America needs to revive the American Dream of homeownership

The idea of helping the lowermiddle class by using the federal government to encourage homeownership is, to put it mildly, out of favor. There’s a popular narrative that the housing bubble of the 2000s — and, by extension, the financial crisis and the Great Recession — were caused by the government making or encouraging cheap loans to low-income Americans. That narrative is a myth — the leading cause of the bubble was private banks making bad loans, mostly to speculators rather than to low-income owner-occupants. But the myth is unlikely to die, meaning that it will be an uphill battle to convince recession-scarred Americans to support the idea of expanding homeownership.

That’s a shame, because for all its drawbacks, homeownership is still a crucial source of wealth for everyone who isn’t rich:

There are big obstacles to build- ing wealth for many Americans. Stocks — the obvious alternative to real estate — can be extremely volatile, and lower-middle class people can’t afford to run the risk of having their assets wiped out.

Housing certainly has its own disadvantages — it’s undiversified, and it can tie people to the economic fortunes of a specific location. But despite the occasional market downturns, housing tends to be a pretty good long-run investment. If lower-middle class wealth is to be rebuilt without resorting to something like a social wealth fund, there are few better alternatives to housing. And lower-middle class wealth desperately needs rebuilding.

If the government is to expand homeownership, it should do so in a way that avoids the mistakes of the bubble period. Previous policies often made it easier for lower-income Americans to borrow money in order to buy houses. But this loaded them up with debt and put them at risk of default — similar to government encouragement of student loans. Instead of repeating this mistake, the government should give low-income grants to put equity into homes.

Several programs like this already exist. The Department of Housing and Urban Development allows families that qualify for housing vouchers in some areas to use them to help purchase homes and pay ownership expenses instead. First-time home buyers are eligible for a tax credit. HUD also used to administer the AmeriDream down-payment assistance program, but the policy never reached many people and was discontinued in 2008.

These programs, or similar ones, would form the foundation of a broader policy to encourage lowermiddle class homeownership and equity building. They would ideally be expanded to cover more areas and more people, and cover more housing costs. The increased expense could be funded by federal wealth taxes or inheritance taxes, perhaps with some contribution from local property taxes or land value taxes. This would amount to a form of direct wealth redistribution — a worthy attempt to fight the inexorably increasing wealth inequality that has caused much consternation in recent years.

But the program would need one more element to make it work — new housing construction. If lowincome home buyers use their government grants to simply bid up the prices of existing homes, the result will be a transfer of money to existing homeowners, not to new home buyers.

The solution is for the government to make these grants conditional on cities building more housing units. This would be a powerful financial incentive; if a city is willing to increase density and to allow the construction of more multifamily housing, it would receive more federal money in the form of homeequity assistance.

So a government homeownership program would have to look very different from the efforts of the past. Giving low-income Americans grants to buy new houses, rather than lending them money to buy old ones, would be a wiser path to rebuilding the American Dream.