Mortgage interest rates remain near record lows today. So does the rate of home ownership, which hit 63.4 percent in July, a 35-year low.
Some people may find this incongruous, even disappointing. They shouldn’t. It’s a sign that a lot of people learned from the recent financial crisis, even if their government still seems perplexed by what happened.
The prime mover in the broader financial crisis was the housing bubble, which was in large part the fruit of a policy, carried by two consecutive presidential administrations and by lawmakers on Capitol Hill, to encourage and subsidize home lending to unsuitable borrowers.
The Clinton administration undertook this as part of a well-meaning effort to make credit more widely available to low-income borrowers. The Bush administration carried the same idea forward with a conservative twist, promoting what it called an “ownership society.” And several lawmakers dug in their heels to defend the policy even when Bush officials became anxious about it.
One lever for the policy was to get the quasi-government mortgage lending enterprises, Fannie Mae and Freddie Mac, to sell much riskier mortgages on the secondary market than they had previously. By 2005, the height of the bubble, Alt-A and subprime mortgages together accounted for more than half of new mortgages. As many borrowers from that period can attest, down-payments and rigorous documentation of income were regarded as quaint anachronisms back then. Banks barely hesitated to make “no-doc” and NINJA (“No Income, No Job or Assets”) loans.
It still seemed like a win-win, because it meant that more borrowers could become homeowners. By the middle of Bush’s second term, homeownership had grown from 64 percent at the beginning of Clinton’s first term to an all-time high of 69.4 percent. Easily available credit meant more and more money was chasing real estate, sending home prices skyrocketing. Buyers acquired a perception that prices could only go up. Stories abounded of ordinary people making fortunes buying and flipping homes, helping fuel the craze — reality shows such as “Flip This House” and “Flipping Out” went mainstream.
The rest is history. Borrowers could not pay their mortgages, investors lost their shirts, lenders pulled back, and prices collapsed. Within a few years, “Flip This House” had given way to “Real Estate Intervention,” in which a tough-looking realtor would soberly break the bad news to his clients. By the end of 2009, more than one in seven outstanding home loans was either delinquent or already in the process of foreclosure.
Today, homeownership has fallen back below where it was when Clinton took office. The only difference is that millions of Americans (disproportionately minorities) are poorer now and have seen their credit histories shredded, again thanks to government policies. If this episode did not demonstrate that government should not be in the business of encouraging one sheltering lifestyle (home ownership) over another (tenancy), then nothing ever will.
The Obama administration announced earlier this year its intention to encourage more risky home loans by lowering mortgage insurance premiums. But the data show that Americans, once bitten, are proceeding with a lot more caution, despite low mortgage rates. Home ownership is not a prerequisite to happiness, after all, nor even to wealth.
And people can learn, even if politicians never do.
