Home-Owning: as American and Affordable as Apple Pie
Bryan and Deborah Campbell have just bought a new house outside Atlanta in a fast-growing subdivision called Flowers Crossing. It has three bedrooms and a two-car garage and cost $98,000. The Campbells put down 10%, and pay $871 a month on their mortgage. He’s 28 and runs a freight terminal for a major trucking company.
Of all our national rituals, few are so universal as homeownership. We now have, the Census Bureau reports, 100 million housing units--a milestone reached in early 1987. We haven’t met the goal set by Congress in 1949 of a “decent home . . . for every American family.” There still are slums and homeless. But homeownership has expanded enormously and, despite popular wisdom to the contrary, remains within the grasp of most Americans.
The Campbells’ home, designated by the National Assn. of Home Builders as the symbolic 100-millionth unit, shows how far we’ve come. In 1940 the homeownership rate was only about 40%. Now the rate is nearly two-thirds, and by their 50s nearly four-fifths of Americans are owners. That’s precisely the proportion that consistently rates homeownership as an essential part of the American Dream.
This is a stupendous transformation. In the 1930s, mortgages covered only 40% to 50% of a home’s value. Repayment periods often lasted only five years. The Federal Housing Administration pioneered longer, larger mortgages. Its practices spread to private lenders, reflecting today’s assumption that people should save for their homes while living in them. Down-payment requirements dropped so low in the inflationary 1970s that, when real-estate prices plunged in Houston, many homeowners walked away. They had almost nothing to lose.
The home symbolizes economic success and family cohesion, but the two now coexist uneasily. Some social scientists think that the pressures to own may subvert the family by keeping women working and reducing birthrates. “People tend to qualify for the maximum house possible,” says economist Dowell Myers of the University of Wisconsin. “It implies that the wife has to keep working unless they want an extraordinarily high payment burden.”
Myers’ proposition is surely arguable. But as more wives work their incomes inevitably become built into what families are willing to pay, and what homes cost. Two-earner households are one reason that the young aren’t being priced out of the American Dream.
True, the homeownership rate for households that are headed by people between 30 and 34 years of age has fallen from 63% to 54% since 1978. But the decline isn’t as ominous as it seems. When interest rates were at their peak in 1981 and 1982, a backlog of buyers developed. Lower interest rates and smaller price increases have made homes more affordable. In 1986 a family with median income buying the median-priced existing home (at about $80,000) would have paid roughly 24% of its income to service an 80% mortgage. In 1977 a similar family buying a median-priced home would have paid only slightly less, 21% of income. (See the table below.)
Inflation and the high-interest policies that reduced it have played havoc with housing affordability.
Some of the drop in the ownership rate also reflects housing’s fading appeal as an inflation hedge. In the 1970s, rising prices pressured people into buying, often earlier than they would have. But, once they bought, inflation made them huge winners. While inflationary economic policies held down mortgage interest rates (adjusted for inflation), home values and income soared. Consequently, the burden of monthly mortgage payments dropped. Average families began to see themselves as real-estate tycoons.
Although speculative buying has subsided, inflation has left huge generational disparities. First-time buyers--the end of the “baby boom”--are victims of bad timing. They haven’t reaped the windfalls that made their older brothers and sisters so smug. It isn’t fair. But new buyers aren’t worse off than their parents. Their parents may have bigger homes now, but they typically didn’t 25 or 30 years ago when they were at the same stage of life. In the 1950s, some “starter” homes were half the size of today’s average new home. Young homeowners will graduate, as others have done, into larger homes vacated by older generations.
None of this, of course, will calm the terror of first-time buyers staring at more debt than seems imaginable. The burden has risen, and accounts for some of today’s anxiety about maintaining middle-class living standards. Nor is the pessimism likely to be stilled by a recent rise in mortgage rates. But the gloom is probably exaggerated. Every wave of home buyers has wondered whether they would achieve the housing that they wanted.
Homeownership’s demands hold us captive. We follow the required rituals, surrendering our down payments and borrowing up to our nostrils. For better or for worse, it defines us.
Median- Priced Median Payment as Existing Mortgage Annual Family Percent Home Rate Payment* Income of Income 1970 $23,000 8.35% $1,680 $9,867 17.0% 1977 42,900 9.02% 3,324 16,010 20.8% 1982 67,800 15.38% 8,424 23,433 35.9% 1986 80,300 10.25% 6,912 29,200 23.7%
*Assumes 20% down payment
Source: National Assn. of Realtors
