One of the causes of the 2008 housing crisis was that people had bought houses with low down payments and then found that they didn’t have the ability to keep up with their loans. Foreclosures became frequent and neigborhoods declined in value.
Because of government policy, lenders gave home loans to people who had not yet developed the financial discipline, or didn’t have the means, to keep current on their home loan.
The families experienced a lot of heartache, not to mention financial setbacks, that need not have happened if not for the low down payments or even “zero down” sales that allowed them to move into houses without preparation for becoming homeowners.
Howard Husock of City Journal writes that, while 2020 hopeful Senator Kamala Harris is right to be concerned about the discrepancy in wealth between African Americans and other families, her housing program would risk results similar to the 2008 debacle.
Under the Harris proposals, four million minority households would receive a $25, 000 federal grant to help them become homeowners (it could be used for down payments or closing costs). The cost of the program to taxpayers would be $100 billion.
The cost to minority recipients likely would also be steep, according to Husock.
African Americans are seventy percent more likely to have experienced a foreclosure than non-Hispanic whites, Husock notes. Why is this?
Those foreclosure rates were, in part, the result of home purchases that required low down payments, or even “zero down.” Loose lending practices enabled unqualified buyers to borrow large sums of money without demonstrating that they could pay it back.
These “no doc” and “liar loans” encouraged speculative buying and brought people into the property market who probably had no business being there. The go-go environment of fast money, house flipping, and dodgy mortgage terms left many unqualified buyers unable to keep up with payments when the economy turned south, and they lost their homes.
That environment hurt those who scrimped and saved to accumulate housing wealth the old-fashioned way. After all, when your neighbor defaults on his mortgage and his house is repossessed by the bank, nearby home values—the cornerstone of household wealth—decline. Vacant houses are magnets for crime and vagrancy.
The key protection against foreclosure—which Harris wants to remove from the equation—is a down payment, based on thrift and savings, the traits that typically make for successful homeownership. New owners whose down payment came from a government grant have no skin in the game. If payments become burdensome or unforeseen and costly maintenance issues arise, they’re more likely to walk away. It’s all house money, anyway.
There is a better way:
The right path then—and now—involves wealth accumulation through employment, savings, and financial acumen. One may wish that a jumpstart by federal government could redeem a sad history. But the record of such interventions shows that they have only made things worse. Harris’s plan would do the same.
So, it is not just homeownership that matters, but the traditional path to homeownership: saving money, planning for the future, and making a commitment are necessary to become long-term homeowners. Families that acquire houses in this way are not likely to end up in foreclosure.