In the wake of the housing (mortgage) meltdown, some economists looking back are questioning the very basis of the "ownership society". I think they make some sense.
The formula, however, changed dramatically at the end of the 20th century. From 1994 to 2005, the homeownership rate reached record highs, thanks largely to innovations in the mortgage-finance market that reduced down payments and minimized equity. This shifted the basic wealth-building proposition of homeownership away from savings to an almost exclusive focus on capital gains. Average down payments fell, reducing the savings required to “get in the door.” More significant was the rise of mortgages that involved no forced savings: the interest-only loan, in which no equity is built because the principal is never paid down, and the “negative amortization” loan, in which payments are so low that they do not even keep up with the interest, leaving homeowners more indebted, rather than less, each month. By 2006, more than one-third of subprime mortgages had amortization schedules longer than 30 years, nearly half of Alt-A mortgages were interest-only, and more than one-fourth were negative-amortization loans.This may not be the minefield it first appears. Rather than saying we allowed the wrong people to borrow too much money betting on always-rising home prices, I believe the authors correctly suggest the housing policy was a gigantic subsidy to the wealthy and housing-specific businesses (construction, RE, finance, etc.) that actually harmed low-income people by diminishing the social goods associated with home ownership.
One effect was to reduce the social benefits of homeownership, because the benefits are a product of equity and not of the mere fact that a contract has been signed and a mortgage taken out. The relationship between homeownership and social goods had been misunderstood: The traits that enabled households to build up the savings necessary for significant down payments — hard work and the deferral of gratification — were misattributed to homeownership itself. Paying a mortgage did nothing to improve children’s educational outcomes; instead, the factors that gave rise to homeownership also led parents to raise children in a manner that led to greater educational attainment.
Without substantial down payments and conservative amortization schedules, the entire proposition of homeownership as a social good is turned on its head. Think of a homeowner with a zero-down, negative-amortization mortgage: The balance would equal at least 100 percent of the value of the house at origination and would steadily grow, putting him ever deeper in debt unless the market value of the house grew at an even faster rate. Rather than being a source of wealth, the mortgage would actually reduce the net worth of this homeowner below what it would have been had he rented.
Rather than providing a social benefit, then, homeownership without equity imposes costs. Andrew Oswald of the University of Warwick has argued that such homeownership can exacerbate unemployment by making workers less likely to move from one labor market to another. Labor mobility is badly undermined when homeowners in a depressed market can’t sell their property for anything approaching the principal balance of the mortgage they originally took out to buy it. [More]
In fact, what has been viewed as a causal relationship (home owners become better citizens, etc.) was probably a correlation. As they illustrate, the behaviors that got a 20% downpayment and other underwriting criteria met are the same ones that cause more civic participation, education, social mobility, etc.
So far so good. But tell me why this reasoning should not apply to the numerous farm ownership efforts or beginning farmer programs?
Back in the day when I served on the old FmHA local board, I wondered at the cases that clearly would never "graduate" to economic "adulthood". I also began to question whether we actually helped with low interest, low downpayment, etc. tools. It would be interesting to see the persistence of ownership from beginning farmer loan programs that subsidize first-time buyers with public funds. How many still are farming or own the land in say 10 years?
Are there any records of the outcomes (with privacy protected, of course) for agencies such as IFDA? None that I can see from their minimal website.
Without such followup data, we could be fooling ourselves as to whether these programs are helping folks or simply employing transaction agents.