Affordable housing is a big political topic lately. To put home ownership within
reach of more people, some lawmakers are flying the idea of 50-year mortgages
becoming the norm (as opposed to the current 30-year term). Is this the right way to go?
Will this make housing more affordable?

     As often happens in politics, simple remedies to complex problems are presented
as a cure-all, then fall short. Longer terms on home loans isn’t a bad idea, but the
underlying problem with affordable housing is that we do not have enough supply to
meet demand.

Factors That Increase Housing Costs

     Estimates show that we need about four million more housing units nationwide to
meet current demand. These could be anything from apartments to duplexes, condos,
or single-family homes. However, we need more than four million new homes because
the population keeps increasing, even as birthrates drop because immigration continues
to rise. Even if we could snap our fingers and create four million more homes overnight,
there would still be upward pressure on home prices.

     As of now, home prices are going up about 4% per year, a little higher than
inflation. Developers would love to build more homes, but there is only so much land to
develop and especially in California, the trend is to conserve open spaces rather than
develop them. For land that is open to development, increases in construction costs,
more building and zoning regulations, and financing regulations put in place after the
2008 housing bubble combine to make building and buying property more costly.
Whether you agree with creating more open space or new government regulations,
there’s no denying that these factors make housing less affordable.

Actions That Would Decrease Housing Costs

     If we want housing to be more affordable, government subsidies aren’t the
answer. In Las Vegas, a 20-acre parcel of federal land was appraised at $20 million
(that’s $1m per acre!), but sold for $2,000 to a subsidized housing builder. That’s an
irresponsible use of tax-payer dollars, as far as I’m concerned. Our country has $38trillion in debt and a $1.5 trillion deficit. Giving away land doesn’t make sense. Why not
build market-rate housing there and take the proceeds to create affordable housing
where land isn’t at such a premium?

     As far as the 50-year mortgage goes, if interest rates stayed the same (which is
likely), the additional 20 years to pay off the loan would lower monthly payments by
8.85%. If rates went up by a quarter of a percent, payments would still drop by 7.8%. I
feel it’s important to mention that it is rare for people to move into a home and stay there
for 30 years, let alone 50. Most 30-year home loans are either refinanced or paid off
when the home is sold.

      So a more accurate assessment is looking at the savings of 30-year versus 50-
year mortgages for the first ten years of ownership. At an interest rate of 6.25%, for
example, at the end of ten years you will have paid down 8.4% on a 30-year term
mortgage. With a 50-year mortgage at the same rate, after ten years you will have paid
down 4%.

      Regardless of the term, borrowers can make additional principal payments
whenever they choose. If the opportunity to invest is less than the rate on their
mortgage, then more principal payments on the loan is a great alternative.

     One of the prevailing concerns about allowing 50-year mortgages is that they will
reduce the cost of the mortgage by about 7.5 - 9% and that homeowners will simply
charge more for the same property. I don’t think they will. The law of supply and
demand is still at play. There may be modest increases in interest rates with the 50-year
mortgage, but as indicated above, people will figure this out and the loans probably
won’t go to term.

     Another challenge in the current housing market is the lock-in issue. People with
ultra-low interest rates on 30-year mortgages don’t feel like they can give them up. If
those loans were assumable or transportable, we’d see a lot more movement in the
market. But that’s a topic for another day.

     The long and short of it is this: we need to make existing properties less
expensive and reduce barriers to development. My solution? Get government out of the
housing business. Allow me, as a buyer, to determine which features I am willing to pay
for rather than having those features mandated by the government. Do I want triple-
paned windows and interior sprinklers? If so, I’ll pay for them. If not, I won’t.

     If you have questions about property management or real estate, please contact
me at [email protected] or call (707) 462-4000. If you have an idea for a futurecolumn, share it with me and if I use it, I’ll send you a $25 gift certificate to Schat’s
Bakery.

     Dick Selzer is a real estate broker who has been in the business for more than
50 years. The opinions expressed here are his and do not necessarily represent his
affiliated organizations.