Highlights from history: How America went from 'nation of renters' to 'an ownership society'

The goal of home ownership is a recent ideal in U.S. history.

At the turn of the 20th century, America was "a nation of renters," according to the Federal Housing Administration.

It wasn't until the stock market crash of 1929 and its aftermath that the tide began to turn in the direction of today's "ownership economy."

But with the serious economic downturn the U.S. is facing now, the ability of average Americans to own their piece of the pie is again in question.

When the stock market blew up on Black Friday, home ownership in the U.S. wasn't the common ideal it is today. Just 40 percent of us could afford to buy the place we called home.

At that moment in American history, although mortgages were available, they were difficult to obtain, and mostly out of reach for the average wage-earner. Terms were draconian -- a 50 percent down payment, followed by a three- to five-year term of monthly or yearly interest-only payments, in turn followed by a large balloon payment of the remaining 50 percent of the loan to close out the deal. It was common to re-finance that balloon payment, too, so the possibility of ever actually attaining ownership was largely a dream.

As markets collapsed, millions were out of work, including two million construction workers. What mortgages there were became an enormous burden to the banks that held them. When mortgagees couldn't pay back their loans and couldn't afford to refinance, banks ran out of money to write more mortgages and a wave of foreclosures ensued.

Into the chaos stepped Franklin D. Roosevelt and the New Deal.

In 1934, Roosevelt created the Federal Housing Administration.

The FHA instituted a program of longer-term mortgages, backed by the government, which insured banks against mortgage losses.

To further encourage home ownership, the Federal National Mortgage Association, Fannie Mae, was established in 1938 to buy the FHA-insured loans and sell them as securities in financial markets, creating what is now called the "secondary market," leveling the playing field with similar rates and similar terms and keeping the money pool full for additional lending.

After World War II, another government program, the G.I. Bill, backed home mortgages for returning veterans.

Post-war prosperity boosted construction to record-setting levels.

The ratio of homeowners to renters rose steadily in the post-war period, until it more than reversed itself. Today, or at least in the recent past, homeownership has risen to nearly 70 percent.

Interest on a mortgage was tax-deductible, making the goal of owning a home and shouldering a mortgage very desirable and a good deal easier than it had previously been.

But at the same time, the tax code encouraged other indebtedness by allowing a tax deduction not just for mortgage interest, but for several other types of interest, including that paid to credit card companies.

By the early 1980s, consumer spending was rising rapidly but savings rates were declining.

Credit cards, once the province of the rich, were in everyone's wallet, and companies like Master Card and Visa mailed them out by the millions.

Even with interest rates on the cards at an average of more than 18 percent, consumers continued to use them, in part because the interest was tax-deductible.

Alarmed, Congress passed the Tax Reform Act of 1986, eliminating the tax deductibility of credit card interest.

For a short while, consumer spending dipped, but that drop didn't last long. Interest rates on credit cards dropped, too, but spending continued. And this time, consumers had another avenue to fuel their spending.

Home equity lines of credit (HELOC) allowed us to pay for the additional spending by tapping the equity in a home, again with tax-deductible interest.

As home prices rose at unprecedented speed and mortgage interest rates dropped, consumer spending barreled ahead.

If consumers had borrowed against their home equity for home improvements, which was the original impetus behind HELOC, it all might have worked out well.

But they didn't. Instead, HELOCs financed more and more debt repayment, pushing the reasonable limits of what could be supported by the average American.

And it wasn't long before the subprime market, aimed at consumers with less-than-perfect credit, also rose to unsupportable levels.

And soon, it all came tumbling down.

Now what?

On the net:

Federal Housing Administration:
http://tinyurl.com/5xzvsg
Home ownership history:
http://tinyurl.com/5jrl5d
Mortgage banking:
http://tinyurl.com/5o8znd
Income tax history:
http://tinyurl.com/6g7s2x
**Contact Kathy Fairchild at marshallhealth@socket.net