The real lessons of declining homeownership

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Thursday, August 5, 2010

FOR YEARS, government policy has aimed at driving up the owner-occupied share of residential housing, on the theory that everyone should have a shot at putting down roots and building up wealth. But judging by the latest numbers, that dream is fading. The national homeownership rate fell from 67.2 percent in the first quarter of 2010 to 66.9 percent in the second quarter, according to the Census Bureau. To put it another way, the recession and its accompanying wave of foreclosures have wiped out the past decade's worth of increases in homeownership. And there's more trouble ahead. According to an estimate from J.P. Morgan analysts, for every house already on the market in the United States, there is another one in or near foreclosure. Some industry forecasts suggest that, by 2012, homeownership rates could retreat to levels last seen in 1960.

No doubt this gloomy news will be a subject of discussion at the Obama administration's conference on the future of housing policy, scheduled for Aug. 17. Convened by Treasury Secretary Timothy F. Geithner and Housing Secretary Shaun Donovan, the event will be step one in the mortgage-finance revamp that was conspicuously left out when Congress tackled financial regulatory reform. But it is critically important that policymakers draw the right conclusion from the declining rate of homeownership. Some -- especially the lobbies and industries that benefited from the old order -- may bemoan the end of the American Dream and demand new federal programs to puff the rate up again. The real lesson is that, over many years, under Republicans and Democrats, subsidies and lax financial regulation inflated the homeownership rate beyond what could be sustained. Too many people got mortgages they could not handle. A bipartisan pro-homeownership policy that was supposed to create communities and individual wealth ended up destroying both.

No institutions played a larger role in the nation's over-investment in single-family housing than Fannie Mae and Freddie Mac, the government-sponsored mortgage-securitization giants. And no institutions fell harder when that over-investment went sour; they are in government hands and absorbing hundreds of billions of dollars in taxpayer support. Dismantling Fannie and Freddie without collapsing what's left of the mortgage market -- or spooking the foreign creditors who hold that debt -- will be the biggest challenge facing the officials who must now redesign federal housing policy. It's good that the Obama administration is turning to this job in earnest. Whatever solution Congress and the administration choose must strike a far more realistic balance between homeownership and rental housing than the government has struck in the past. It will be politically difficult to shrink federal support for the American Dream. But it's the only way to prevent another financial nightmare.


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