The Legacy of the Great Depression and the Need for Alternative Forms of Tenure and Home Financing

By Michela Zonta

Open the newspaper on any day of the week and you will most likely come across a headline such as “U.S. Unemployment Rate at 26-Year High,” “Hundreds of Workers Laid Off,” or “Area Foreclosures Increase,” along with news about business closures, bankrupt financial institutions and increasing rates of homelessness.

Such headlines and news are not very different from those of the late 1920s. Indeed, the scale of the current economic recession has often been equated with that observed during the Great Depression. Ironically, the very institutions that emerged as a response to the Great Depression have largely contributed to the recent housing crisis, along with the belief in homeownership as a potent symbol of the American Dream. And, yet again, they have again been at the core of a variety of policy responses. What we need instead today is a progressive reexamination of homeownership and laissez-faire housing policies and practices in favor of alternative forms of housing tenure and more aggressive techniques to preserve low-income rental units.

Homeownership as National Policy

At the core of the current crisis are a number of institutions and mechanisms that emerged in response to the Great Depression. Before the Great Depression, the financing of home purchases was very expensive and only the most affluent segments of society could afford homeownership. The collapse of the housing industry following the Wall Street crash of October 1929 prompted the federal government to adopt a series of initiatives to stimulate overall economic recovery by addressing both unemployment and the shortage of affordable housing. By sponsoring slum clearance and the construction of public housing in inner cities, the federal government sought to boost employment in the housing industry and provide affordable housing for the poor. It also sought to ensure that more households could afford to own their own homes through the establishment of low down payments, reduced monthly payments and long-term mortgage loans, as well as with the creation of insurance schemes designed to stabilize financial conditions for homeowners and mortgage lenders.

Federal responses to the housing crisis of the late 1920s are often associated with programs such as public housing, which were designed initially for the “worthy poor,”—formerly middle-class and working-class families in need of temporary housing. Over the years, however, the direct provision of housing by the federal government turned into a means-tested solution for the poorest residents, which diminished both its public support and its impact. It is the large, although less visible, set of federal programs supporting homeownership for white middle- and upper-income consumers that originated and crystallized in the wake of the Great Depression that has had the most substantial and lasting impact on the housing market. These programs and institutions, along with an overall ideology, developed in support of homeownership played a key role in the economic recession of eight decades later.

By facilitating access to mortgage lending, New Deal policies contributed to the illusion of homeownership by creating a dependence on credit. This illusion, coupled with an over-reliance on the private market to be the primary provider of housing and the cultural and social significance attached to single-family homeownership as a potent symbol of the American Dream, are the key forces that led to the current housing crisis. And, similar to eighty years ago, these have also been the basis for the most popular responses to the economic recession. Since the Great Depression, homeownership became the goal of increasingly larger segments of society, thanks to the restructuring and deregulation of the mortgage lending industry. The growth of the secondary mortgage market and innovations in credit scoring, in particular, made it easier for lenders to secure funds and assess risks of default. At the same time, the subprime mortgage market made it possible for large numbers of marginal borrowers to be part of the American Dream, despite the high and hidden costs often associated with such loans.

Following the recent burst of the housing bubble—fed by record-level low interest rates—property values rapidly declined across the nation, making refinancing of existing mortgages unaffordable for many homeowners. At the same time, rising interest rates in the subprime mortgage market made many homeowners unable to meet their financial commitments, threatening the solvency of several financial institutions. Similar to the Great Depression, the housing and financial collapse precipitated a severe credit crunch, a sharp rise in home foreclosures, loss of savings by many households, declining stock prices, a drop in housing construction, the collapse of financial institutions and other businesses and skyrocketing unemployment rates.

Here We Go Back to the Homeownership Myth

During the first year of the Obama administration, a number of policies and programs were devised in order to boost the economy and address the devastating impacts of the current housing crisis on large segments of the population. These included bailout legislation for troubled lending institutions, tax credits and foreclosure moratoria, among others. Although much of this policy agenda ought to be praised by liberals and conservatives alike, proposed housing-related programs and policies, once again, seem to emphasize homeownership.

Given the importance historically attributed to single-family homeownership in American society, it is no surprise that homeowners have received most of the attention of the media and policymakers in the wake of the current housing finance collapse. Without a doubt, homeowners are being hit hard by the foreclosure crisis, particularly those with limited financial resources and poor credit who succumbed to the illusion of homeownership at the hands of financial institutions and practices that targeted marginal borrowers and a society that oversold its benefits. For many, however, foreclosed properties have suddenly changed from a symbol of the American Dream and of economic, social and psychological security to a true nightmare and financial point of no return.

The Squeeze Is on the Renters

Much less attention has been devoted to those segments of the population who do not explicitly conform to the single-family homeownership norm—renters. Renting has historically been associated with low-income families and people of color. Most importantly, in a society where private property is central, the right to housing is non-existent and homeownership represents the “passport” to full citizenship rights, tenancy has traditionally been associated not only with limited housing security but also with lower social and political status and less than full citizenship, especially for those who are permanently locked into this form of tenure because of very low incomes.

As the National Low Income Housing Coalition claims, low-income renters had already been experiencing a housing crisis before the inception of the current wave of foreclosures; since the mid-1990s, affordable housing had been in short supply. Renters are also not immune from the foreclosure crisis. A large proportion of renters are at risk of losing their homes because the buildings in which they reside are threatened by foreclosure. Most importantly, as large numbers of homeowners lose their homes to foreclosure, the pressures on the rental market increase by further shrinking the supply of affordable rental units, pricing those with very low incomes out of the rental market and contributing to higher levels of overcrowding and homelessness.

Housing security for low-income renters is increasingly being jeopardized by an ever-shrinking supply of affordable housing. This situation is exacerbated by the depletion of federal tenant-based housing subsidies and the net loss of affordable housing units resulting from the conversion of public housing into mixed-income developments. Indeed, in contrast with the New Deal era, the poor and society at large can count on neither the direct provision of housing by the government nor the series of other welfare subsidies that used to serve as an important safety net.

Toward Alternative Forms of Tenure and Social Housing

The continuing reliance on the private market despite its apparent failure, and on the ideal of homeownership, may represent an effective response to the current housing crisis only for those who were already better off at the onset of the recession. When it comes to marginal borrowers and low-income renters, however, the dissolution of the welfare state makes economic recovery and poverty alleviation more challenging than ever. These dynamics call for a reexamination of the ideology and normative orientations that have justified and continue to justify housing policies and planning.

Progressive policymakers and planners along with grassroots practitioners and advocates for the right to housing should take advantage of the momentum represented by the current crisis to advocate for the preservation of low-income housing and for secure tenancy for all renters, especially those with very low incomes and at risk of losing affordable housing. At the same time, they ought to urge a shift in national policy to support the adoption of social ownership and social financing policies and practices along with alternative forms of tenure that have almost never been embraced by American society but that have the potential of alleviating homelessness and poverty.

Successful examples of alternative forms of tenure and social housing may be found in other industrialized societies where housing, like health care, represents a social entitlement. Shared housing and cooperative housing, for instance, have long been adopted in several European countries as effective means to ameliorate market forces in the provision of affordable and good quality housing.

Michela Zonta, PhD., is a professor of urban and regional planning at the L.D. Wilder School of Government and Public Affairs, Virginia Commonwealth University.

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