Accountability of the American Homebuyer from the US Housing Bubble

     As many already know, the US Housing Bubble was spearheaded by millions of homebuyers defaulting on sub-prime mortgages and extreme bank leveraging. This created an artificial rise in housing prices and then a bust moving into 2006-2012.  Documentaries, books, and research pieces have been put together regarding the reaction, mainly blaming the greed of Wall Street and mortgage companies like Countrywide. The “explanation” has certainly become a repetitive process. That being said, one subject of conversation that is almost never discussed is the fault of the American homebuyer.

     In most debates about the housing crisis, the American homebuyer who lost there home is seen as the victim. While some were conned into signing false mortgages and faced unknown payment increases, the vast majority could have prevented loosing there homes and credits altogether. Even if the real estate market had not faltered, many individuals signed risky reverse mortgages or delayed payments, assuming 20+% increases in home values per year [1]. That being said, homebuyers in many cases should have know that purchasing $600,000 to over $1 million homes with 5 figure household incomes was an  unrealistic proposition, no matter what salesmanship they faced [1]. At some point the principal had to be paid off.

     One reason homebuyers were so enticed was that the single-family home has always stood as the quintessential example of the American dream. This incentive was strong enough to push homebuyers basic logic aside. However, this priority of homeownership has been around for centuries in the US. Unlike the more dense multi-family housing structures of Europe, Americans strived to be better. Historically, the vast majority of presidents, politicians, and bureaucrats alike have strongly supported homeownership with measures like the Homestead Act, the Housing Act, and Fair Housing Act [1]. The US has always believed that homes gave people a social and financial stability with more involved citizens, safer neighborhoods, and healthier children.

     For these reasons, the federal government has a long history of making home mortgages easier to attain. One of the first was the mortgage interest deduction that individuals could apply to federal income taxes [2]. Soon after, the creation of the Federal National Mortgage Association (Fannie Mae) in 1938 provided local banks with federal money to finance home mortgages, creating the 30-year fixed rate mortgage and leading to more housing loans [3]. After World War II, the GI Bill helped veterans make lower down payments with low interests [3]. It was during this time that suburban residential developments began to cover the US and homeownership rates rose to over 60 percent [4]. The US had become a country of homeowners and the Federal government was there to back up that ideal.   

            From that period, the 30 year fixed rate loan with 20% down became the gold standard for home mortgages.  Homebuyers would schedule immediate interest payments, and show several proofs of income. Unfortunately, beginning in the 2000’s there was a move by the Federal government to address homeownership among low-income families and minorities. The solution was to hand out loans with low interest, little to no money down, and limited proof of income. While there may have been a good premise behind the Fannie and Freddie loans, it had harmed those that it tried to help. Many of these low-income families signed off on mortgages that they could afford hypothetically for the first several years, but would have almost no chance of repaying the principal over a longer period.

When these homebuyers defaulted and housing values plummeted, trends in homeownership were substantially altered. Younger adults are now renting much longer than the generations before them because they are choosing to save assets and/or seek investments that are perceived as safer than purchasing a home [4]. Those who are fortunate enough to purchase homes are opting for more modest ones with lower payments [4]. Additionally, many real estate brokers and economists have noted that new homes have become smaller and lack the pricey extras such as patios or pools [4]. Homeowners are also remaining in those first homes for longer periods of time;  11% of those surveyed owned their home for 3 years or less, down from 30% in 2006 [5]. The idea of being able to purchase a home to build wealth and its use as a conservative long-term investment has dwindled.

            The US Housing Bubble has left a scar in homebuyers, and the types of financial incentives they should accept. Owning a home is a massive responsibility and not everyone is cut out for it. There are simply some individuals that do have the financial responsibility or means to own a home. Unfortunately, in more recent decades the federal government went to far in pushing the homeownership agenda and millions of people acquired homes that they would never be able to pay off. While the goal for increasing homeownership seems ethical, homebuyers should not have the privilege to transfer their debt onto the construction industry and middle class. The single-family home can and will represent an individual’s greatest investment, source of wealth, and vessel for life as long as the US does not compromise sound lending principles. Sustainable loan commitments and a healthy economic environment are the only sources to real increases in homeownership rates and quality of life for a lasting period of time.

Work Cited

[1] “The Fuel That Fed the Subprime Meltdown.” Investopedia. 26 February 2009. 9 April 2013. Web. <investopedia.com>

[2] “Inside Job” Directed by: Charles Ferguson. Film. 8 October 2010.

[3] “The Case Against Home Ownership.” Kiviat, Barbera. Time Magazine. 11 September 2010. 10 April 2010. 

[4] “Homeownership Harder to Attain Since Recession.” Pittman, Kristen. The Wichita Eagle. Kansas.com. 6 September 2011. 13 April 2013. Web. <Kansas.com>

[5] “Shifting Confidence in Homeownership: The Great Recession.” Bracha, Anat, and Jamison, Julian. Federal Reserve Bank of Boston. 13 April 2013. Paper.