Housing’s Treacherous Path: From 44 Percent Homeownership to 70 Percent. The Levittown Dream and Nothing Down Madness. How a Nation lost its way with Homeownership.

It is a fascinating case study in the perceived power of homeownership that even after our economy was brought to its economic knees by a massive housing bubble that the government, Wall Street, home buyers, and sellers somehow view homeownership as our ticket to getting out of the financial mess.  That is, the housing poison is also the cure.  In our current culture long term memory is more of a burden when it comes to economic calamity.  People seem to forget that only in March of this year the entire global economy was melting down before our very eyes because of toxic loans.  Instead of questioning decades of assumptions that proved wrong we jumped on the same beat up bandwagon and here we are repeating the same song.

The cookie cutter planned community madness started with Levittown after World War II.  These towns were built in communities in New York, Pennsylvania, New Jersey, and Puerto Rico.  The communities were built with speed and efficiency.  It is interesting that the communities started out as rental units and within two days 2,000 units had been rented.  With demand surging the properties were then sold as purchase units with the help of the Federal Housing Administration (more on them later).

Levittown is now used in a derogatory sense to highlight massive cookie cutter suburbia.  Many people in these communities actually enjoyed their towns but critics were everywhere.  Yet we went from Levittowns to McMansion Villages with the twist that homes were bigger for ever smaller families.  Once the credit markets were freed from any shackles by deregulation banks pushed the limits on the borrowing population.  That is how places like California saw home prices triple in less than a decade.

The problem with believing that homeownership is part of the American Dream is that it misses the fundamental economic question.  By labeling something a dream it makes it harder to confront with factual data.  This reminds me of the parents that let their kids audition for American Idol even though they sound like a cat in heat.  Many people should not be homeowners and that is okay.  Yet politically this must be like kryptonite because who in the world is going to want to pop that dream?  Can you imagine being labeled the anti-homeownership candidate?

This insistence on allowing the homeownership dream to permeate the country has pushed the homeownership rate to unsupportable levels:

Now during the Great Depression homeownership dropped to 44 percent.  It is also the case that during this time many loans were also based on 5 year balloons which made it hard for many to borrow, especially in the bank failing environment of the depression.  Yet after that bump, homeownership increased from 1941 all the way to our housing peak in 2005 reaching a peak near 70 percent.  Yet very few even bothered to ask if this was even good for our economy?  Clearly it wasn’t.

The perversion of mortgage products during the recent bubble is enough to make anyone ill.  Products like option ARMs, mutant mortgages that have no place in any market, suddenly became commonplace and allowed a monthly payment obsessed culture to purchase homes they could never sensibly afford.  A $500,000 home became a $1,500 minimum payment and a $50,000 leased car became a $500 monthly payment.  Banks knew that these loans were never going to be paid back.  They just hoped that by the time the owner sells the home, the loan would be off their books if it wasn’t already in some mortgage backed security pool.

This housing obsession has now led us into a very tight corner.  Mortgage rates have nowhere to go but up and everything is being done to keep rates at historical lows:

The only reason rates are this low is because the Federal Reserve is keeping the Fed funds rate hovering at zero.  As you can see from the chart above, our current rate environment is a total anomaly.  The average mortgage rate over 40 years is 9 percent (match that to today’s 5.5 percent rate).  Yet even if rates went up to historical averages this will destroy the monthly payment mentality.  Let us run the numbers for two mortgages:

5.5% – $200,000

PI:           $1,135

9% – $200,000

PI:           $1,609 (41% higher)

Now the above is significant.  In our current troubled economy monthly payments matter for budget constrained Americans.  Assuming the $1,135 is all the homeowner can afford and rates go up to 9%, the mortgage will need to come down by $60,000.  You can see how this becomes problematic.  If there is a dollar shock or if inflation starts picking up the Fed is going to be stuck and the housing market is done.  The current environment is completely artificial.

The problem with the homeownership propaganda is that it doesn’t produce a balanced forum of discussion.  The NAR and NAHB have major lobbying arms in Congress.  What is the renter lobbying arm?  In many cases renting is a better option for people yet you rarely hear this side of the coin.  Renting is typically cheaper and in some communities in California nearly half as cheap.  The analysis isn’t so cut and dry.  Yet again, you run into that American Dream propaganda pushed by the banks that actually caused much of this mess.  Do you really think it was George Washington who said, “yes, let us fight a revolutionary war so people can purchase McMansions they can’t afford and drive around gas guzzling cars with lease payments the size of a mortgage.”  Somewhere along the line something got really messed up.

I put a big blame on the down payment, or lack of it.  Back in the 1980s it was the rage to see on infomercials these nothing down pitches.  They had to talk about nothing down because mortgage rates were up to 17.5 percent!  So people just wanted a bone thrown their way and the majority didn’t believe in this pipe dream.  But this was only a tiny part of the market.  Most of the money wasn’t made on the nothing down side but by pitchmen that sold the sizzle.  Many who plunked down hundreds for this dream ended up getting a stale steak.  But over the next 20 years as regulation was chomped away by the corporatocracy we suddenly had a way to make loans to any living being so long as they had the wrist power to sign a document.  Zero down in California became the new booming market.  And with the removal of income verification, suddenly 100 percent of the citizenry was primed for the American Dream of owning a home.  So prices got pushed up to ridiculous levels.  What was once a late night infomercial joke had become standard practice.  California became Levittown in state form.  And not only California, but the entire country.

So where do we go from here?  Remember how Levittown grew because of the FHA?  The FHA now makes 4 out of 10 loans in California and backs similar numbers nationwide.  The problem?  They only require 3.5 percent down and with the tax credit, depending on your purchase price, you might be able to buy a home with nothing down.  Is it any wonder that default rates on FHA loans are now spiking?

At a certain point the homeownership dream is nothing more than a mirage.  If you can’t afford the payment and put your monthly budget at risk, then why buy?  Many, unlike the corporate banking cronies, do not have access to unlimited bailouts.  And with nearly 4 million foreclosure filings in 2009 many are realizing the homeownership nightmare.

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