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LAURA SULLIVAN, Host:

We're back with ALL THINGS CONSIDERED from NPR News. I'm Laura Sullivan.

(SOUNDBITE OF MUSIC)

SULLIVAN: Say you own a house in St. Paul, Minnesota. It cost you $172,000, that's the median sales price of a single family home in the U.S. right now. You're able to make your monthly payments, but like many Americans, just barely. This is your little slice of the American dream.

Now let's say someone tells you they're going raise your interest rate, and they're going to cut the value of your house, and they're going to take away the tax deduction that you get for mortgage interest. And what if that person tried to tell you that all of that would actually be good for you? How much help should the government be giving homeowners?

There's a small group of economists and even a few policymakers who say Washington needs to stop propping up a broken system. Viral Acharya, a New York University professor, is one of them.

VIRAL ACHARYA: The whole slew of subsidies that we have for housing in the United States are not in the end making everyone better off.

SULLIVAN: Acharya co-wrote a book called "Guaranteed to Fail," and it argues that the American housing system needs to be radically rebuilt.

ACHARYA: Our long-term proposal is to reduce the extent of homeownership subsidies that we are providing, so wind down Fannie Mae and Freddie Mac in the long run, and second, remove the tax deductibility of mortgage interest rates so that we are not distorting the system to over-borrow on houses.

In the short run, you would have to deal with the problem that there are many underwater mortgages out there. We should do decisive one-time principal write-downs on these mortgages. So my proposal to essentially soften the blow for those who are most heavily indebted is precisely to ensure that the transition doesn't end up being, one, where we are just stuck in a housing market that becomes completely illiquid because of a one-time shock.

SULLIVAN: What you're talking about is higher interest rates. Your house is going to be worth less, and you're not going to get a tax deduction on all that interest that you're paying on your house. I mean, how are you going to sell this to people in the middle?

ACHARYA: It's to essentially convey them the right message, that while on the one hand, you get all these deductions and subsidies, on the other hand, it's fueling a housing price boom in the economy. So, yes, you got the subsidy, you got a lower interest rate, but it's not just you who got the lower interest rate. Everyone else around you got the lower interest rate. So they all want to consume more housing. The property prices therefore went up, so the amount of property you wanted to buy actually cost you more than what it should have in the natural equilibrium for the economy.

So what we have not done is to convey to people the right and the full economic content of how the subsidies are not in the end making everyone better off.

SULLIVAN: I mean, this ship has sort of sailed. You know, millions of homeowners are in these homes right now. I mean, how do you tell them you're going to have to move because it's better for the economy overall?

ACHARYA: So just to be clear, I don't think the existing subsidies, those that have already bought houses and those who are claiming deductions would go away. The idea would be on new purchases. So what this is going to do is that in the refinancing market or when you're trying to sell your house, the new buyers are not going to get the tax breaks in some sense.

Maybe we could put in place a rental subsidy in order to put the housing and the rental on equal footing that would suggest that if it's going to become easier to rent your property, there would be people who would be willing to buy houses in order to do so.

And note that once you remove the subsidies, actually housing prices should come down. As a result of it, more people should be willing to sort of buy houses in the first place. So there's sort of all kinds of countervailing effects. All distortions that we have created are going to one by one start getting fixed, and those would actually enable us move the long-term transition out of the current mess or debacle that we have in the mortgage finances.

SULLIVAN: Will fewer people own homes?

ACHARYA: The historical evidence seems to suggest probably not. If you look across, say, 25 largest countries of the world, United States in terms of its home ownership rate sits right at the center, which seems to suggest that the whole slew of subsidies that we have for housing in the United States is neither sufficient nor necessary to produce extremely high homeownership rate.

SULLIVAN: That's Viral Acharya, a New York University finance professor and co-author of the book "Guaranteed to Fail." He's in our New York studios. Thank you so much.

ACHARYA: Thank you, Laura.

SULLIVAN: Acharya's idea is drastic, but policymakers are taking at least some elements of it seriously. President Obama says he wants to overhaul Fannie Mae and Freddie Mac, and the co-chairs of his deficit commission call for cuts in the mortgage interest deduction.

Henry Cisneros, secretary of Housing and Urban Development under President Clinton, says the most extreme proposals would be a disaster.

HENRY CISNEROS: If we did it all, if we just cut it out, it would be grievous damage to the way our economy functions, the way our housing markets function. We would see less production. We would see less incentive to become homeowners. We know what homeownership is important to the creation of the middle class.

Many studies have shown that one of the principal ingredients for sustaining the American middle class is the enforced savings that people have in the equity in their home. It is their net worth and, for some Americans, the only net worth that they can account for. So it would grievous in its effect.

