It’s a Wonderful Life

In Frank Capra’s classic 1946 movie, It’s a Wonderful Life, we are told, It’s deep in the race for a man to want his own roof and walls and fireplace.

Ferguson walks us through the history of homeownership, identifying the Federal Housing Administration as the spark that really made the difference for American homebuyers.  By providing federally backed insurance for mortgage lenders, the FHA encouraged large, long, fully amortized and low-interest loans.  From the 1930s onwards, the US government was effectively underwriting the mortgage market, effectively causing property ownership and mortgage debt to soar after the Second World War.  Home ownership increased from 40% to 60% by 1960.  The graph below shows the recent bubble in the American Dream reaching unprecedented highs.  In hindsight, it is now clear that many of these new home owners were not well served by America’s Mortgage Monsters.

Source: US Census Bureau

Historically, government incentives to borrow and buy were logical for ordinary households.  This changed with the advent of securitization which ultimately broke the social ties between mortgage lenders and borrowers.  As Ferguson accurately portrays, the full implications of this transition for ordinary homeowners were not apparent for nearly two decades later.

“We want everybody in America to own their own home,” President George W. Bush had said in October 2002.  “It is in our national interest that more people own their home,” he repeated in December 2003.  Few disagreed.  Ferguson now reminds us:

It’s not owning property that gives you security; it just gives your creditors security. Real security comes from having a steady income, as the Duke of Buckingham found out in the 1840s, and as Detroit homeowners are finding out today. For that reason, it may not be necessary for every entrepreneur in the developing world to raise money by mortgaging his house. Or her house. In fact, home ownership may not be the key to wealth generation at all.