drive up mortgage interest rates significantly in the near future, which would be a serious threat to home valuations.
● There are signs that overall consumer confidence may be improving. The Conference Board reported its September consumer confidence index increased to 104.5 from 100.2 in August, and the University of Michigan, reported its index increased to 85.4 from 82 in August.
● The analytics firm comScore Media Metrix recently reported that the number of unique visitors to top real estate Web sites increased 17 percent from August 2005 to August 2006.
● Although almost half of the respondents to an October AP-AOL poll said that the housing market in their area is overpriced (46 percent), even more (49 percent), believe that housing prices in their area will go up in the next two years.
● Transaction costs are declining. A combination of the proliferation of new real estate service business models is giving buyers and sellers more ways to save money on transaction costs and less reason to wait.
● A few leading economists with respected track records are beginning to conclude the worst may be over. Former Federal Reserve Chairman Alan Greenspan, who has had a pretty successful track record in predicting economic trends, recently said "Most of the negatives in housing are probably behind us."

Of course it’s not possible to accurately predict the top or bottom of any market, and the real estate market is also very location sensitive. However the American Homeowners Foundation believes Mr. Greenspan is likely right in his overall assessment. Notwithstanding the gloom and doom, and absent any really bad national economic news, there’s a very decent chance that nationally home values will level off in 2007. Key will be inventory levels and annual sales rates. When they get back to historic levels - 2.5 months of inventory supply or so in the resale market, about 5.6 million annual sales – the real estate market should return to normalcy. If home prices do not drop much more by then, most homeowners will still have benefited from one of the most impressive decades of home appreciation in history. And if that’s true, 2007 home buyers may find the best of all worlds – tremendous selection, low mortgage rates, and the opportunity to buy a home at the bottom of the market.

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