Bloomberg, September 24, 2018: America needs to revive the American dream of homeownership
The idea of helping the lower-middle class by using the federal government to encourage homeownership is out of favor. There’s a popular narrative that the housing bubble of the 2000s was caused by the government making or encouraging cheap loans to low-income Americans. That narrative is a myth — the leading cause of the bubble was private banks making bad loans, mostly to speculators rather than to low-income owner-occupants. But the myth is unlikely to die, meaning that it will be an uphill battle to convince recession-scarred Americans to support the idea of expanding homeownership.
There are big obstacles to building wealth for many Americans. Stocks — the obvious alternative to real estate — can be extremely volatile, and lower-middle-class people can’t afford to run the risk of having their assets wiped out. Housing certainly has its own disadvantages — it’s undiversified, and it can tie people to the economic fortunes of a specific location. But despite the occasional market downturns, housing tends to be a pretty good long-run investment. If lower-middle class wealth is to be rebuilt without resorting to something like a social wealth fund, there are few better alternatives to housing. And lower-middle class wealth desperately needs rebuilding.
Although housing is an important part of the economy and the largest financial asset of most homeowners, it’s also a form of social equity. Because local control over schools and land use is so entrenched in American society, it will be difficult to give renters anything close to equal opportunity in America without giving them a path toward homeownership.
Homeownership can also encourage low-income people to build more wealth on their own. Monthly mortgage payments can act as a behavioral nudge that prompts people to save more each month. If the government is to expand homeownership, it should do so in a way that avoids the mistakes of the bubble period. Previous policies often made it easier for lower-income Americans to borrow money in order to buy houses. But this loaded them up with debt and put them at risk of default. Instead of repeating this mistake, the government should give low-income grants to put equity into homes.
Several programs like this already exist. The Department of Housing and Urban Development allows families that qualify for housing vouchers in some areas to use them to help purchase homes and pay ownership expenses instead.These programs, or similar ones, would form the foundation of a broader policy to encourage lower-middle class homeownership and equity building.
The solution is for the government to make these grants conditional on cities building more housing units. If combined with more direct incentives for dense development, would help combat the nationwide housing shortage that has persisted since the crisis.
