It has been said that for there to be fundamental change in any industry there must be chaos or disruption. The housing industry is in disruption. So what fundamental changes are in store for housing, especially home ownership? Let us take a look at home ownership in the United States and consider its past, present and future.
First, a look back. Prior to the 1930s buying a home meant paying cash. Other homeowners were those who built their homes themselves or inherited their homes. In order to increase the number of homeowners, the federal government in the 1930s created the Federal Housing Administration to help provide long-term financing for homeowners. The housing policy of the country was that home ownership was great for the country. Financing a home went from paying cash to widely available financing and a secondary mortgage market that provided plenty of funding. By the 1980s the home ownership rate had increased to almost 70 percent.
In the early 1990s Congress mandated that HUD loosen its policies to provide for more home ownership. After all, if it was such a good thing then the more people who owned homes would be good. The problem was that the only way for more people to own homes was to make those homes more affordable. The only way to make those homes more affordable was to lower the down payment and other costs to get into a home. You know the rest of that story. People who could not afford to be homeowners — at least not in the homes that they were “qualified” to buy — could not pay their mortgages, especially the variable rate mortgages. That led us to the current massive oversupply of houses in some states and the current situation, i.e. chaos. That is the present.
The present is not very pretty. The value of housing in the U.S. has collectively fallen by $6 trillion, according to some experts. In July 2010 existing home sales went down 27 percent from the previous month. Nationally, residential housing values fell 16 percent from 2007 to 2008. Not every market is affected the same way because real estate is a very local industry. In Nevada, one of the fastest-growing states in the past decade, 68 percent of homes are now “underwater,” meaning that the amount owed on them is more than the value. Arizona comes in second in this category at 54.7 percent and Florida is third at just over 50 percent, according to a recent report by CoreLogic, as cited by Forbes magazine blogger Francesca Levy.
The future of home ownership may not be ownership at all, but renting the home. The arguments for such a policy go like this: Young people (the creative class) are mobile and will go where the creative economies are located, lower income people cannot afford to buy because of high initial costs and credit conditions and home ownership is “trapping” Americans who are upside down in their unsold homes and cannot move to where the jobs are thus causing local economies to go down. In the Sept. 2010 edition of Money magazine there is an interview with Richard Florida, author of “The Great Reset: How New Ways of Living and Working Drive Post-Crash Economy,” headlined “Owning a Home is Overrated.” The current issue of Time magazine features an article titled “The Case Against Home Ownership.” Read deeper into the articles and you will see that the authors do not condemn home ownership as much as the headlines would have one believe. Nevertheless, all of this is evidence that we are in a time of disruption, confusion or chaos in the housing industry.
As I digest all of this — “digest” being the operative word – I am reminded of the time that I overate a delicious spaghetti and meatball meal. The food was so good that I gorged myself — I was younger then — only to suffer the consequences later. You know the consequences of such an action so I will not describe them in detail, but it wasn’t pretty. I could not eat spaghetti and meatballs for two years. Just the thought made me nauseous. Metaphorically, we have overeaten the delicious home ownership meal and we are now throwing up. But our future housing policy should not be to give up the partaking of home ownership. It should be to have that meal in moderation so that its digestion is good for our growth and sustainability. We are at the convergence of the Age Wave, the shift from an industrial to a knowledge/service economy and the overextension of credit. It is not a pretty sight.
That does not mean that I disagree with those who advocate more renting of homes. Indeed, I have written before that not every household should be in an owner-occupied dwelling. Home ownership is not for everyone. But let’s not throw home ownership in the garbage disposal just yet. Housing policy is not Humpty Dumpty. It did indeed fall off the figurative wall, but it can be put back together again. We need to get back to fundamentals and to let the market correct itself. Just because Humpty has fallen off the wall does not mean that we should abandon eggs altogether.
Phil Hardwick is coordinator of capacity development at the John C. Stennis Institute of Government. Contact him at firstname.lastname@example.org.