HomeK
Accounts: A Down Payment on Homeownership and Retirement
Next week, Zillow, the Progressive Policy Institute and
Columbia Business School will host a housing forum aimed at exploring the
ways in which the public and private sectors have responded to the
unprecedented national housing crisis. Leading up to the event, we’ll post
published works from a variety of our speakers. A full speaker list and short
bios for each forum speaker can be found here. If you’d like to attend the event on April
4-5 in New York, please RSVP here.
PROGRESSIVE POLICY INSTITUTE | POLICY BRIEF
By Jason Gold and Anne Kim
Two years after the meltdown in the nation’s housing market,
housing remains weak. Home prices fell to a new low in the first quarter of
this year—confirming a feared “double-dip” in the market. Prices are now down
nearly33 percent from their high five years ago (1).
With housing and its related industries—construction, home
retail, etc.—constituting almost 19 percent of the nation’s economy over the
last 40 years, restoring the housing market will be essential to a sustained
economic recovery (2). And key to this will be ensuring a robust market for
first time home sales.
Yet, even with home prices as low as they currently are,
many potential homebuyers may face more—not fewer—obstacles in their path to
homeownership. In the aftermath of the crisis, credit is tighter, as are down
payment requirements. At the same time, the stresses of the economy have meant
that potential homebuyers are in worse shape financially than they once were.
The creation of a new, tax-preferred mechanism for down
payment savings—a “HomeK”—could help first-time homebuyers navigate these new
hurdles while also promoting more savings. And if structured as a carve-out
from existing retirement planning mechanisms, not as a new type of account, the
HomeK would have the added benefit of promoting retirement savings and will not
contribute to further tax code complexity.
How the HomeK Would Work
Under this proposal, an individual would have the option to
segregate up to 50 percent of employee contributions into an existing
retirement account (401(k), IRA, SEP) into a housing-specific “sub-account.”
Employer matching contributions would not be eligible for this set-aside, and
the lifetime limit per individual would be $50,000 in pre-tax contributions.
The eligible use for the money in a person’s HomeK set-aside
would be for a down payment on a first home, provided that the loan does not
exceed the applicable loan limits for a government-sponsored Federal Housing
Authority (FHA) loan in that area. Buyers who qualify would be allowed a
one-time disbursement of the money in their HomeK set-asides for this purpose.
This disbursement would either be tax-free or at a steeply reduced rate,
depending on their income:
In addition, to discourage abuse of the mechanism, including
“cash-outs” on a newly purchased home or investment-focused activity, buyers
would be required to buy the home as a primary residence and would not be
allowed to increase the original loan amount for two years in order to receive
the full tax benefit of the HomeK set-aside. Moreover, there would be a one-year
“vesting period” from the date of the first set-aside before a buyer could
withdraw money under this mechanism.
Individuals would also be allowed to terminate the HomeK
set-aside at any time, which simply means that the balances in the HomeK would
revert to their original status as retirement savings without penalty.
The HomeK proposal would provide a variety of benefits both
to individual homebuyers and to the housing market as a whole:
- Would eliminate or drastically reduce current penalties for withdrawals from retirement savings.
Many Americans already draw down their retirement savings to
pay for a home, but under current law, they do so under heavy penalty. Any
permanent withdrawals from retirement accounts are subject to taxation as
ordinary income, plus an additional 10 percent early withdrawal penalty. For
example, if someone makes a $30,000 withdrawal from a 401(k) account that is
subject to the 28 percent marginal rate, the total payable in taxes including
the 10 percent penalty would be $11,400. These taxes would effectively reduce
someone’s available down payment to just $18,600. The other currently available
option, loans from a retirement account, must be repaid with interest. There
are also additional complications if an employee leaves an employer before the
loan is repaid.
The HomeK would not need to be repaid. In addition, the
savings cap would be higher than other traditional IRAs and with pre-tax
dollars, unlike a Roth IRA.
- Would boost first-time housing demand.
First-time homebuyers are both a key piece of the housing
market in and of themselves as well as a catalyst for upstream demand.
First-time homebuyers constitute 40 percent of home sales in a “typical”
year—in the last two years, they accounted for 3.4 million of the 8.4 million
homes sold (3).
First-time homebuyers are a central source of the “churn” in
the housing market that generates continuing demand. Sellers to first-time
homebuyers are usually “trading up” to more expensive homes or building new
ones. These sales in turn generate a cascading effect on the home building
industry, home décor retail stores, furniture makers and so on. When potential
new buyers sit on the sidelines, existing homeowners are stuck, unable to move
out and up. According to the Washington Research Council, the multiplier effect
of 12,000 additional first-time buyers would generate enough construction,
resale and renovation activity to create as many as 8,500 desperately needed
jobs. Potential wages and benefits from these jobs would total as much as $340
million, and the total increase in gross domestic product (GDP) on the state
level would potentially be as high as $1.35 billion (4).
