In our last post, I listed some of the reasons that make owning a home a no-brainer. The government offers substantial tax incentives to spur home-ownership, as there are numerous societal benefits tied to increased home-ownership. Even more compelling is that the difference in net worth between Americans who own homes and those who don’t is staggering, a difference of more than 3x. So if the forces of society, tax policy and personal finance all favor owning a home, why are US home-ownership rates still hovering around 63%, which is close to a 50-year low? Several larger forces are working against would-be home-buyers.
Governments are still smarting from 2007
To set the stage for why home-ownership remains elusive for millions of Americans, we need to rewind to 2007. The Global Financial Crisis was catastrophic across all levels: stock markets crashed, many multi-billion dollar corporations failed and vanished or were reluctantly bailed out by governments, trillions of dollars in individual wealth evaporated. Even now, a decade after the Global Financial Crisis, governments around the world still yearn for one thing above all else: economic growth. It’s this drive that sets the context for what today’s real estate climate.
The Fed is shoring up the economy, but may be hurting home buying
In order to kick-start the economy following the Financial Crisis, the Federal Reserve has enacted several measures to spur overall growth. Perversely, some of these actions effectively discourage home buying. The Federal Reserve has maintained historically low interest rates to increase overall borrowing and economic activity. The cheaper access to credit has applied significant upward pressure on home prices. Linked to low interest rates, the Fed has been expanding money supply, furthering the general inflationary effect, especially on home prices. The Fed has also been actively purchasing mortgage-backed securities since 2008, and now more than half of all mortgages are held or securitized by government entities.
Residential real estate regulation: protecting us from ourselves
Subprime mortgages played a starring role in helping cause the 2007 Financial Crisis, and the government’s response has been to implement new regulations to prevent off future meltdowns. One outcome of these regulations has been the incredible tightening of credit standards for potential borrowers. Mortgages that required merely decent credit scores now require Warren Buffet-level credit, to the extent that many millions of Americans are missing out on loans that would have been achievable in earlier, more reasonable credit environments. The new regulations are compounded by the paper-based transaction model, requiring additional time and management to complete each transaction.
Adding it all up, the deck seems stacked against those of us who would like to own a home. The overall economy is recovering well from the Great Recession, yet home-ownership rates are still remarkably low. Home prices are pushing higher each year, helped along by the monetary policy of the Federal Reserve. And while interest rates are still low for the moment, access to bank-held credit is more difficult than ever for anyone without an impeccable credit history. Legacy paper-based transactions are stressed by regulatory requirements, lengthening the purchase process considerably. Has there ever been a clearer need for an alternate solution to finance and purchase home?
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I founded Reasi, a home lending startup that brings convenience and cost-efficiency to the home transaction process. If you are buying or selling a home, and want to save money while doing business outside the traditional financial system, Reasi is for you.
Have a question on how blockchain will change the way we fund home purchases, or want to make a suggestion on a future article topic? Please write me at john@reasi.com and I’d be happy to start a conversation. Alternatively, you can follow me on Twitter and LinkedIn.
