There are two eras in American history that today’s potential home buyers look back on with envy: the post-war boom of the fifties and the real estate bubble years leading up to the financial crash of 2009.
In both those periods, real estate was a booming industry. In the fifties, it was the government spending money like water so people could buy homes. In early years of the 21st century, it was the banks bending over backward to lend people almost as much as they wanted… certainly more than they needed. Today, things are different in some very important ways.
These days, stagnant wages and rising rents make it almost impossible to scrape up enough money for the down payment on a house…if you can even find one that’s affordable. But it wasn’t always like this.
After World War II, the government flooded the Federal Housing Authority (FHA) and the Veterans Administration (VA) programs for home loans with funds to provide cheap, easy financing with low down payments and interest rates. Lenders were protected from defaults because the loans were backed by the US Treasury.
There were 1.35 million home starts in the US during 1950, and 51% of them were VA and FHA loans. Home ownership jumped from 40% to 60% in the next 50 years. Then financing became even easier to get for several years after 2000, due to loosening of a variety of standards.
- Documentation – Low credit, no down payment? No problem. Lenders would give you up to 125% of what the property was appraised for with low or no documentation loans.
- Loan Products – Before the crash, you had fixed and adjustable loans, but the ARMs could have a ridiculously high cap. You also had a choice of interest-only, balloon loans and even customized loans allowing you to choose your own payments.
- Paperwork – Lenders did have to provide a loan estimate, Truth-in-Lending statement and a HUD-1 statement which contained all of the terms of your house purchase. But a vast majority of borrowers were actually completely clueless about exactly how they managed to afford the house they bought.
Today, you need to provide documentation about every single part your finances, as well as come up with at least a 3% to 3.5% down payment. Loan products are basically down to just fixed and adjustable, and the adjustable loans are required to have caps to prevent them jumping too high too fast. The lenders are now required to provide much more user-friendly standardized documents of your mortgage.
Home building became stagnant during World War II for two main reasons. The first was that there was a mass mobilization of potential home buyers into the military. The second was that there were severe shortages of materials, because so much of them had been directed toward the war effort. Naturally, there was a great deal of pent up demand for home ownership when the war ended.
And the government was willing to meet it. Through the federal programs mentioned above, $3.6 billion was used for loans between 1953 and 1957, a number that completely dwarfed the amount devoted to public infrastructure during the same years. This allowed 2.4 million units of affordable housing to be started.
Adjusted for population and other factors, the 1.2 million homes started in 2017 were nothing compared to that. In fact, it was the lowest number per capita of homes started in 60 years. And unlike the post-war boom, far fewer of these homes are affordable enough to be considered starter homes.
In fact, every year, the supply of starter homes shrinks more than 15%. There’s are reasons for that, primarily stemming from the real estate bubble bursting.
- Low interest rates – Potential sellers have little motivation to move and get a new mortgage while the one they have is so low, especially if their homes are still underwater. Seniors, in particular, are working longer and are more willing to hang on to their homes while rates are low.
- Costs – According the building industry, affordable homes are almost impossible to build these days, due to the combination of costs for land, materials and labor.
In spite of the fact that 10 million Americans lost their homes during the crash, a majority of adults still want to own one, including about 90% of renters. But one of the most fundamental differences between now and then is that buyers are now seeing houses as a home in which to live, rather than just an investment opportunity.