In the midst of the subprime crisis, there's an important question that analysts and policymakers have neglected: Did so many people need to own homes in the first place? The dream of home ownership has long been part of the American experience, but, as the federal government steps in to artificially support borrowers and lenders with tax credits that encourage more spending or with public spending that keeps over-indebted borrowers in unaffordable homes, we ought to consider whether it's time to wake up from that dream.
Indeed, we ought to consider what role the federal government has played in creating this mess. By stimulating home ownership while failing to account for the reasons home ownership is valuable to society, Washington has simply sought to buy our votes with our own debt. As the subprime crisis accelerates and threatens to spread through prime and near-prime markets, policymakers face a watershed moment. To keep us from an economic nightmare, they need to replace the dream of home ownership with policies that actually increase wealth--not just the illusion of it.
The term "mortgage" comes from the French root mort, meaning dead, and the Germanic root gage, meaning pledge, which suggests how seriously the use of debt to buy a home was once taken. Traditionally, buyers purchased their first home in their twenties or thirties as they were starting a family, and, since the 1930s, they almost always financed that purchase with a 15- or 30-year fixed-rate mortgage that required monthly payments of principal and interest. Because it was relatively difficult to sell, the home was in essence a forced savings plan that increasingly tied the interests of the borrower to those of the community.
However, in recent years a confluence of factors--falling interest rates, new types of mortgages, the elimination of the once-standard 20 percent down payment, and a perverse tax structure that provides the greatest benefit to those that borrow the most--have transformed the home from an illiquid asset into just another consumer good. Home owners now have less equity in their properties, and, as a result, the social benefits of home ownership have decreased; their ties to their communities have been weakened. What's more, the decline in home equity means that Americans are likely to retire with fewer savings in what has been historically their largest asset and, in turn, place a larger burden on a social welfare system that will already be stressed by baby boomers' retirements.
The government has been directly responsible for this shift, working proactively with industry since 1995 to "achieve an all-time high level of homeownership." Unfortunately, the only way policymakers and the housing industry could do this at a time when home prices were beginning to rise rapidly was to create risky financial products, like mortgages with fluctuating interest rates--or what the government euphemistically termed "creative financing." Borrowers, in turn, flocked to these loans because, while they dreamed of owning a home, the growth in wages had not kept pace with the appreciation in real estate prices for most of the past 40 years. As a result, in markets like Miami and Las Vegas, where home prices rose rapidly relative to wages, borrowers were forced to become more and more leveraged. And, even in markets like Akron, Ohio, and Ann Arbor, Michigan, where housing prices weren't so supercharged, falling wages and job flight made it difficult to buy a home at all. Today, more Americans may "own" their homes in a very narrow sense--home ownership has jumped from its usual level of 62-64 percent (where it had stayed for 40 years) to almost 70 percent--but the market's natural equilibrium has been disturbed by the government's attempts at social engineering.
Rather than artificially stimulating home ownership, the government should have focused more on supporting wage growth. This would have enabled workers to accumulate real wealth, rather than simply encouraging the illusion of wealth formed when one buys an expensive house by taking on an unmanageable amount of debt. In the current climate, the government could stimulate the economy by investing in infrastructure--schools to re-educate displaced workers, highways to link suburban or rural labor to business centers, and other programs that encourage employment rather than giving consumers one-time tax credits that simply spur further excessive spending and further indebtedness. In contrast with helping citizens to buy expensive property, strengthening America's economic foundation is not only an appropriate function for government, but arguably its most basic task.
Instead of reassessing its priorities in the wake of the current crisis, however, the government is now trying to keep home prices artificially high by offering risky programs to prevent homes from selling on the open market, such as expanding the Federal Housing Administration's purchase of low-down payment and risky mortgages and urging the "modification" of existing mortgages. These efforts primarily benefit realtors and lenders by allowing them to recast mortgages and receive a few more payments from the 40 percent of borrowers who will re-default anyway. Instead of modifying their loan terms, many troubled borrowers would be better served by simply sending their house keys back to their lenders and signing over the title to the home, thereby freeing up cash to rent or buy a more affordable house while avoiding a bankruptcy or foreclosure. In fact, most lenders would be better off, too, since they could avoid the expense of foreclosing on a property that is falling in value and that the borrower is no longer maintaining. Unfortunately, a "keep the borrowers in their homes" mentality in Washington, which is emotionally attractive to borrowers and economically attractive to lending lobbyists, has prevented policymakers from embracing this option.
Those who support government intervention maintain that falling home prices are a danger. But a danger to whom? Falling prices would allow new buyers to purchase homes they could genuinely afford, and existing borrowers who are able to make payments would continue to build equity in their homes. People would also have less incentive to frequently flip from one home to another, and thus they would deepen and lengthen their ties and obligations to their communities. Falling prices might even allow a return to the increasingly rare single-income household, thus allowing one parent to tend to the needs of the family's children. Besides which, in our drive to spur home ownership, we have stigmatized renting. Renting has real economic value--especially for that portion of the workforce that needs to remain mobile in order to find employment--yet investment in rental properties has been minimal for decades.
For the past decade, Americans have increasingly relied on the appreciation of their homes, rather than the returns of their labors, to support themselves, creating an unsustainable and destabilizing economic mirage. Home ownership will--and should--remain a goal, but only if it brings with it the long-term commitment that a mortgage traditionally implied. Home ownership is a social good as long as it allows buyers to build equity--an investment not only in their house but in their community--but a home without equity is really just a rental with debt.
Joshua Rosner is managing director of Graham Fisher, an independent research consultancy.
By Joshua Rosner