The Debtorship Society

More Americans became "homeowners" while owning less and less of their homes.

Real estate used to be a pretty lowbrow business. When my grandmother opened her agency in the 1950s, it was mildly groundbreaking for a lady to be involved in the grimy, pushy, mold-concealing business of hawking houses. When I accompanied my father on his own real estate agent rounds on a South Jersey barrier island during the Carter/Reagan years, the job seemed to alternate between long hours of cleaning up every form of human waste, heavy volumes of legal documentation, and brief, tense altercations with deadbeats, squatters, and shady contractors. The preferred weapon for this last exchange was a baseball bat. 

If anything can be said for that less genteel age, it's that people had an incentive to reduce their vulnerabilities. To be deeply in debt was considered unwise, possibly shameful, and definitely (given what now seem like usurious interest rates) hazardous to your health. A homeowner was somebody who owned a nontrivial equity stake in his or her residence, and a down payment was 20 percent if you had good credit. Meeting those standards was viewed as admirable. Liberals and conservatives joined in lauding the energy, thrift, and good sense of the American homeowner.

Where liberals and conservatives agree, social engineering must follow. A national homeownership rate above 60 percent—a figure that made the United States the envy of the planet—was deemed too low. Why not use the government to nudge that number up?

Uncle Sam has many options for boosting homeownership rates. The simplest and most important is the tax code, which allows you to write off interest payments on your real estate holdings. But there are other tools. The real interest rate on mortgages has been shaved down by 50 basis points or more thanks to the secondary mortgage market patrolled by the ostensibly competing government-sponsored entities Fannie Mae and Freddie Mac.

Fannie and Freddie also appeared to be useful in pursuing two contradictory goals: motivating banks to lend money in formerly redlined communities while allowing the relatively rich to increase the size of their own government-subsidized loans. Since 1980 the limit on a conforming loan (i.e., one that Fannie and Freddie are willing to buy from a bank) has more than quadrupled, from $93,750 to $417,000. (This growth has been well above annual inflation, which would put the current cost of a conforming loan at less than $245,000.) And if you live in a part of America where $417,000 still seems like a lot to pay for a house, be advised that the limit in "high-cost areas" is even higher: $625,500, up from $140,625.

These homeownership engineering policies create a direct incentive for Americans to take on more real estate debt. Clinton and Bush administration officials argued that they also pushed up the homeownership rate, which having hovered between 60 and 65 percent from 1960 to 1997 rose in the last decade, peaking at 69.2 percent in 2005.

The problem with subsidizing debt is that, whatever its secondary benefits, the primary signal it sends is to take on more debt. As the percentage of people called "homeowners" has increased, the percentage of their homes that they actually own has been plummeting.

According to the Federal Reserve's flow of funds data, owners' equity as a percentage of household real estate dropped from 58.4 percent in 2002 to 41.4 percent in the first quarter of this year. Some portion of this decline can be attributed to the steep drop in house prices (though in many parts of the country prices have not yet returned to 2002 levels), but that portion is actually pretty small. And the trend has headed more or less steadily downward since 1985, the last time the equity portion reached 70 percent. Americans own a lot less of their homes than they used to.

Like many Frankenstein creations of the liberal-conservative consensus, homeownership engineering finally conked out during the Mad Monster Party that was the George W. Bush administration. Bush began his second term committed to creating an "ownership society." But throughout both his terms the rate of real homeownership was declining.

So what does it look like when a fantasy like that ends? Jim Klinge, a north San Diego County real estate agent, has drawn tens of thousands of fans to his "Jim the Real estate agent" YouTube videos and bubbleinfo.com blog. Klinge's handheld, self-narrated video tours of dilapidated homes set up an exquisite contrast: The gang-tagged walls and stripped-out fixtures create a real sense of tragedy and decline, of somebody's evaporated dream. But Klinge's sardonic wit ("I got the ice cream truck in every video," he drawls during one of many looky-loos through declining barrios) reminds you why pity and contempt can't be separated. These people weren't just deadbeats, he demonstrates over and over, but the kind of deadbeats who would (for example) spend a home equity line of credit pimping out a bathroom while not repairing a dangerously rotted load-bearing beam.

The world of actual real estate, it turns out, remains hard and unsentimental. Earlier this year, Klinge launched a one-man, pre-dawn raid on one of his bank-owned listings, subduing and handcuffing a pair of squatters while wielding, of course, a baseball bat. More recently, while Klinge was trying to persuade a mother of five to leave her foreclosed residence, the mother asked him for money to buy her kids hot dogs.

The continuing fall of real estate values, Klinge says, is providing "a test of character in a way Americans haven't been tested in generations. Ever since the military went voluntary, we've had it pretty easy. My fear is that we've become too much of a namby-pamby society."

Klinge is not opposed to government action, and he recommends subsidizing interest rates at 4.5 percent for purchases of foreclosed properties as a means to encourage both banks and delinquent borrowers to wrap up the foreclosure process quickly. The Bush and Obama interventions have aimed to do precisely the opposite. "I believe the government has succeeded in making a less hard landing," Klinge says, "and they're just kicking the can down the road another year."

But the effects of homeownership engineering are more than just financial. Social engineering may aim to create stronger citizens, but it usually ends up producing weaker people.

Contributing Editor Tim Cavanaugh ([e-mail]) is a writer in Los Angeles.