Debtor Society

From the Washington Post:

The Subprime Meltdown and the Ownership Society

A huge percentage of the easy-money mortgages issued to low- and moderate-income families in the past few years are going bad. This has led to bankruptcies for the big lenders in this market and millions of dollars in losses. The chain of defaults has also raised concerns about the mortgage and housing market more generally, and a growing number of economists view a recession induced by a housing crash as a distinct possibility.

The full effects of the collapse of the subprime market remain to be seen, but it is not too early to talk about the policies that got us here. In particular, the government policy of promoting homeownership should be examined.

Proselytizers of homeownership can be found in both political parties. Democrats have long argued for lending policies that allow easier mortgage credit to low-income families to help remove an important obstacle to achieving financial security. Republicans tend to frame their support for homeownership as part of their drive to create an “ownership society” in which everyone owns a piece of the country and can share in its prosperity.

The result has been a range of policies that promote homeownership while generally neglecting renters.

While homeownership is often desirable as a means for accumulating wealth and obtaining secure housing, it will not always be a good mechanism for either. People often find it necessary to move for reasons that are not easily controlled. For example, sickness, death or unexpected family break-ups may require changes in living arrangements. Similarly, in the dynamic U.S. economy, where job security is a relic of the past, workers frequently have to move to maintain or advance their careers.
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The situation is even worse if the home purchase price was driven up in a speculative bubble, as was the case with many homes in recent years. Not only will some home buyers incur large transaction costs, but in today’s market they are also likely to be forced to sell their houses for less than they paid. This is precisely why so many moderate-income home buyers are defaulting on their mortgages. They have been stuck with mortgages that they cannot afford, on homes that are worth less than their purchase price. In this situation, many people wind up losing whatever savings they put into their house.
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A serious housing policy should recognize that renting can be a better option for many Americans, especially for tens of millions of families with low and moderate incomes. The country cannot allow its housing policy to be determined by ideology or the interest groups that benefit from this ideology.