For as long as I can remember, owning a home has been taken for granted as an essential element of the American Dream. But this may be a relatively recent aspiration, arising only in the second half of the last century. Let me tell the story in two parts.
Early in the Century
In the 1920s, fewer than half of American families owned their homes. American financial institutions offered two ways to finance such purchases:
-- from banks, which required a 50 percent down payment and offered five-year loan terms,
with balloon payments required to cover final payment at the end. It appears that many
people, perhaps most, renegotiated their mortgages frequently and avoided the big final payment.
-- from savings and loans, which required smaller down payments of 30 to 40 percent, and
offered self-amortizing notes that paid off loan balances over 11 or 12 years.
These were pretty onerous terms. Saving between 30 percent and 50 percent of a home's purchase price must have been a heavy burden in times when people were much poorer and innovations like electricity and indoor plumbing still were far from common in American houses.
During the 1920s, the American economy caught fire. Stock prices rose and rose, as did home prices. By 1930, 46 percent of American families owned their homes, and home values had increased substantially, creating what we would now call a bubble.
We all know what happened in the 1930s. The stock market crash of 1929 was followed by a breakdown of the economy. Millions of people lost their jobs and the money they had invested in the stock market. Banks, at least the ones that survived, pulled back and refused to renegotiate their five-year balloon notes. Not surprisingly, the housing bubble burst, and home values dropped by half.
In 1938, the government established the Federal Housing Administration (FHA) and the Federal National Mortgage Association (Fannie Mae) to guarantee longer-term home loans at fixed rates and keep people in their houses. This no doubt helped, but by 1939, 10 percent of all homes were in foreclosure and the rate of home ownership had dropped to 42 percent.
World War II and Later
The real estate market stayed flat through the Depression and World War II. When employment picked up to manufacture weapons and other supplies for the troops, jobs became more plentiful, but there was not much to buy. Everything from nylon stockings to gasoline and tires, from cigarettes to canned food and coffee and sugar was rationed. All workers were urged strongly to buy war bonds.
After the war, the soldiers came home, and the demand for housing for new families grew exponentially, assisted by the newer, government-guaranteed mortgage model of 80 percent fixed-rate loans that amortized over 30 years.
This worked pretty well until it didn't. A recession in the early 1970s and several other events -- an oil price spike, runs on the dollar and the government's easy money policies -- raised interest rates so high during that decade that homes and home loans became much more expensive.
According to the Federal Home Loan Mortgage Corporation (Freddie Mac), the average interest rates on a 30-year fixed-rate mortgage increased from around 7.5 percent in 1971 to 12.88 percent in early 1980. Here was the effect on typical families.
1971 1980
Median Home Price $25,200 $62,900
Median Family Income $7,805 $16,154
30-Year Monthly Pmt $186 $481
Mortgage/AGI 29% 37%
Even with the increase in mortgage costs as a portion of family income, the percentage of homeowners grew slightly over the period, from 64 percent in 1971 to 65.5 percent in 1980. Much of this no doubt reflected the coming of age and family formation during that period of the Baby Boom generation, the largest in American history.
Still, homeownership increased from 42 percent in 1939 to almost two-thirds by 1980. Then things got really interesting. More on that tomorrow.
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