Goldman Sachs Fraud Charge: U.S. Home Ownership: Background, Part 1

Last week's charges of fraud toward Goldman Sachs by the SEC may have been triggered by the 2008 financial crisis, but the whole thing has been cooking over the course of many years. And tempting though it may be to blame it all on Wall Street and big banks, they had plenty of willing help from our elected officials. In this post I am going to consider long-term trends in housing and borrowing to illustrate the evolution of the crisis.

First let's consider home ownership in the U.S. (If you're up to speed on that topic and want to jump ahead and follow the money, see Part 2.)

Owning a home is the a key component of the American Dream -- from the standpoint of civil and financial liberty, having a plot of land and a house that is yours to enjoy, and fix up, and of course profit from owning.

I'm no anthropologist or semiotician, but it seems to me that home ownership is tied up in the American psyche -- the pioneer spirit, "the Myth of the West," that sort of thing. Plus we have, or used to have, a lot of the stuff needed to build homes: land and wood.

By comparison, in Europe home ownership varies a lot by country. Some are higher than the 65 percent that used to prevail in the U.S., some are lower, as we see in this graph, admittedly out-of-date, from the OECD.

There are social costs to home ownership, we learn from Dismal.com:

In the 1950s, most European countries had very low rates of homeownership and also low unemployment . Today, some of those countries have dramatically increased the number of people who own their homes - and unemployment has gone up in those countries as well.

The two most dramatic examples are Spain, where 80 percent of the residents own their homes, and Switzerland, where only 28 percent do. Spain's jobless rate is 18 percent, while Switzerland's is only 3 percent, Oswald reports...Unemployment in Europe doesn't match the pattern of welfare benefits in different countries; nor is it higher in areas with strong labor unions, he says.

``This American conception that the European countries are ossified because of the welfare state being so generous just isn't true,'' he told me.

The missing piece is homeownership, Oswald insists, in part for the reasons Jones mentions above. People who own houses are less mobile; therefore they tend to go jobless longer rather than uproot themselves.

...
``Of course, people want to be homeowners if they possibly can,'' he told me. But "when you achieve a world full of homeowners, you ossify the labor market''-making it that much harder to guarantee prosperity for your children and grandchildren.

But houses are expensive, and not everyone can afford to build, buy or maintain one. And for years, at least back to 1960, the facts of U.S. home ownership reflected that, hovering between 62 percent and 65 percent of households, moving both up and down with the economy. That's not what makes an eye-popping graph so I won't show it.

But look at this one: things get interesting between 1995 and 2005, when home ownership went up every year. It's only from 64 percent to 69 percent, but in a country of 300 million people, that steady increase mobilized a lot of concrete, 2x4s and glass, and created a lot of new jobs for construction workers for new homes, employed a lot of new real estate brokers, and since most homes are paid for over a long period, lots and lots of new mortgages.

In short, both the Clinton and Bush administrations, all 16 years worth, pushed home ownership. I will write separately on that. Alan Greenspan, recently on the hot seat with a committee investigating the financial crisis, shot back, in effect, "But you guys kept telling us to increase home ownership!"

A great sea of money was diverted into mortgages, and lots of new homes were built and bought. And prices rose and rose. More on that in Part 2.