In a recent course I used housing as an example. You can buy a house with 20% down or as little as 3%. If you buy a house at 100k and put down 3% and the market goes up next year, your return on the $3,000 down is $3,000, which is 100%.
The person who put 20% down gets $3,000 increase on $20,000, which is 15%.
The situation is complicated by various taxes and fees which interfere with the investment's liquidity. Moreover one tends to live in one's house so the cost-of-interest is mixed up with the quality of life issue. But nonetheless, many people do realize the "downside" of a leveraged position when they find out that the housing market declined (as in Boston c. 1990). If you put $3k down on a $100k house which you sell at $90k, you'll have to cough up an additional $7k to get out of the house--the equivalent of a 200% margin call.
The fact that high transaction costs are in place in housing markets indicates there may be some stabilizing influence to a Tobin type tax. But notwithstadning very high transsaction costs, you still get bubbles and crashes in real estate markets. But they do seem to go "slow motion" compared to near-zero transaction cost markets.
Since "slow motion" crises offer more opportunities for resolution than fast crises, there probably is some merit in the Tobin tax position.
For good or for bad, the old saw that houses aren't affordable because you need a 20% down payment is history. You can get into a house for as little as 3% of sale value, although I would think that fees of various kinds would double or triple that. But it's still a lot less than 20%.
But the downside of affordable home ownership for people without a large income transfer from their parents is the high leverage. Since the whole notion of "downside exposure" on a "leveraged position" is hard to convey in fairly sophisticated media (you don't really see much that's coherent outside the Dow Jones publications), we can assume that low income borrowers really haven't a clue of their potential risks. They could face real problems in the event of needing to move: if the primary income earner got sick and they needed to move to an apartment and sell the house, they might find their meagre savings wiped out. Low equity positions in the house might make it hard or impossible to put a new roof on if needed.
But there is an up side. Given the notorious difficulty of saving (as a general rule), people who build up equity in their houses may be buying into a long-term viable asset rather than more dinners and movies. So the good/bad side of low down payment home ownership may be a wash.
-- Gregory P. Nowell Associate Professor Department of Political Science, Milne 100 State University of New York 135 Western Ave. Albany, New York 12222
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