Debt-financed Homeownership:
Five Observations and 10 Key Questions

Ever wondered whether taking out a mortgage to buy a home has been worth it, both for you and for the economy? Perhaps it was worth it historically but less so during the Great Recession? What about now? And what does the future look like?

These are some of the questions the St. Louis Fed's Center for Household Financial Stability was eager to answer. So, on Oct. 12, 2018, the Center and the Private Debt Project convened, in partnership with the Financial Security Program of The Aspen Institute, a one-day, invitation-only research symposium among leading experts in Washington, D.C., titled Debt-Financed Homeownership: Its Evolution, Impact, and Future.

This symposium was the third in the Tipping Points series, which has explored when household debt "tips" from being productive and wealth-building for families and the economy to harmful to both. Summaries, papers and presentations from all three symposia may be found here.

Building on a well-received framing paper by the Center research team—William R. Emmons and Lowell R. Ricketts—five key observations emerged, along with 10 critical questions for moving forward.

Five Observations

At the conclusion of the symposium, five key observations and themes emerged:

1. An unwavering belief in homeownership and rising prices. Despite the housing crisis of the past decade, there remains a strong and enduring faith in the power of homeownership—as a bedrock principle of our middle-class society, as a source of social stability and as the principal means of building wealth. Part of this is an assumption, though not a correct one, that home prices are always rising.
2. Homeownership's prominent role on family balance sheets. Homeownership is, by far, the largest component of wealth for the majority of U.S. families but also the principal source of debt. And one of the disadvantages of relying on homeownership for wealth-building is that the only way of accessing that wealth is to take on debt.
3. Outsized risks to families and the economy. Precisely because of its prominence, debt-financed homeownership poses large risks to both household and macro-level financial stability—and thus to economic growth. Today, policymakers face this dilemma: Even as the importance of homeownership to wealth-building has increased, the risk of debt-financed homeownership has grown.
4. Homeownership's uneven costs, risks and benefits. Homeownership also results in an uneven distribution of benefits, costs and risks—with benefits largely accruing to wealthier families who can better manage the risks of debt-financed homeownership, while costs and risks disproportionately fall on less-educated, younger and nonwhite families who cannot. That said, the Great Recession was not solely concentrated among low-income homeowners or in subprime mortgages but also hit higher-income groups who bought larger homes than they should have, and who extracted too much wealth via home equity loans.
5. The role that sheer luck, in the form of timing, has played in determining who has built, maintained or lost wealth from homeownership. In their paper, Emmons and Ricketts found that (1) older Americans have reaped the most benefits from homeownership because they bought well before the housing bubble; (2) Americans middle-aged and approaching middle age, especially Gen Xers, have barely gained, if at all, from homeownership because they tended to buy homes during the housing bubble—which meant that many of them suffered severe housing wealth losses, some even to this day; and (3) younger Americans—many of whom started their careers in or following the Great Recession, and many of whom are saddled with student loans—have weak homeownership rates and have generally found homeownership elusive because of tighter credit standards and other factors.

10 Key Questions

Finally, considering all the papers and discussion, the symposium raised 10 larger questions and challenges for future consideration:

1. Balancing the risks and rewards of homeownership? Could we develop products and public policies to better share the risks and rewards of homeownership and family wealth? Could social insurance schemes be enhanced along these lines? Could risk-pooling products be created, scaled and profitable?
2. Transitioning to sustainable homeownership? What would it take to make homeownership more sustainable, especially for lower-income and minority households? How do we resolve the dilemma of expanding homeownership among low-income and minority households without exposing them to an unacceptable level of risk?
3. Government's best role in promoting and protecting homeownership? With one in eight American families experiencing eviction, should the government be more involved in affordable housing and less involved in homeownership? Is the government, overall, too involved, or not involved enough?
4. Reducing family and macroeconomic risk within the “American” mortgage? Is it possible to update and strengthen the standard mortgage that symposium contributor Thomas Herndon of Loyola Marymount University calls the unique (by international standards) “American” mortgage—the long-term, fixed-rate, fully amortizing mortgage that includes a universal ability to repay—with the aim of reducing the risk of debt-financed homeownership?
5. Optimal housing stock? To what extent does debt-financed homeownership produce an optimal housing stock? To what extent is the problem not the risk of debt-financed homeownership but the lack of affordable housing?
6. Alternatives to homeownership? Do we rely too much on homeownership to build wealth in the United States? Should and can we develop alternatives to homeownership to build wealth and promote asset ownership? How can we diversify the household balance sheet?
7. U.S. economy still too dependent on housing as a source of growth? Similarly, do we emphasize housing investment at the expense of other investments? What's the optimal level of investment in homeownership?
8. Relationship between housing and credit cycles? As a robust academic debate is exploring, did a larger credit bubble derived from financial deregulation and global macroeconomic conditions lead to a rise in housing prices that led to the crisis? Or did overly optimistic expectations of the economic returns to housing (rising prices and accumulated wealth) lead to the credit bubble?
9. Role of banking and financial reform? Relatedly, should our reform efforts focus on large macro-prudential regulation, or should they focus more specifically on mortgage market reform? What reforms would make banks more effective and efficient lending institutions for homeownership?
10. Housing, financial fragility and growth? What is the relationship between debt-financed housing and financial fragility? Have banks become too dependent on real estate and housing lending? Does the preponderance of debt for mortgages affect our vulnerability to interest rate changes and tie the hands of central banks in making monetary policy?

The Center aims to continue this inquiry, as well as pursue other key questions, regarding homeownership in fall 2019—stay tuned!

Ray Boshara is director of the Center for Household Financial Stability at the Federal Reserve Bank of St. Louis.