Is the American Dream Turning Into the American Nightmare?by Tim Manni
“For many, the American dream of home ownership turned into a nightmare of debt and foreclosure.”-David Wessel (The Wall Street Journal)
That pretty much says it all, doesn’t it?
David Wessel of the Wall Street Journal wrote a really thought-provoking article recently that suggests we (if we haven’t already) re-examine our nation’s housing system and the overemphasis we put on owning a home. Wessel says that maybe it’s about time that we recalibrate what it means to achieve (at least part of) ”the American dream.” Maybe more of us should stay renters as opposed to owners. Would that really be so bad?
Over the last 100 years or so, this country has championed the idea of homeownership. On the way to “achieving the dream” — joining the ranks of the middle class — it could be said that America has grown “addicted” to the idea of homeownership. As with any addiction, there has been a whole lot of denial and there have been plenty of enablers along the way.
“Dating [back] to a 1918 government ‘Own Your Own Home’ campaign,” writes Wessel, our political leaders have supported homeownership possibly to a greater degree than any other initiative:
The U.S. has long seen home ownership as an unquestioned virtue, dating to a 1918 government “Own Your Own Home” campaign. Herbert Hoover, Franklin Roosevelt, Bill Clinton and George W. Bush all talked as if owning a home was the only way to join the middle class. Not only did it promote social stability—recall Mr. Bush’s “ownership society”—and build well-maintained neighborhoods, home ownership became a hedge against inflation and a way to save for retirement. Until it didn’t.
Home ownership rose from around 40% of households in the 1940s to about 60% in the 1960s and then hovered around 65% until the 1990s, when a government-backed push to spread ownership, particularly among minorities, helped lift the rate, reaching a peak of 69.4% in mid-2004.
That “peak” in 2004 is now more commonly referred to by many as the “bubble.” But soon after 2004 things fell apart and that bubble burst.
Throughout the years, loan terms and lending conditions have gotten progressively longer and more lenient, while the repercussions of failure have gotten worse. As any market observer will tell you, the markets rarely ever learn from their mistakes. And it’s interesting to note that while the U.S. is mired in a housing meltdown, its neighbor to the north, Canada, has largely avoided any significant crisis:
As late as the 1930s, a U.S. mortgage was generally a loan for three to five years, at which time the borrower had to pay it off. Then the government fostered the 15-year fixed-rate mortgage—and eventually the 30—and the concept that the homeowner would pay off principal in monthly installments.
Most other countries rely on mortgages in which the rate is fixed for only three to five years. In the U.S., one usually can refinance a mortgage without penalty to take advantage of lower rates. More than 70% of mortgage applications filed in early June were for refinancing existing loans, the Mortgage Bankers Association says. Elsewhere, refinancing is less common. Adjustable rates and prepayment penalties make it less alluring.
So what’s the problem here? Are our mortgage loans too alluring? Do we have too many options?
You could counter the argument that U.S.-style mortgages are “too alluring” by pointing to the incredibly-strict private lending environment we are now experiencing: lenders requiring 20% downpayments, pristine credit and debt-to-income ratio requirements. We agree that things are tough in the private market, but as Wessel alludes to, maybe the real problem is that we have too many easy options.
It’s a shame that underwriting conditions in the private market are so tough right now that many have been prevented from getting a Fannie Mae or Freddie Mac-guaranteed mortgage, but let’s not forget about the Federal Housing Administration (FHA): a government insurer that makes it possible for just about anyone (low credit and income requirements) to own a home with as little as 3.5% down.
So even though credit conditions are tight in the private market, there’s still a wide-open credit spigot (in the form of the FHA) that’s making new loans available.
Have lenders and lawmakers spoiled us but giving us too many options and too many opportunities to own?
Are we leveraging an unreasonable amount of our income and assets just to own a home?
It seems that in America there are so many initiatives and programs (FHA, the tax code, state HMFA programs, HUD, etc.) designed to promote homeownership at any level, at any income and at any level of qualification. Beyond all the programs designed to get people in homes, what about all the programs designed to keep people in their homes?
Think of all the money we have spent over the last few years on housing preservation programs, and to what avail? There’s HARP, HAMP, HAFA, 2MP, HAUP, and those are just programs with popular acronyms. To what ultimate cost are we committed to support this idea of homeownership? Has the very idea that ‘to really achieve success in America you need to own a home’ made us worse off?
Owning a home is an investment. But what happens when too many Americans make a bad investment?
Many virtues of home ownership evaporate if the value of the house falls to the point where one owes more on it than it’s worth.
READERS: Has this housing downturn changed the way you feel about owning a home? Or, is owning a home still an important, if not the most important, goal in your adult life? Should we completely re-think all of the systems designed to promote homeownership?