COVER STORY: Why families struggle to afford a home
by Robert W. Patterson
News Weekly, November 12, 2011
Traditional measures of economic growth routinely ignore the indispensable contribution of healthy intact families to society’s overall well-being.
The collapse of the American housing asset bubble, which triggered the 2008 global financial crisis (GFC), had much more to do with family breakdown than policy-makers have been prepared to acknowledge, according to Robert W. Patterson in the following article from The Family in America, which has important lessons for Australia.
The growth that the typical American family wants to see is the kind that gives the economy a human or family purpose. It is the kind of growth that allows a breadwinner to earn a “family wage” sufficiently high enough to support and provide benefits for a spouse and children.
But as currently constituted, measurements of gross domestic product tell us nothing about the presence or absence of such an economy. The GDP captures a rather limited range of activities, counting only financial transactions in the “public” and “private” sectors of society, regardless of their impact on the family.
Moreover, parasitic undertakings of the private sector — such as gambling and pornography interests — which corrode the social fabric, are considered “pluses” for the GDP.
The fatal flaw is that the GDP leaves out the most important sector of society that makes the private and public sectors able to function: the social sector. The social sector comprises the realm of society, as John D. Mueller explains in Redeeming Economics (available from News Weekly Books), where people relate to each other without contracts or commercial transactions and where they satisfy their profound need for emotional connections and personal relationships. Here, people give gifts and transfer resources with little or no expectation of reciprocity.
The social sector includes, for example, all kinds of voluntary activities that charitable and service organisations perform.
For certain, the most important work of the social sector takes place within the enduring bonds of marriage and the family. The GDP thus tells us nothing about an enormous and important sector of economy.
While most economists treat the family as an adjunct to the market, there would be no social capital, no private sector, and no public sector without the family. There would be no economy without the social sector. In reality, the private and public sectors are adjuncts to the social sector.
Yet the activities of marrying as well as bearing children, which Adam Smith considered among factors of lasting economic growth and true wealth in capitalist societies, are not counted in the GDP. In fact, many economists look at children, although surely not their own children, as a special kind of consumer good. Likewise, all the vital production of a full-time, at-home mother — caring for and rearing children, food preparation, household management, volunteering, and even home-schooling — does not count in the GDP because it does not involve a financial transaction.
Further skewing the books, every time an intact family breaks up — which represents a huge loss to parents and especially to children. Believe it or not, every divorce, because it generates activity in the private and public sectors, boosts the GDP. That activity includes greater workloads for divorce lawyers as well as the divorce-court and child-support systems, heightened demand for second households, therapy for the children, as well as new or increased employment commitments for the mother outside the home.
The GDP rises in response to all these inputs, but the net effect is reduced happiness, the handicapping of the next generation, and a less promising economy down the road. So in the GDP universe, the destruction of a little civilisation through divorce — which splits a strong joint home economy into two weaker ones — is considered good for the larger economy.
Lessons from the housing bust
All this raises doubts about the GDP, a metric that fools Americans into believing that the nation is moving forward when in fact the country may be moving backwards. The last thing America needs is a preoccupation with economic indicators that fail to capture what really matters.
This was precisely the problem that led to the housing bust. For years, the nation’s policy-makers — Democrat and Republican alike — had been fixated on “growing the economy” by promoting home ownership through every antic imaginable, including reckless lending, but had ignored the imperative of “growing the family” when indicators of marriage and family formation were heading south.
Even though both parties have been chastened by the realities of the housing bust, neither party understands how their joint abandonment of socially conservative housing policies in the 1970s ultimately inflated the real estate bubble. As social historian Allan Carlson has extensively documented, the early federal housing and mortgage policies put together in the 1930s New Deal era were animated not by a desire to create macro-economic benefits by fostering home ownership but rather by the recognition that the nation needed to help young married couples with children to buy their first home.
Those early policies infused the housing and mortgage industries with a human purpose: providing homes for American families and children, not treating real estate as a commodity to be traded like common stock. This family-centric vision not only transcended profits but also, by preventing the housing industry from expanding for its own sake, limited systemic risk.