SULLIVAN: You spent your career trying to close the income gap through housing subsidies, sort of raise the poor into the middle class through homeownership. If we were to eliminate the mortgage tax deduction, would that make it more fair for everybody that owns a home? Because rich people get more benefit for the mortgage tax deduction than poor people do.

CISNEROS: The mortgage tax deduction is so embedded in our economic system, our housing finance system, that I think it would be major disruption to, quote, "eliminate it." And I have not heard, you know, really serious propositions about eliminating it. It's very close to Social Security as one of those third-rail issues.

But I have heard a good deal of discussion about modifying it, about modifying the scale of it, about modifying the impact for higher incomes, about modifying the scope, what it can be used for, second homes and vacation homes and so forth. All of that is on the table. And I think you will see some changes in it. But I think the fundamental instrument is important to the housing sector as we know it.

SULLIVAN: That's Henry Cisneros, former secretary of Housing and Urban Development and the executive chairman of institutional investment firm CityView. He's been speaking with me from his home in San Antonio, Texas. Mr. Cisneros, thanks so much.

CISNEROS: Thank you.

SULLIVAN: Now while a lot of Americans can't afford a home right now, there are plenty of foreigners who can, and they want a piece of the American dream too - at least the dream with the oceanfront view, the pool and the nightlife of Miami. Thanks to foreign buyers, home sales are so good there that more houses and condos could sell this year than during the boom year of 2005, a time when...

OLIVER RUIZ: You put up a sign, and by the end of the day, you had three contracts.

SULLIVAN: That's Oliver Ruiz. He's a managing broker of Fortune International Realty in Florida. He says when the housing crisis hit in 2008, Miami almost crumbled. Foreclosure after foreclosure, high rises full of empty condos that no one could sell.

RUIZ: Everybody began to scramble because you got used to a lot of activity and then all of a sudden it just - the bottom fell off.

SULLIVAN: And you had just no buyers coming in the door. Would you put up an open house sign and just wait all day for someone to come?

RUIZ: Yeah. Yes. Yeah. As a matter of fact, if you looked at the local newspaper, which advertises all of the local sales, that page went away. There was nothing happening.

SULLIVAN: And so now here we are, 2011, what's business like now?

RUIZ: Nonstop. It's like it was back in the boom.

SULLIVAN: Take like a condo in 2005. How much would it have sold for, and then how much would it have sold for now?

RUIZ: In 2005, it probably would be about 450, and now you could probably get it between two and 225.

SULLIVAN: Wow. So now, I mean, it's basically half off.

RUIZ: Yeah. Exactly. Fifty percent.

SULLIVAN: So right now, if you were to describe your clientele, what does it look like?

RUIZ: Well, if you want to name a nation, I can tell you they're here. Miami is the playground of the world right now. We sold a home the other day on Key Biscayne to an Argentinean fellow for about $13 million.

SULLIVAN: Wow.

RUIZ: We also sold a home to a Russian there for about $4 million.

SULLIVAN: I bet those homes have pools.

RUIZ: They have pools, and they have the water in the back, matter of fact. And you can park your yacht back there.

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RUIZ: You know, one interesting sale that we made the other day were to three Norwegians who import all of the farm fed Norwegian salmon into the United States and they wanted a little piece of the action here in Miami so they bought two penthouse apartments on a building on Brickell Avenue.

SULLIVAN: What does this mean for locals in Miami who need a place to live?

RUIZ: Well, aside from all the premium real estate, the local buyers have the confidence again to buy and sell. However, they can't sit on the fence anymore because it's beginning to bounce back, and they just can't sit back and say I'm going to wait a little more to see if I can get a better deal.

SULLIVAN: There's some competition out there.

RUIZ: Yes, there is competition.

SULLIVAN: Overall, how have this foreigners buying up so many of these properties affected the local economy?

RUIZ: Well, it's helped tremendously. They come in, and they spend money. They buy - they go into a store and they don't just buy one bottle. They buy boxes. They go into restaurants, and they spend a lot of money. So the economy of Miami has been helped tremendously by the foreign buyers.

SULLIVAN: Is there any downside to this?

RUIZ: The only downside that I can tell you is that unfortunately, some of the - I was talking to someone the other day - it cost you $35 to park your car in South Beach.

(SOUNDBITE OF LAUGHTER)

SULLIVAN: That's Oliver Ruiz. He's managing broker of Fortune International Realty in Florida. Thank you so much for talking to us today.

RUIZ: Oh, my pleasure.

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