Equality and Equity: A World of Difference
Equity means recognizing that we do not all start from the same place. Because of that, we must acknowledge and make adjustments to imbalances. In terms of housing equity, it would mean that any person who acts responsibly to house their family should be able to do so. That includes people working, if able, or seeking public assistance if not able to work. Anyone who does those things should be able to secure a decent place to live.
In past generations, workers in entry-level or chronically underpaid jobs were able to find housing that suited their basic needs. Some were able to buy homes and start building wealth.
Housing inflation
For decades, housing prices have increased faster than general inflation. Wages have not kept up. Now, more than half the renters in Massachusetts are spending more than a third of their pay for housing alone. This leaves them strapped to pay other bills and to save. Currently the average cost of a two-bedroom apartment is between $2000 and $3000 a month. [source]
Wage stagnation
Raising minimum wage has been a long struggle, politically. Even with a $15 an hour starting rate, workers near the bottom of the scale cannot make ends meet.
Suppose two adults work full-time at $15 per hour. Math: 50 weeks X 40 hours a week X $15 =$30,000 a year. That is $2500 a month, gross pay. After taxes, it is more like $2000 a month, per full time worker. If the two adults both work full time, one adult’s pay is covering rent and the other’s is paying for everything else.
Saving will be very hard in that household. But, suppose they work hard and save some money. Maybe one of the adults is working two jobs. Let’s say they save a 5% down payment for a median-priced condo in Boston. The median is $675,000 [source], but let’s go below that for simplicity. Let’s say $600,000 for a condo. That 5% down payment is a year’s salary for one full time worker at $15 an hour: $30,000.
Good for them. They worked hard. They saved every penny.
Now, they need to borrow 95% for that condo. They are out of luck. That’s a $570,000 mortgage. In order to get a mortgage, borrowers’ need to reliably earn enough so that they are paying no more than about 40% of their income on housing. (The required income varies, based on credit score and overall debt). Mortgage, with tax, insurance and condo fees and PMI on that property comes in at about $4,500 a month. That is more than their total family income, for two full time paychecks.
There is some help! They can get down payment assistance and a good mortgage rate through programs like One + Boston. With that program, they can get their mortgage down to about $3,500 a month. If one of the family members works two full-time jobs, maybe they can own a home in Boston; three full-time wages at $15 and hour brings in about $6000 a month in take-home pay. They might just squeak into home ownership. Or maybe not.
Arguments against increasing housing equity
I keep hearing the same old story from Realtors® who speak out against the real estate transfer fee. They refer to their hardworking forebears who saved and bought a home. This provided the family with entry into the American Dream. In old age, those forebears should not be taxed, because they need the profits for their retirement.
It is a perfect example of a story that illustrates a complete lack of understanding about what equity means.
This is what was said to the Joint Committee on Housing by representatives of the Massachusetts Association of Realtors® last month.
Go to the picture of the State House and click on the video. Go to 5:47 where the Realtor® representative talks about his immigrant parents saving every penny. Then listen to him say that people who use the One+ Boston program are “not competitive” in the market at 5:52.
This is a clear demonstration of not understanding equity. Equity would require that people who benefited from housing inflation participate in corrective measures so that people like them (who worked hard and saved) can have the same benefit from the housing market.
False arguments against the transfer fee
Within his talk (back around 5:48), he describes how people who are selling their houses need the profits to fund their retirement and retirement medical care. He claims that a transfer fee will interfere with that.
Let’s unpack that:
Suppose a homeowner purchased their house in 2013 for $575,000 – which was the average price for a single family home in Somerville in 2013. It is now worth $1.23M.
If, upon sale, the seller is required to pay the maximum rate of the proposed transfer fee rate, the fee due at sale would be $4,600.
Their gross profit would be $669,000. If we subtract for professional services during the transaction (high-end $70,000) and repair and maintenance ($200,000 – that’s high, too), the seller’s profit is still $399,000 – a profit of 69% on their investment. They would have gained either housing for themselves or rental income for ten years, too.
If they bought in 2003, the average price then was $472,000. In 1993, $160,000. The further you go back, the higher the profit to the sellers.
People who benefited from the American Dream have gained hundreds of thousands of dollars by owning their house. If they believe that people who work hard should have a chance at the American Dream, they need to change their behavior.