When politicians, especially ones on the political left, talk about raising the wages of workers throughout the nation, they usually talk about things like raising the minimum wage, or the need for workers to be able to form unions so that they can use the power of collective bargaining to increase their wages with their employers.
One of the primary reasons behind raising the minimum wage, or helping workers form unions, is to allow them to have that higher income level that makes housing more affordable to them. Maybe housing, owning their own home, was out of reach to these people, and these two strategies allow homes to now be within their financial reach.
But if these two strategies actually do help make homes affordable when previously they weren’t, this presents us with yet another problem. And this has to do with how housing prices are determined.
I want you to keep something in mind – the cost of housing tends to be strongly determined not just by whether you have good credit history, but also by how much money potential homeowners can get loaned to them in a mortgage loan. It’s usually based on about 40% of a person’s or family’s income. The more income someone makes, the more loan money they qualify for from the bank, or some other lending institution. As the amount of money that can be loaned to these potential homeowners increases, the amount of money they can offer a seller of a house increases also. This means that over time, that the price of homes increase.
Why do I bring this up? Although all people spend their income on numerous things, such as housing, utilities, transportation, clothing and food, it is my opinion that spending on housing represents a large primary portion of a person’s income. How much a person has to spend on housing, and the quality of housing that someone can get for their money is a strong representation of their quality of life. That’s why I bring up the next point.
If the cost of housing goes up over time, then any benefits to increased wages today, either through raising the minimum wage, or through a union’s collective bargaining, will eventually be offset and negated by the increase in housing costs over time. In other words, any income increase will eventually be eaten up by increased prices for housing, rendering the benefits of any wage increase null and void over time. Then we’re back to square one: needing to raise people’s incomes so they can afford the new, higher housing prices.
In other words, there are really no long-term benefits to increasing the minimum wage, or through using collective bargaining to increase worker’s wages. The cost of living will eventually increase, and their standard of living and quality of life will be just the same as before, when their wages were lower.
If you really want to help workers with lower income out, particularly those who make the present-day minimum wage, then increasing the minimum wage can help in the short term, but it is not the best approach to solving this problem, especially long term. What we need is a solution that improves the worker’s buying power, standard of living, and quality of life in the short-term and long-term. So, how do we do that?
What I’d like to do right now is to present a solution that will solve this problem, as well as some other problems, such as what to do during economic recessions and depressions to keep people from losing their homes to the bank, and what to do when “automation” takes over some of our jobs.
So, what is this solution, you ask?
The Solution
So, the primary idea that I’m going to try to present here to solve these problems is this:
We use an incremental process, over the course of say 20-40 years, using manipulation of interest rates and the length of mortgage terms, and a few other strategies, to make housing prices more affordable in the long term.
This strategy would do the following:
a) The actual monetary value of homes would either stay the same, or increase very slightly, but would not keep pace with inflation. For example, if inflation was about 2 percent per year, the cost of housing would only increase between 0.25 and 0.5 percent per year.
b) Over time, because housing costs aren’t keeping up with inflation, the actual cost of housing for people, and families, should decrease in real terms, making it easier for people to afford homes in the long run.
c) In the end, after 20-40 years, mortgages will only have a maximum term of 15 years in length, will be based on only the primary breadwinner’s income rather than the total household income, and will only be based on 25 percent of the primary breadwinner’s income rather than 40 percent like today.
The benefits of this approach would include the following:
1) Because housing now costs less, the cost associated with housing could be afforded by one adult income, rather than two adult incomes pooling their resources together. This would make it easier for the other adult head of household to drop out of the workforce if they so choose, or need be.
2) If there was a severe economic recession, or depression, and there wasn’t enough work to go around, it could allow one of the two adults in a household to drop out of the workforce, for the time being, in order to allow for each household to have at least one income producer.
