What happened to the American Dream of a college education and home ownership?
– Anonymous Iguana Reader
This is the second part of a three-part series addressing the reader’s question about the American Dream. In this installment, Mr. Econ tackles home ownership.
Home ownership was viewed as critical to America and its communities because it provided a stable place to live and raise a family, thereby producing stable communities. Home ownership was also the basic component of “wealth” for a family.
Starting in the 1970s, the U.S. housing market changed dramatically. A home was no longer viewed as a stable place to live; instead, it became an investment.
Prior to the 1970s, homes, home prices and home mortgage loans were the bedrock of the U.S. economy in many ways. Banks were mainly local and did a majority of their lending in the local housing market. In fact, many banking institutions were only allowed to make home loans, and those had to be in the local market.
Banks got the money to make home loans from “Passbook Savings Accounts.” Many economic calculations were historically judged based on what was called the “Passbook Rate,” which was around 5 percent. This is the rate banks paid depositors on passbook savings accounts. Banks lent out this money at somewhere between 5 and 10 percent, depending on the type of loan and the creditworthiness of the borrower.