Dodd-Frank curbed lending and contributes to the ongoing decline in the home ownership rate, but the lending that Dodd-Frank prevents is the toxic lending that caused the housing bubble and crash that pummeled the home ownership rate.

For nearly 100 years, Presidential administrations crafted housing policies to maximize the rate of homeownership and the rate of home price appreciation. Both Democrat and Republican administrations touted homeownership as the best investment a middle-class family could make, and home ownership became synonymous with the American Dream.

We reached peak American Dream in the early 00s. At the time, the surface conditions appeared great: house prices appreciated rapidly, mortgage equity withdrawal fueled an economic boom, subprime lending provided homeownership opportunities to nearly everyone, and record numbers enjoyed the American Dream of homeownership. Unfortunately, it was all an illusion.

The “innovative” loan products turned out poisonous to millions of borrowers who subsequently lost their homes in foreclosure. In a surprising example of legislators devising an intelligent law that actually fixes the problem, Congress enacted Dodd-Frank, which prevents lenders from making bad loans to unqualified borrowers.

Homeownership is not right for everyone, a lesson most policymakers learned from the housing mania. As a society we can’t achieve 100% homeownership, and we shouldn’t pursue policies that seek to maximize homeownership. Many Americans are better served by the freedom of movement that accompanies renting; young people in particular may want to move for career advancement. Further, many Americans lack the financial management skills necessary to sustain homeownership. Those who lack these requisite skills must be excluded because if lenders bestow homeownership to those unable to sustain it — which they did during the housing mania — the result is a heart-wrenching price crash and 10 million foreclosures.

During the housing boom, everyone was able to ignore the reality that homeownership is a privilege and not a right. Everyone considered themselves a homeowner, even those who didn’t pay for their houses.

Diana Olick, Thursday, 28 Apr 2016

After gains in the second half of 2015, the homeownership rate fell to just 63.6 percent, seasonally adjusted, in the first quarter of this year, according to the U.S. Census Bureau. Homeownership hit a high of 69.4 percent in 2004, during one of the biggest housing booms in history. That was also when mortgage lending was arguably at its loosest level in history. The homeownership rate is now just one-tenth of 1 basis point higher than its all-time low in the second quarter of 2015.

(See: Is home ownership still the American Dream?)

Economists continue to point to a recovering job market as fuel for growth in the housing market, but for young Americans, just having a job does not translate to homeownership. High levels of student loan debt, tight mortgage underwriting standards and overheating home prices are all contributing to very low homeownership rates among the nation’s youngest workers. Homeownership among those aged 25-34 today is nearly 10 percentage points lower than it was a decade ago. First-time homebuyers are still barely 30 percent of today’s buyers; traditionally, they comprise 40 percent of homebuyers.

(See: First-time homebuyer rate falls, Millennial homebuying myth shattered)

“Rental affordability remains a big problem in many places, and that makes it harder to save for a down payment,” said Jed Kolko, an independent economist and senior fellow at the Terner Center for Housing Innovation at University of California, Berkeley.

(See: Potential homebuyers can’t save for down payments with high rents)

“We’re still seeing relatively few first-time homebuyers because young people are buying homes later than they used to. Some of this is a long-term shift toward marrying and having children later in life. Some of this is that the recovery has been slow among young adults.”

(See: Do Millennials reject the American dream of homeownership?)

Is Dodd-Frank to blame?

Legislators in the US could have maintained a 70% homeownership rate. They could have banned foreclosures, forgiven mortgage principal, and allowed the 10+ million delinquent borrowers to keep their homes without making further payments. The federal reserve could have printed money to buy every bad mortgage in the United States. Of course, such radical policy initiatives would have serious repercussions and long-term effects, so legislators and the federal reserve looked for other solutions.

When millions of borrowers stopped paying their mortgages, a great many foreclosures were bound to follow. Borrowers who could sustain homeownership with a lower interest rate or a longer amortization schedule were provided loan modifications; the rest were put out of their misery on the courthouse steps.

The millions of foreclosures that followed the millions of mortgage delinquencies inevitably lowered the homeownership rate. There were not enough qualified borrowers to replace those who weren’t up to the challenge of maintaining homeownership. If Dodd-Frank weren’t in place, lenders could have saddled the next generation of would-be owners with the same toxic loan products that pushed the homeownership rate so high in the early 00s, but what good would that accomplish? Instead of one generation of washout homeowners, we would have two.

Dodd-Frank is responsible for the lower homeownership rates in as much as it prevented the next generation from repeating the mistakes of the previous one. Many people claim that Dodd-Frank is preventing the Millennial generation from becoming homeowners, but in reality, Dodd-Frank is only preventing Millennials from becoming temporary homeowners like those in Generation X were.

(See Which generation was hurt the most by the housing bust?)

The homeownership low is caused by failed housing policy

The low home ownership rate is a direct result of failed policies that put people into homes under circumstances where they couldn’t sustain ownership. It’s not the direct correlation through the GSEs that political right would have us believe. Boosting home ownership by insuring loans to low-income borrowers was not the cause of the housing bubble. (See: The big right-wing housing bubble lie and Dodd-Frank works well, so financial elites hate it)

Failure to regulate derivatives caused a massive amount of capital to flow into unregulated toxic loan products. It was a double failure of the Greenspan federal reserve exacerbated by government subsidies and policies that encouraged too many people to buy houses they could not afford.

Dodd-Frank was crafted to address the real causes of the housing bubble. Through Dodd-Frank’s effective ban on interest-only and negative amortization loans, borrowers can’t leverage their income beyond their ability to repay, so their collective action doesn’t push housing market pricing beyond the reach of everyone except those using toxic financing. Dodd-Frank provides stability to the housing market by preventing people from obtaining the short-term illusion of homeownership, and although this makes the homeownership rate lower than the housing bubble heyday of 2005, those that own homes today are much more stable, and so is the housing market.

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