Housing is back, but the American Dream isn’t

The housing market has made a remarkable — if partial — recovery since the disaster that befell it 10 years ago. In the years since the crisis, the market has recouped about two-thirds of the value it lost in the crash:

But unlike in the early 2000s, when housing became a vehicle for broad-based middle-class wealth, today’s bull market is shutting out many lower-earning and younger Americans. This is partly because of policy choices. But it also illustrates some of the pitfalls of relying on housing as the pillar supporting a country’s middle class.

Traditionally, homeownership has been the most reliable path to building wealth in the U.S. Lowerand middle-income Americans tend not to own a lot of stocks — instead, they keep most of their wealth in their houses:

This isn’t such a bad thing, in general. Yes, a house isn’t a diversified investment portfolio — it’s vulnerable to local market downturns, and it’s correlated with one’s job, so having a lot of money tied up in a house is fairly risky. But on the bright side, paying a mortgage is a good way of disciplining yourself to save money at a high and constant rate; over time, saving is the key to building wealth. And although some will claim that houses don’t yield as good a return as stocks, that has only been generally true in the past few decades. Historically, when rental yield is included, real estate has actually done pretty well:

Unfortunately, less affluent homeowners took quite a bath in the housing meltdown and financial crisis. The result for many was the undoing of decades of wealthbuilding:

Why has the housing recovery not done more to reduce wealth inequality, or to restore wealth for those at the bottom of the distribution?

A clue can be found in the lower homeownership rate:

This obviously means that fewer Americans are benefiting from the rise in housing prices than in the early 2000s. But it’s also a reminder of how many people lost their homes in the collapse of the housing bubble. Foreclosure forced many mortgage borrowers to sell at the bottom of the market — now the houses they used to own are in the hands of wealthier people or companies, who are profiting handsomely from the price rebound. The government’s failure to help keep people in their homes during the crisis means that many lowerincome Americans are having to start all over again building wealth from nothing.

The fall in homeownership also reflects the fact that less creditworthy borrowers have been shut out of the housing market since the financial crisis. The Federal Reserve Bank of New York’s Quarterly Report on Household Debt and Credit shows that while mortgages for people with higher credit scores have increased, loans for those with less-than-stellar ratings have dried up:

This might be because of postcrisis wariness about lending to subprime borrowers. It might be the inadvertent result of well-intentioned regulation by the Consumer Financial Protection Bureau, which seeks to protect poorer borrowers from predatory mortgage lending. In any case, the decline of mortgage lending to less-creditworthy borrowers means that ownership of the nation’s housing stock is increasingly concentrated in the hands of the wealthy.