Homeownership was once an entry way to middle class life. A home was once the most valuable and expensive possession for the middle class. Owning a home was also a wealth building tool. Many homeowners were able to build wealth by paying down their mortgage. While an investor paid down his or her mortgage the price of the home would increase. The increase in the price of one’s home represented an opportunity to increase one’s net worth. The benefits of homeownership may be overshadowed by the recent housing correction.
The Correction
In order to promote homeownership mortgage services companies were created such as Freddie Mac and Fannie Mae. These companies helped make homeownership affordable by buying loans from banks and creating investments out of them. The system worked until the system was abused. Banks had no risk and therefore started to lend to about anyone. Potential home buyers had no discipline and started buying too much home. Because of the behavior of both the banks and consumers the housing market came crashing down in 2008. The result of the crash was massive foreclosures, declining property value and a decline of household wealth. Here are some facts about the current state of the housing market.
- New single-family home sales fell to a seasonally adjusted annual rate of 250,000 in February
- New homes are now selling at half the pace of 1963, although population has grown by 120 million people
- Existing home sales fell 9.6% in February, the third largest monthly decline in 12 years
- The Median existing home price continues to drop, falling 1.1% to $156,100
The Increase Cost of Ownership
The correction also left the government questioning the validity of Freddie Mac and Fannie Mae. Because banks did not own these loans it created a moral hazard. The government is now proposing to get rid of Freddie Mac and Fannie Mae. The result of phasing out Freddie Mac and Fannie Mae will be the increased cost of homeownership. The result of this decision will be even greater for minorities. Minorities suffered the greatest lost during the housing correction. If banks are required to own more of the loans they service they will add more fees and other expenses to compensate for the risk. The proposal, if passed will have an impact on the future home buying behavior of Americans. If homes are less accessible will that mean the end of homeownership?
Article first published on Technorati.
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