Too many blogs about homeownership give tips and tricks for money management, and while financial literacy is an important aspect of saving for and owning a home, it isn’t the only factor.
Homeownership rates are plummeting, and it is largely thanks to systemic forces bearing down. Those particularly affected are young Americans, BIPOC and those lower than upper-middle-class.
If you can’t afford a home right now, you aren’t alone. Here are the real reasons so many are suffering from the housing crisis, and what you can do to make your homeownership dreams come true.
Increasing Land Rents, Stagnating Land Taxes and Incomes
Land has always been valuable because it allows land owners to generate income in various ways: harnessing or producing resources, charging rents to tenants, etc. Accordingly, property today is seen as a good investment for entrepreneurs and private citizens alike.
In a growing economy like that of the United States, landowners naturally accrue windfall gains on their real estate, and those windfalls have been increasing — but land taxes have not, and neither has investment in affordable housing options.
For most of American history, up until the 1960s, housing prices remained relatively stagnant despite rising populations and incomes. Then, between the 1960s and the 1990s, various policy changes drastically reduced property taxes around the country and withdrew state provisions for affordable housing.
On top of this, banks expanded mortgage credit. Ultimately, this allowed more people to afford more real estate in a short period of time.
In the past 20 years alone, real house prices have increased by 50 percent, but incomes have flatlined. As a result, to purchase a home, an average individual like you needs to rely heavily on mortgage credit. Which brings us to the next issue.
The Issue of Money Creation in Bank Lending
Mortgage loans allow indispensable tools for being able to afford property when you cannot afford property. More than 90 percent of all home purchases are financed, and only about one-third of homeowners ever manage to pay off their mortgage. However, the process of creating a home loan is somewhat dangerous for banks, the economy and homebuyers.
Essentially, banks create money in the act of lending, which they deposit in the lender’s account. Banks don’t borrow money from elsewhere in the economy when they hand out cash for homebuying; they merely expect the loan to be repaid.
This system functions perfectly when mortgage lending supports new construction homes because the new money can be absorbed into the economy in the form of real property. However, most homebuyers are after existing property on existing land. Using mortgage loans, buyers can compete over these homes, driving up home prices, increasing the demand for mortgage credit — and a feedback cycle develops.
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Over time, this feedback cycle has led to housing prices way out of the scope of the average American’s income. You still need a down payment and a certain debt-to-income ratio to qualify for a mortgage. If you are at a favorable socio-economic starting point, begin saving for a home early and utilize money management software to your advantage, you might be able to purchase a home in a reasonable amount of time.
However, while Americans like you scrimp and save, the wealthy are quickly and easily snapping up the homes that become available, adding them to their income-generating hoard. Worse, because affordable housing is so scarce and initial investments so high, rents are increasing, leading to more people being evicted and living on the street.
Developing an American Solution to the Housing Crisis
Our current housing system is best described as “residential capitalism,” whereby consumer demand determines housing prices. However, this method isn’t feasible in a modern economy backed by incredibly powerful and unregulated banks.
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America needs to break free of the feedback cycle which perpetually increases home values and establish a system where home prices remain at more reasonable rates relative to incomes. As demonstrated by advanced economies with secure housing markets, the key to doing this seems to be tight control on mortgage credit creation.
If you are hoping to own your own home, you need to make a financial plan and work hard to achieve your financial goals. However, more importantly, you also need to support government policies that make it easier for average Americans like you to achieve the American dream.
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