- Would encourage greater participation in retirement savings.
As critical as it is for workers to start saving young, too
many young people don’t save for retirement. In 2009, only 13 percent of
workers between ages 20 and 30 who have access to a 401(k) plan participate
(5).
But while retirement may be far from the minds of these
young workers, homeownership is not. In 2009, the average age of a first-time
homebuyer was 34 (6). The HomeK creates a near-term goal for young
workers while using a long-term savings mechanism. Thus, young workers could be
effectively “lured” into saving for retirement. And because employer matches
would not be eligible for segregation into a HomeK set-aside, and because the
HomeK set-aside would apply to a maximum of 50 percent of employee
contributions, these workers would be contributing to their retirement savings
as well.
Even though some may argue that this proposal encourages
Americans to put their savings into a relatively low-return investment–a home–the
benefits of early savings outweighs the costs of potential foregone returns
from a higher-yield investment (such as stocks).
- Would encourage “responsible” homeownership.
Without doubt, risky behavior—including the extension of
home loans to buyers with no down payment, no proof of income and other
flaws—helped contribute to the housing market’s collapse. As late as 2009, as
many as one-fifth of first-time homebuyers made no down payment on their loans
(7).
In this era, too many people were looking to homes as
investments, not as assets, that could be quickly flipped or bought and sold
like stocks.
Nevertheless, a home continues to be, as it should, the
principal store of wealth and financial security for most middle-class
Americans. HomeK would restore and promote this view by ensuring that
first-time homebuyers put “skin in the game” by putting their own savings at
stake. In addition, the money in a HomeK set-aside that is used for down
payment would not be “spent” but instead transformed into equity that will
serve as the foundation for even greater accumulation of wealth.
Why HomeK Now
The need for a new mechanism like the HomeK is urgent.
First, homeownership rates are declining and threaten to
drop even more. While the peak rate of 69.4 percent in 2004 might be considered
“too high,” there’s now a real danger of over-correction. In the hardest-hit
Western states, the homeownership rate is as low as 61 percent (8), which is
lower than the historic national average of 66.5 percent (9).
Arresting this drop and restoring the homeownership rate to
its historical stability is essential to the continued well-being of America’s
middle class. Homes are and will continue to be the largest asset that most
Americans own. Homes are not just a place to live in; they are the engine of
opportunity for many families. Home equity offers retirement security,
collateral for starting a business, the ability to pay for a child’s college
education and more. Less homeownership means less opportunity for the middle
class.
Second, breaking into the ranks of homeownership promises to
be increasingly difficult. Although some new restraint in credit standards is
certainly warranted in the wake of the financial crisis, the danger now is
overcorrection. Some economists say that overly tight credit standards are
depressing home sales by as much as 15 to 20 percent (10).
Conclusion
The HomeK is a simple, easy-to-administer and cost-effective
proposal that would provide multiple benefits to middle-class families while
helping to shore up the country’s still-flagging housing industry.
Creating HomeK would help ensure that for tomorrow’s
homebuyers, the dream of homeownership doesn’t stay just a dream, but a
reality.
About the Authors
Anne Kim is a senior fellow at the Progressive Policy
Institute. She is also the principal of Blue Sky Concepts LLC, a policy and
political consulting firm based in Washington, D.C.
Jason Gold is a senior fellow at the Progressive Policy
Institute for financial services policy and directing PPI’s “Rethinking U.S.
Housing Policy Project.”
About the Progressive Policy
Institute
The Progressive Policy Institute (PPI) is an independent
research institution that seeks to define and promote a new progressive
politics in the 21st century. Through research and policy analysis,
PPI challenges the status quo and advocates for radical policy solutions.
Appendix—Questions and Answers
Isn’t this going to add more complexity to the tax code?
No. The HomeK is a set-aside inside an existing
retirement account mechanism— the 401(k). It is not a separate account.
If the goal of HomeK is to encourage retirement savings, why
encourage people to invest in a home versus keeping their money in stocks, which
have a higher historical rate of return?
The problem is that too many young people are not opening
retirement accounts and saving at all. HomeK gives younger savers a short-term
goal that would create an incentive to open a 401(k) account early. The potentially
lower rate of investment return from buying a home would be more than offset by
the increased participation in retirement accounts by younger workers, the
accumulation of equity by these individuals and the social and community
benefits of homeownership.
Will this cost the federal government a lot of money?
It may cause some revenue losses to the government if more
people are opening retirement accounts and then withdrawing the money earlier
at a lower rate (versus paying a higher rate of taxes at a later date).
However, the HomeK has several features that make it more likely to be a
relatively cheap way for the government to stimulate demand: (1) it’s a
set-aside in an existing mechanism, not a separate account; (2) withdrawals are
not wholly tax-free but at a discounted rate; (3) participation is voluntary;
and (4) there is no federal match for the money put into the set-aside account.
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