3) “Automation” is predicted to eliminate some jobs in the near future, thus reducing the supply of jobs within our society (e.g. truck driving and manufacturing). This may mean we will have to account for this in society, while still looking out for everyone’s “general welfare,” by making sure every household has at least one income producer before we allow a second adult to go into the workforce. If this is the case, we will need to make sure housing is affordable enough to be paid for through a single income, while still allowing households to have enough to pay for other expenses like food and transportation.
4) We can have a setup where the lower a person’s income, the lower their interest rate allowed, and longer their length of mortgage term that is allowed, thus making it more possible for housing to be within the reach of their lower incomes. This approach can help in leveling the playing field when it comes to housing being affordable. These people would then be able to afford housing that in today’s homeownership climate would be beyond their reach.
Let’s go into more detail now about how to go about this strategy.
We would work with the rules of securing mortgages through banks, and slowly change them.
Reducing Mortgage Term Lengths
For example, right now, many people get mortgages that are 30 years in length. In some parts of the country, that length has been extended to 40 years because of how expensive and unaffordable homes are in those areas. Every so often, we would reduce the maximum term length of a mortgage by six months or so. For example, after the first implementation, the maximum term length in many areas would be 29 years and 6 months. Once the housing market adjusted to this new max length, another reduction in the max term length would take place, so that mortgages could be no longer than 29 years in length.
We would continue to do this over the course of 20-40 years. In the end, the maximum length of a mortgage’s term would only be 15 years.
Reducing Percentage of Household Income
We would do the same with the portion of household income that a bank looks at to determine how much money can be used for securing a home loan through a bank. Right now, banks usually look at 40 percent of household income, and figure out how much loan money a household qualifies for based on that. In the first implementation of this long-term plan, the rules might be changed so that securing a home loan, that is, a mortgage, is based on 40 percent of the primary breadwinner’s income, and only 30 percent of the secondary breadwinner’s income. After home prices adjust to this new norm, the next implementation step would be brought in – 40 percent of the primary breadwinner’s income, and only 20 percent of the secondary breadwinner’s income. In each successive step, the percentage of the secondary breadwinner’s income would decrease more and more until their income is not considered at all, but only the primary breadwinner’s income.
Once we get to the point in this long-term plan that only the primary breadwinner’s income is considered when securing a home loan, we would start to reduce the percentage of his or her income considered when determining loan amount. That reduction would continue until only 25 percent of their income was considered.
In the end, the home loan amount that a family qualifies for will be based on only 25 percent of the primary breadwinner’s income, and no other family member’s income.
This strategy, if done right, will allow housing prices to either stay the same, or increase only very slightly, over time, and would definitely ensure that those housing prices don’t keep up with inflation. We would make sure that the actual monetary value of homes didn’t decrease. At least in parts of the country where homes are more affordable.
For example, let’s say we have a $250,000 house somewhere in the Midwest. In 30-40 years, that home price should be no less than $250,000, but no more than perhaps $300,000. If the rate of inflation stays at about 2% per year, then over the course of time, the actual price people pay for their homes, after accounting for inflation, would amount to a smaller and smaller portion of the household’s income.
In other parts of the country where home prices are astronomically high, we may want to implement a slightly different strategy that reduces home prices in the long term to make them more affordable, without financially hurting homeowners.
When it comes to this long term strategy to slowly and incrementally decrease the length of a mortgage term, and portion of income used to determine loan amount, we would need to have a group of highly-qualified economists and financial experts that would determine policy changes, that is, when mortgage term lengths can be shortened a little bit, and when the percentage of a person’s gross income looked at is lowered yet a little more.
We also need to keep in mind that every community is different and unique, so the term changes and policy changes would not be changed uniformly across the entire country in cookie-cutter fashion, but would be changed based on the economic climate and financial conditions of each metro area. The changes could even be variable in different parts of the same metro areas.