For an entire generation, this devotion to building not just houses, but homes, worked wonders. Default rates were extremely low. Moreover, the number of owner-occupied homes more than doubled between the years 1940 and 1960, and increased again by almost as many between 1960 and 1975, raising the percentage of Americans living in owner-occupied homes from 44 percent in 1940 to 65 percent in 1975.
Underwriting these remarkable achievements was federal oversight of the old “savings and loan” associations through the Federal Home Loan Bank Act of 1932, which also introduced the 30-year, amortised mortgage. That legislation not only gave mutual savings banks, which were local institutions, a market niche — allowing them to pay higher interest rates than commercial banks on savings deposits — but also helped to keep home prices within the reach of most American families by encouraging thrift and standardising mortgage-eligibility procedures that limited loans to responsible and credit-worthy borrowers.
Among underwriting procedures that kept housing prices relatively modest for the average middle-class family was the practice of counting only one salary per married couple to determine home affordability.
This human, “pro-family” orientation of federal mortgage assistance came under attack in the 1970s. Both policy-makers and home-builders lost sight of the needs of young married couples with children.
Part of the problem was demographic. By this time, most of the nation’s intact families were already living in their own homes, a credit to the New Deal-era policies. In addition, as economist David P. Goldman has noted, the dramatic growth in the number of married-couple families with dependent children since the Second World War had levelled off (at around 25 million).
Given that the nation’s stock of housing units with three bedrooms or more (about 36 million units in 1973) was roughly in line with the number of families, there was no need for continued suburban expansion. Indeed, as the Baby Boomers pulled back from the marriage and fertility patterns of their parents, the natural demand for family housing that characterised the 1950s and 1960s was drying up.
This fall in housing demand, of course, didn’t sit well with housing and mortgage interests. Looking for ways to prop up demand that wasn’t really there, the legislators, regulators, developers, home-builders, realtors and lenders started to spin real estate as an investment vehicle — not for its human purpose.
Consequently, housing policy shifted away from the goal of providing homes for young married couples with children to promoting real estate as a hedge against inflation. American investment in housing continued. Between 1973 and 2005, the number of U.S. housing units with three bedrooms or more doubled, to 72 million.
To find buyers for all this housing surplus, financial institutions offering mortgage subsidies would no longer favour a relatively dormant market — young married parents — but instead would favour the growing population of households without marriage or children that would triple by 2005: single persons, cohabiting couples, the divorced and unwed mothers.
As these applicants for home mortgages, on average, are not as credit-worthy as married parents, loan underwriters had to weaken mortgage eligibility standards.
On the theory that U.S. housing prices would never go down, financial entrepreneurs introduced subprime loans in the 1980s while hiding the risks of the new lending schemes through the practice of selling investors bundled packages of loans guaranteed by the government and quasi-government agencies, such as Fannie Mae and Freddie Mac.
The dramatic increase in financial support for non-family households seeking new housing since the 1970s represented significant economic and environmental inefficiencies, as the average size of U.S. households declined even as the square footage of newer homes significantly increased.
Yet the expanded supply of housing and relaxed mortgage-eligibility standards were not simply driving demand; they appeared to be fostering family break-up, separation, divorce, and cohabitation outside of wedlock. In essence, American housing policy was no longer reinforcing the married-parent family as the social ideal or upholding the needs of children; it had lost what Carlson calls its “normative content”.
So at the very time the housing industry was booming, the “home economy” was struggling. Moreover, the single-salary rule that was used to qualify mortgage applications was eliminated under legal pressures from activists who claimed to be representing women, not the family. All these policy reversals coincided with the sharp decline in the proportion of new mortgages granted to married couples with children, which in the mid-1960s time represented 99 percent of all Federal Housing Administration mortgages.
The Democrats and the Republicans have been equally complicit in the fixation on home ownership, not family formation, as a means of growing the economy. Both sides of the aisle have supported policies that disproportionately encourage and reward home ownership over other forms of capital investment.
Making matters worse, both parties have more or less supported the Federal Reserve’s effort, since the mild 2001 recession, to keep interest rates at historically low levels. While it may not have been apparent at the time, every one of these developments put upward and artificial pressure on housing prices. As Carlson draws the analogy, policy-makers in Washington supported the digression of U.S. housing policy from a world where men like George Bailey of It’s a Wonderful Life and family-owned institutions like the Bailey Brothers’ Building & Loan were the dominant players to the nightmare where financial giants like Mr Potter, who lack a sense of civic mindedness, and big Wall Street firms, not only took over the industry but also benefited as their friends in Washington quickly came to their rescue when their house of cards came tumbling down.
