WASHINGTON, November 6, 2013 — One of the foundations of the American dream has always been home ownership.
It used to take nearly a lifetime of sacrifice before most people could afford to buy a home. Buying a home took on special significance after World War II, with the GI Bill rewarding the sacrifice of American serviceman overseas. It also marked the first time that mortgages became the principle vehicle Americans used to purchase homes.
Before the war, banks were hesitant to lend money on such a speculative item as a house. A house was considered, at best, an improvement upon land ownership — not a standalone investment. Not only were banks hesitant to lend; most Americans hated debt. It was not uncommon for people to hold mortgage burning parties, where they would celebrate paying off their mortgage and getting out of debt.
Even today, in much of the rest of the world, most people have to pay a large portion, if not all of the purchase price of a home up front. This often means scrimping and saving over a lifetime, deferring spending and increasing the average savings rate in many of the world’s emerging economies, and even in many of its established economies.
In America, the GI Bill enabled thousands of young couples to buy homes early in their lives. Home ownership became not only a dream realized, but a cornerstone of American wealth. One’s home became an asset. For most of the last 70 years, this has been a good thing. It helped Americans live a lifestyle envied by the rest of the world. In the 1950s, homeowners held an average equity in their homes of 80 percent or more. And even up to 1973, the average homeowner equity hovered around 70 percent.
Coming out of the dot.com debacle, government policy tried to improve the economy by spurring spending and production. The Federal Reserve lowered interest rates, attempting to encourage borrowing and investment in productive enterprise. The Clinton Administration had bolstered the power of the quasi-governmental lending organizations Fannie Mae and Freddie Mac, charging them with the task of helping home ownership become more accessible, especially by targeting low income families.
Everyone knows what happened next. In 2008, the midnight chimes tolled and the party — reckless, debt-based spending — was over. When the music stopped, it stopped so abruptly that people barely knew what hit them. One day they were living a life of extravagant luxury unsupported by their income and wealth. The very next, many had lost their jobs and were facing foreclosure on their homes.
The sub-prime mortgage crisis occurred when people could no longer borrow and home prices stopped rising. It was a disaster that left the whole American economy stranded in a debt it could barely hope to repay.
Few people, including most politicians and business leaders, predicted that the trouble would spill over into the global economy. But that’s just what happened. In fact, it brought the world financial system to its knees. Wall Street, which had bet big on collateralized mortgages, lost big.
Part of the problem had to do with the sheer size of its banks after a decade of consolidation. When they caught the flu, the rest of America got pneumonia. The other problem was leverage. Even with their unwieldy size, the banks might have withstood the sub-prime debacle had they not been so highly leveraged.
Home ownership is now at an 18-year low. The home ownership rate stands at 65.3 percent, down from the 2004 peak of 69 percent. Young people have been especially hard-hit since 2008, as have blacks, whose home-ownership rate is only 43 percent. As more and more people have become renters, rents have shot up to an inflation-adjusted national median of $735, with rents in the Northeast at a record-high median, $961. This has happened while real wages have stagnated or declined around the country.
The dream of home-ownership is not dead, but it is in serious trouble. The question now is not when it will recover, but whether it will, and whether policy makers really care.
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