Keep in mind that housing costs would still be determined by market mechanisms across the country. Housing prices tend to go up when people sell their houses to the highest bidder. What this strategy does is it limits the amount of money the highest bidder would be able to offer by slowly reducing the variables that determine how much money a potential home-buyer qualifies for from their local mortgage lender or bank. A homeowner could still, over time get his or her money’s worth out of the house when it comes time to sell, and not lose money, but by controlling the amount of money for which a potential home-buyer qualifies, we can limit the amount for which homes sell, so that over time housing costs take up less and less of a person’s income, including the total household income.
Some Other Benefits
Since people are using less of their incomes to pay for housing, they would be able to save more money, or have more of their incomes to spend on other things. This could improve the general economy if done right, and reduce levels of stress in the lives of people and families as they worry less about income and being able to pay their bills, thus improving our psychological and emotional health as a nation.
If there was an economic recession, and households ended up making less income, they would still be able to afford their mortgage rather than have to go through foreclosure. Yes, it would end up being a higher percentage of their gross income, but would still be manageable.
It would allow a second adult, if they so choose, to drop out of the workforce, since their income would no longer be needed to pay for the mortgage. You would end up seeing more stay-at-home moms or dads, since they could then afford to go that route.
You would see more small-business start-ups. By relying on the income of their partner, the second adult in a household could resign from their regular job, and start their own business, perhaps starting out of their own home, because they can now afford to do so with housing costs being low enough to allow for that.
It would allow more people to pay off their mortgages quicker, which would mean that more people would own their homes free-and-clear, meaning that the rate of foreclosure, and homelessness, theoretically goes down.
Economic Downturns and Automation
It could be used as part of a strategy to maximize well-being and reduce destitution during times of economic recessions or depressions. I briefly talked about this earlier, but let me go into more detail now. For example, perhaps at some time in the future, there is a severe economic depression where, under present-day conditions, you’d have an unemployment rate of 30% or higher, but the government took a strategy requiring that all households had only one working adult, and required the second adult to drop out of the workforce for the time being, to allow available jobs to be utilized to benefit the maximum number of households (e.g. two incomes supporting two households rather that both being in the same household while another household is destitute because of no income), thus reducing the level of destitution and need in the country to a bare minimum. This strategy can be supported best when only one person’s income is used for housing costs rather than using total household income.
The same principles apply when it comes to “automation.” When we require that all households have only one working adult until all households are accounted for, before letting a second adult enter the workforce, we would apply the same strategy. And for this strategy to work, we would need to reduce the percentage of income used for housing purposes, and that’s what my strategy for reducing the real cost of housing is about.
There’s one other thing that needs to be added to this plan. We always need to make sure that the supply of housing is equal to, or more than, the demand for housing. In this way, we can make sure housing prices don’t soar due to high demand, but are kept under control. And while we do this, we would also use the three mechanisms in my strategy to help control how much money in a household income is used to pay for housing in the market.
Back to Minimum Wage and Unions
Now that I’ve presented my long-term strategy for how to bring housing costs under control, let’s go back to talking about increasing the minimum wage and forming unions so that they can use collective bargaining to increase their wages.
When it comes to increasing the minimum wage, that strategy does help some people in the short-term, while hurting others, and it doesn’t really do anything beneficial to those workers in the long-term.
Of course, I’ve already said in my article about raising the minimum wage that only a small percentage of the population, about 2-3 percent, work at minimum wage, and a vast majority of people, 97-98 percent, work at jobs that pay more than the minimum wage. I’ve also said that most of the people that work the lowest-paying jobs end up leaving those jobs for others that pay more, and in some cases substantially more. And if these two things are correct, then focusing on raising the minimum wage to help people is really a very useless way to help large numbers of people.
When it comes to supporting the formation of unions in the workplace by employees, it could be argued that all the benefits that pro-union people say are derived from unions can be gotten through other means, and all without the detriments that come from unions – for example, by creating federal laws that have the same effect.
Conclusion
So, there you have it. Using this long term plan to reduce the cost of housing can benefit us as a nation, make housing more affordable, reduce destitution and homelessness, allow us to get through economic recessions and depressions better, help alleviate some of the problems associated with “automation,” and help level the playing field when it comes to affordable housing.
