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Expanding Homeownership - What Went Wrong

By Randy Johnson for Credit.com

If there has been a common theme across the political landscape during the past thirty years, it is that of expanding homeownership. You hear it at Congressional committee meetings; it has been mentioned as an objective in the annual reports of virtually every agency in the federal government agency connected with housing; and it has been incorporated in specific language in virtually every law that has anything to do with housing.

But there is a further veiled meaning here. When politicians say "expanding homeownership opportunities," they really mean figuring out ways where more minorities can have the opportunity to buy homes. When you look at the homeownership statistics, it is clear that the classes of people who have not been able to participate are largely minorities, particularly Blacks and Hispanics. Let's look at homeownership statistics from the U.S. Census Bureau for 2007:

White, non-Hispanic
 75.2
Asian 60
American Indian
 56.9
Hispanic 49.7
Black
 47.2


At this point, I think it makes sense also to look at the gains that have been made in recent years. This graph shows the changes from 1994 to 2005:

US Home Ownership Stats

You can see that there were gains in all groups, a good sign. I do not have the data to support this, but my guess is that if you went back to 1965 when much of the civil rights legislation was passed, you would see that the progress was even more dramatic. This graph makes the point that while there has been progress, there is still a significant gap.

I also want to state my personal opinion on this: I believe that citizens who own property have a much better opportunity to create personal wealth. I believe that homeownership gives people a greater stake in what happens in America and makes them better citizens. I believe that children who grow up in a home owned by their parents get a more wholesome view of what democracy and freedom mean to them and that gives them a better future.  

It is also clear that there were practices that created real barriers. Real estate agents didn't want to show minority homebuyers homes in white neighborhoods, a practice now forbidden by law. Lenders wouldn't lend in certain areas, a practice called redlining. That is now illegal and under the Community Reinvestment Act, many lenders are under specific orders to increase lending in neighborhoods that were previously "underserved." I believe that these barriers no longer exist. So hopefully we all have some good reasons for favoring expanding homeownership opportunities.  

But we have just engaged in an experiment that did expand homeownership. The result has been an unmitigated disaster, not just for the homeowners who lost their dream home through foreclosure, but for the rest of our society as we recoil from the devastating effects of the bursting of the housing bubble, the ravaging of hard-earned retirement and other accounts, and a devastating increase in unemployment.

I think that the people of this country, all of them, deserve and answer to the question, "What went wrong?" Here's my analysis…

Normally, a family decides they want to buy a home. This creates a tiny sliver of demand and a whole body of people like real estate agents and mortgage people work to get them ready to buy. When conditions are right, lots of people make this decision and we have a normal market.

Think of it as all these people being in a swimming pool. The job of the housing industry is to stand on the edge of the pool and wait. When someone swims over to the edge and asks for help, we help them out. But the first step consists of them initiating the process.  

What went wrong is that we turned the normal equation for homebuying upside-down. Greedy real estate agents and greedy mortgage brokers and greedy builders jumped into the pool and dragged people over to the edge where some accomplice would help them out of the pool. It turned out that many of these people were not prepared for the additional responsibilities of home ownership. In some cases they were bad credit risks; others had poor employment and income history; and of course, many had no down payment. In some cases, they were poor risks in all three areas.

In a rational world, these were all disqualifying criteria. But because of the greed up in the rest of the food chain, the rational rules had been thrown out the window. As a consequence, these poorly prepared people were sold homes anyway. To top it off, many of those loans were toxic and the effects of that precipitated the current credit crisis.

To find a solution, we need to go back to basics, which means that people have to prepare for homeownership the old-fashioned way. They need to earn their way by demonstrating financial responsibility. In a future article I will discuss how we can do a better job next time.

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