Another broken promise
The efforts to “grow the economy” by artificially enlarging the real-estate market backfired. This unravelling didn’t happen right away. But the structure gave way at the very moment when economists thought recessions were a thing of the past and home-owners thought rising housing values would continue to deliver unprecedented levels of discretionary income.
Indeed, the first decade of the 21st century was the worst decade of economic performance since the 1930s. As the Washington Post reported in early 2010, the previous 10 years were “a lost decade for American workers” as measured by a wide range of data: Job growth was essentially zero, as the modest gains in employment in the middle years of the decade did not compensate for the job losses due to the recessions that framed the beginning and the end of the 10-year period.
Driving the distortion of housing prices, in part, is a new demographic phenomenon of the past 30 years: the multiplication of upper-middle-class couples in which both husband and wife are highly educated and command high salaries. These dual high-income couples represent a social arrangement very different from that found in marriages in which the wives’ earnings from outside employment are supplementary. The new arrangement allows a relatively small number of privileged “power” couples to pool their resources and social networks, doubling their advantages relative to their less-privileged peers, especially those living on one pay cheque but rearing more children.
By eliminating the “one-salary” rule for weighing mortgage eligibility, policy-makers drove up home values and so helped create a new dynamic in which the old “family-wage” economy gave way to a new “dual-income” economy.
The net effect has been the development of an entirely new living standard, one that further disorders the economy: a standard set by the high-earner two-income family that leaves all others behind, especially the one-earner family that not long ago epitomised the vast American middle class. The multiplication of couples in which both husband and wife hold advanced degrees and earn high salaries has created a new social segregation as divisive as racial segregation.
The fact that middle-class couples — especially young married parents who seek a conventional division of labour so that Mom is not forced to work outside the home and can have three or more children — find their backs against the wall underscores how the American economy of the 21st century has lost any sense of human purpose.
Investment in human capital
Had policy-makers not lost sight of the family in the 1970s — had they focused on ensuring that the growth in the numbers of married-parent families that graced the immediate postwar era had continued as the then-rising Baby Boomers reproduced the same healthy family patterns — the economic narrative of the past 10 years would have been very different.
Unfortunately, policy-makers focused instead on the mere production and consumption of goods and services as ends in and of themselves.
The lesson for 2011 should be clear: Now, more than ever, the country needs economic policies that foster family growth. A renewed policy focus on the development of human capital is imperative because people are what matter most in any economy.
As Patrick F. Fagan explained in The Family in America (Spring 2010), every marriage is a fundamental building block of the economy: “Every marriage creates a new household, an independent economic unit that generates income, spends, saves and invests. The vast majority of these new households produce children and transforms what are largely self-centred babies into responsible adults, contributing the indispensable next generation of human capital to the economy.
“But that new household does more than simply increase the labour supply or consumer spending…. Marrying and staying married for life, as well as bearing and rearing children, … transforms the behaviour and attitudes of men and women — and their children — in profound ways that not only strengthens the economy but also serves as its very lifeblood.”
Likewise, John Mueller has warned, “neither growth of the labour force nor rising labour productivity owing to technical progress can be assumed, because there can be no growth in the labour force without a prior investment in child-rearing”. Investments in human capital in one generation, he writes, determine the return of labour compensation of the next, a return which has historically accounted for two-thirds of economic growth in the United States.
Given the deterioration of the social sector since the 1970s, policy-makers should recognise that corrective action to rebuild the American family is every bit as urgent as were measures to stabilise the credit markets in 2008.
To understand this urgency, we need only to paraphrase Abraham Lincoln’s observation that labour predates capital: the family is prior to, and independent of the economy. The economy is only the fruit of the family, and could have never existed if the family had not first existed. The family transcends the economy, and deserves much higher consideration.
Robert W. Patterson is editor of The Family in America, a journal of public policy published by the Howard Center for Family, Religion and Society, in Rockford, Illinois. The above piece is a shortened version of an article from The Family in America, Vol. 25, No. 1, Winter 2011 edition. The full-length version, complete with footnotes and references is available from: