In his Great Reset press tour, Richard Florida has been challenging people to think hard about the role of home ownership, especially in the US but also in some struggling Canadian cities. He is correct to point out the tragedy of the problem–people who have no equity in their homes and cannot sell them also find it hard to pack up and move to cities with more opportunity. They get stuck.
However, I’m not sure the solution is less home ownership on average than the historic norm in both countries of roughly 66% of households owning homes. (addition: Florida himself suggests a 50% ownership rate, some of the media discussing his work have implied he suggests almost getting rid of it altogether, which is incorrect.)
The solution may be a return to the old fashioned approach to home ownership, which had the following characteristics:
- You had to have a down payment, whether 25%, 20% or 5% (in the pricier places). Saving up thousands of dollars required a level of personal fiscal discipline (almost like a test to pass to become a home owner)
- You had to have an income that would support a 25 year amortization, paying down the interest and the principle every month.
- Most home owners had a goal of paying off the mortgage as fast as possible–this represented freedom, and even upward mobility.
- As a result, equity in houses was not a cash machine it was something to treasure and hold on to.
- As a result, retirees had a nest-egg. Even if property values only kept up with inflation, it was a forced savings plan.
Under this paradigm of home ownership, moving to another city was not that hard. If you had significant positive equity in a home it meant that you could sell, move, and buy in the new place.
The recent housing over-building and subsequent price collapse destroyed this American dream. It has destroyed the fiscal responsibility that millions of Americans displayed who did not treat their house as an ATM and responsibly paid down their mortgage every month.
Looking ahead, restoring this fiscally prudent mindset based on saving might be a path out of the current malaise. America needs a higher savings rate. And all it might take is tougher mortgage lending rules.