How Gov't. Turned American Dream Into Nightmare

Excerpts below from an excellent WSJ article "The New American Dream: Renting: It's Time to Accept that Home Ownership is Not a Realistic Goal for Many People and To Curtail the Enormous Government Programs Fueling This Ambition," by Thomas Sugrue, professor at the University of Pennsylvania.

Excellent analysis of how government policy turned the American Dream into the American Nightmare for many homeowners, because of public policy that encouraged excessive home ownership and in the process turned good renters into bad homeowners.

For most Americans, until the recent past, home ownership was a dream and the pile of rent receipts was the reality. From 1900, when the census first started gathering data on home ownership, through 1940, fewer than half of all Americans owned their own homes. Home ownership rates actually fell in three of the first four decades of the 20th century. But from that point on forward (with the exception of the 1980s, when interest rates were staggeringly high), the percentage of Americans living in owner-occupied homes marched steadily upward. Today more than two-thirds of Americans own their own homes (see chart above). Among whites, more than 75% are homeowners today.

Yet the story of how the dream became a reality is not one of independence, self-sufficiency, and entrepreneurial pluck. It's not the story of the inexorable march of the free market. It's a different kind of American story, of government, financial regulation, and taxation. We are a nation of homeowners and home-speculators because of Uncle Sam.

Herbert Hoover signed the Federal Home Loan Bank Act in 1932, laying the groundwork for massive federal intervention in the housing market. In 1933, as one of the signature programs of his first 100 days, Franklin Roosevelt created the Home Owners' Loan Corporation to provide low interest loans to help out foreclosed home owners. In 1934, F.D.R. created the Federal Housing Administration, which set standards for home construction, instituted 25- and 30-year mortgages, and cut interest rates. And in 1938, his administration created the Federal National Mortgage Association (Fannie Mae) which created the secondary market in mortgages. In 1944, the federal government extended generous mortgage assistance to returning veterans, most of whom could not have otherwise afforded a house. Together, these innovations had epochal consequences.

Easy credit, underwritten by federal housing programs, boosted the rates of home ownership quickly. By 1950, 55% of Americans had a place they could call their own. By 1970, the figure had risen to 63%. It was now cheaper to buy than to rent.

It's a story riddled with irony—for at the same time that Uncle Sam brought the dream of home ownership to reality—he kept his role mostly hidden, except to the army of banking, real-estate and construction lobbyists who rose to protect their industries' newfound gains. Tens of millions of Americans owned their own homes because of government programs, but they had no reason to doubt that their home ownership was a result of their own virtue and hard work, their own grit and determination—not because they were the beneficiaries of one of the grandest government programs ever.

But by the 1960s and 1970s, those who had been excluded from the postwar housing boom demanded their own piece of the action—and slowly got it. The newly created Department of Housing and Urban Development expanded home ownership programs for excluded minorities; the 1976 Community Reinvestment Act forced banks to channel resources to underserved neighborhoods; and activists successfully pushed Fannie Mae to underwrite loans to home buyers once considered too risky for conventional loans. Minority home ownership rates crept upward—though they still remained far behind whites. Even at the peak of the most recent real-estate bubble, just under 50% of blacks and Latinos owned their own homes. It's unlikely that minority home ownership rates will rise again for a while. In the last boom year, 2006, almost 53% of blacks and more than 47% of Hispanics assumed subprime mortgages, compared to only 26% of whites. One in 10 black homeowners is likely to face foreclosure proceedings, compared to only one in 25 whites.

During the wild late 1990s and the first years of the new century, the dream of home ownership turned hallucinogenic. The home financing industry—at the impetus of the Clinton and Bush administrations—engaged in the biggest promotion of home ownership in decades. Both pushed for public-private partnerships, with HUD and the government-supported financiers like Fannie Mae serving as the mostly silent partners in a rapidly metastasizing mortgage market. New tools, including the securitization of mortgages and subprime lending, made it possible for more Americans than ever to live the dream or to gamble that someone else would pay them more to make their own dream come true. Anyone could be an investor, anyone could get rich. The notion of home-as-haven, already weak, grew even more and more removed from the notion of home-as-jackpot.

Bottom Line: More support for the high likelihood that the global financial crisis, mortgage tsunami, and housing bubble can all be traced to federal government intervention to create affordable housing, see previous CD post here.