Minnesota 2020 Journal: After the Housing Hangover
Minnesota’s housing market is coming back to life. That’s welcome news. Looking forward, the new new won’t look anything like the old old. Exorcising Minnesota’s housing bubble excess returns home values to conventional stability but also reduces access to home ownership. We won’t be able to treat our homes as maxed-out credit cards but, at the same time, fewer people will own traditional homes unless we change the rules and the way we help people realize home ownership.
Over the past generation, Minnesotans bought, sold and financed homes like 17th century Dutchmen on a tulip binge. We did not behave as badly as home buyers and speculators in other American markets but we’re not free of responsibility either. Minnesota’s housing market did not, as a consequence, crash as fast or as hard it crashed in either states but our recovery has been equally slow and sobering.
It’s important to understand the structural elements leading to the home mortgage finance crash. Large scale housing mortgage investors were throwing money around freely. This incentivized marginally-eligible buyers, in a wide range of incomes, to accept unhealthy and unsustainable loan terms. Everyone was willing to believe that home values would continue climbing, creating a path to theoretical mortgage payment stability for even modest income earners. In other words, buying a house that you couldn’t afford with borrowed money that could only be paid back if the home appreciated by some ridiculous amount, allowing you to sell at a profit and buy a new, appropriate-to-income home, only worked for a few people who were just plain lucky. High risk investment behavior became, for about a decade, near-normal home purchasing behavior.
Home purchasing and ownership is a generally wise long-term investment but it still takes a back seat to housing’s immediate function: shelter. Home ownership for most Minnesotans allows owners to capture their home’s accumulated capital value growth while pivoting into age-driven changing housing needs. Owning a home promotes family and community stability but, for mortgage financiers, there’s not a lot of fast money making opportunity in 30-year fixed mortgages.
Earning a quick buck requires changing the investment picture and rules. The entire home mortgage industry was predicated on helping people with average incomes finance a home purchase with a 30-year loan. Several generations ago, prospective home purchasers had to present sizeable down payments. Depending on the era, somewhere between 25 and 50 percent of the purchase price was required before a bank loan was possible. That means, in today’s terms, having $100,000 to pay against a $200,000 house. The bank was virtually guaranteed not to lose money because the borrower’s downtown payment covered the bank’s up-front lending risk.
While this seems responsibly conservative, the whole process is actually an incredible drag on economic activity. Tying up capital in low risk, low interest investments is an inefficient cash management strategy. It’s leaving money on the table rather than growing the economy. Correcting one problem, however, created another.
Financial wizards reasoned that if bonds could be grouped together, analyzed and resold in units reflecting their risk as collateralized debt obligations, home mortgages were ripe for the same practice. It’s true that most mortgages are sober, straight forward affairs but, still, some are riskier than others and should be priced accordingly. After some federal legislative and regulatory changes, the home mortgage secondary market took off but what was good for investors wasn’t as great of a deal for home purchasers.
Modest risk yields modest investment returns. High risk yields, or can yield, high returns along with spectacular investment loss. For many homeowners, their housing strategy subtly shifted from modest, long-term parameters to higher risk/reward behavior. Lulled or, perhaps more accurately, enticed by institutional and political advocacy, people learned to tune out the cautionary this-is-too-good-to-be-true voice in their heads. Even without selling a home, cash could be tapped with borrowing against the home’s growing value, turning long-term shelter investments into credit cards. As wages stagnated, home equity loans substituted, fueling the bender and further drowning out common sense.
When the home mortgage bubble crashed, it landed hard. The collapse wasn’t fast nor was it resolved quickly. We’re still dealing with post-collapse fall out. Looking forward over the next ten years, the experience of purchasing and financing a home will look a lot more like 1955 than like the heady excesses of 2005.
Going back to the old days isn’t a solution. We don’t need impossible home ownership barriers anymore than we need homes as credit-cards. Minnesota needs rising wages supporting family and community stability. That change starts with a minimum wage increase. Minnesota needs effective government financing that helps families purchase homes without throwing them to financial wolves. That starts with increased regulatory oversight that balances risk against reward. Minnesota needs a better deal, one that puts Minnesotans first.