Taxpayers Crushed by the Destructive Push for Home Ownership

September 22, 2008 by  
Filed under Debt and Credit

Stakeholder Industries Push the Myth that Home Ownership is for Everyone 

Everyone agrees that that the current crisis in the financial markets is caused by the billions of dollars in mortgage loans that are in default, and by the reality that the amounts owed exceed available equity in the associated real estate.  Enough said about that. 

Mr. ToughMoneyLove has some additional hard truth.

This crisis found its root in the myth that every working adult needs to be a homeowner.  This destructive myth has been relentlessly pushed by builders, Realtors, mortgage brokers, lenders, and investment bankers.  Each of these business interests has a primary goal of increasing revenue and profits.  There is nothing wrong with a profit motive.  However, their mission has been to persuade working adults at all income levels that home ownership is their moral and economic imperative.  “Renters are losers” they say and “owners are winners.”  The Realtors even have a set of consumer talking points that cast home ownership in almost angelic terms as being both patriotic and critical to our survival as a civilization.  

The profit makers did not care that this message has no historical basis in fact.  Nor did they care that so many people who believed and acted on the message would experience financial ruin.  As long as they could re-package and leverage the risk up the economic chain, they could inoculate themselves from the financial disease they were spreading.  We know now that the last link in the chain is the U.S. taxpayers.  

Government Pushes the Myth of Home Ownership 

The federal government has been fully complicit in the destructive mission to drive consumers into homes they cannot afford.  Some of you may recall the initiatives and goals announced by the White House in 2002 for “expanding opportunities to home ownership.”  One stated goal of this initiative was to increase home ownership by minority families.  This is an admirable goal as long as it focuses on removing discriminatory barriers and on increasing the availability of affordable housing for everyone.  But if you read the details of the initiative, it included many features intended to remove financial barriers to home ownership.  Financial barriers affect everyone and were there to protect the system from failure.   The government didn’t care.

In 2003, President Bush stated that “it is in our national interest that more people own their own home.”  (“National interest”?  Do you think he is saying that now that it is going to cost all taxpayers close to a trillion dollars?)  As part of the “expanding home ownership record of achievement,” the White House included the American Dream Downpayment Act (to help 40,000 families each year with their down payment and closing costs) and the Zero-Downpayment Initiative to allow the FHA to insure mortgages for first-time homebuyers without a down payment (including 150,000 new homeowners in the first year alone.)  

Does this sound like responsible government policy to you?  Did it make sense for the government to openly encourage home ownership for people who needed zero down payment loans or who could not afford to pay closing costs?  Mr. ToughMoneyLove thinks not.  If the government had asked me, I would have told them.  But I don’t donate to political campaigns so no politician is going to seek out or listen to my opinions.

Obviously, the real estate, building, and lending industries were cheerleaders for all of these government initiatives and they no doubt backed up their cheers with substantial campaign contributions.  

Home Ownership Rates Increased to Record Levels

Some readers may be thinking that Mr. ToughMoneyLove is just ranting again, with no facts to back him up.  If you are one of those readers, you would be wrong. 

The aggressive pursuit of homeownership for all has worked.  Let’s start with the home ownership statistics.  According to the U.S. Census Bureau, in 1960, 62.1% of U.S. households lived in a home owned by someone in that household.  (The others lived in rental units.)  That percentage remained relatively stable and in 1990 was still at 63.9%.  What happened after that is telling.  From 1990 to 2004, the home ownership rate increased to 69.0%, falling slightly to 68.1% in 2007.  (I suspect that this drop coincided with the increases in loan defaults and foreclosures that started in 2005.) 

If you are thinking that a 6% increase in home ownership rates (62.1% in 1960 to 68.1% in 2007) is not significant, you would be wrong.  Also according to the U.S. Census Bureau, there were 111.6 million U.S. households in 2006.  Comparing historical and current home ownership rates, that would produce a relative increase of 6.7 million homeowners.  (Again, most of that increase came in the 1990’s and after, when Americans really embraced debt-driven consumption.) 

Billions are Added to Total Mortgage Debt 

When you add so many new homeowners to the market compared to historical averages, other metrics must obviously increase as well, including mortgage debt loads infused into the credit markets.

A survey conducted by Experian in February 2008 found that the average balance of a delinquent mortgage was $131,000.  Just for sake of argument, let’s apply this average mortgage balance to the 6.7 million additional housing units associated with the increased home ownership rate.  Using these numbers, that would mean $877 billion in individual mortgage debt in 2007 that would not exist if home ownership rates had not been pushed above historical numbers.  I grant you that this number is not a precise calculation or estimate, but you have to acknowledge that whatever the real number, it’s huge.  Where did all of this new homeowner debt end up?  It was re-packaged, securitized, and leveraged into the belly of the hungry profit monster that is now taking down our financial system.  And, it doesn’t include the disturbing data(also courtesy of Experian) that from 2001 to 2006, the percentage of consumers having open home equity loans and home equity lines of credit increased by 63%.  This also was one of the industry talking point benefits of home ownership. 

Do you see a correlation here? 

Home Affordability Has Declined

What is particularly troubling about the increase in home ownership rates is the decrease in home affordability found in data compiled by the Center for Housing Policy.  For example, the number of working family homeowners who were paying more than 50% of their income on housing increased by 75% from 1997 to 2005.  Renters also suffered.  This tells us that in most areas of the country, there is a lack of affordable housing.  But that is not the concern of the Realtors, builders, or Wall Street because you cannot make as much money on affordable housing.

The Hard Truth Bottom Line

Home ownership rates have increased 6% in the last 15 years while the availability of affordable housing has not.  This increase in home ownership was strongly pushed by industry and government pronouncements suggesting that renting is not in the national interest.  The funny money mortgage-backed security industry was right there pulling as the others pushed.  Everyone ignored the fact that these millions of new homeowners were those on the financial margins and would be caught in the middle.  Well they were caught in the middle.  But you know what?  The entire pile has fallen over, right on top of all taxpayers. 

The correlation between statistical data and present outcome confirm that homeownership is not for everyone, at least until more affordable housing is made available.  It was irresponsible for our government to aid and abet the destructive push by industry that increased home ownership to rates that were not sustainable by the personal finances of the borrowers.

Here’s my suggestion.  The next time the government or a stakeholder industry tells you that borrowing to purchase something is in the national interest, pay no attention.

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3 Responses to “Taxpayers Crushed by the Destructive Push for Home Ownership”
  1. JB says:

    Doesn’t home ownership help fight against the declining home affordability?

    I bought a house this year that’s just a bit of a stretch, however I am guaranteed that rate for the next 30 years. That has to be worth something. As a renter you never know what the market could do (especially in today’s economy!)… maybe rental prices shoot up 200% in the next 5-10 years. I still have my home paying the same amount.

  2. Praveen says:

    I don’t think the government trying to expand home ownership to groups that traditionally rented (such as minorities) was the main culprit.

    I think most of the damage was caused by house flippers and speculators in places like California, Nevada, and Florida.

    In fact, Florida was the location of an infamous real estate boom and bust from 1924-1926. The difference is that, back then, Wall Street wasn’t linked up through the repackaging of mortgages as securities.

  3. @JB: Don’t get me wrong – I am a proponent of home ownership but not for folks who have marginal finances. Those are the people that the government targeted with its initiatives and threats to lenders.

    @Praveen: I would tend to agree with you about the flippers and speculators but that doesn’t explain the 6% increase in homeownership rates by U.S. households. That increase closely coincides with the failure rates we are experiencing.

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