The belief that every American deserves to own a home no matter their financial status played a role in putting the country into deep recession, one that was the worst financial calamity since the Great Depression. But despite the lessons supposedly learned from the subprime debacle that led to the resulting global economic meltdown in 2008, one of the Big Four banks is once again considering handing out home loans that fall into the "subprime" category.
Lend! Lend! Lend!
In good times, banks are more willing to give out favorable loans, even to customers with a less-than-stellar chance of paying the loan back. They are all too willing to take that risk when profits are up and the economy remains strong.
Of course, as we learned a scant five years ago, that risk can blow up in the banks' faces in fantastic fashion. The limitations put on subprime lending this time around as a result of Dodd-Frank will mitigate the risk for mass default may possibly mitigate that risk. And the new loans will certainly avoid the staggering teaser rates, and require much larger down payments from customers with poor credit scores.
However, the real issue is not whether or not subprime customers are worthy of a mortgage. It's whether or not it's even in their best interest to take one out.
Owning a Home Can Hurt Your Mobility
When a customer is tied down to a property, it makes it that much harder to move for a job. In many cases, the equity accumulated via home ownership does not offset the potential financial gains of mobility.
A 2013 study conducted by the
The authors of the study theorized that high ownership rates tended to stifle innovation and job creation, and tended to increase a person's commute times, further sapping worker's productivity while increasing transportation costs.
So Why the Push to Own?
There are benefits to home ownership, to be sure. Equity is a marvelous thing, and getting in on an area before it booms out can reap high rewards.
But for the banks and the majority of consumers, the sell on home ownership is simply that it is the single most important representation of what it means to realize the American Dream.
If consumers wish to buy that tangible cornerstone to prove their place in the middle class, it is their prerogative to do so. And banks like
But as a way to increase savings or potential earnings, for many people home ownership is less than ideal. Consider that since 1975, owning a home would have returned on average 4.5 percent, versus a 9.8 percent if that same capital would have been put in the stock market.
For customers with worrying credit scores, home ownership might be a physical representation of class ascension, but it's not always the best economic decision.