Starting a family is becoming rarer and rarer in the United States, and marriage and birth rates are at record lows. One obstacle to would-be family-formers is that it’s harder to own a home than it used to be.
Historically, families started building their wealth with “starter homes”: small, low-cost, single-family homes. Imagine a two-bedroom home with one living area, a tiny deck, no garage, and a small yard. This is enough for one or two children, and if real estate prices go up, selling this house allows you to level up without too much of a shock.
It is well documented that starter homes are harder to come by, in part because regulations make them less economical to build. Emily Badger at the New York Times documented this thoroughly.
But what about the existing starter homes? For instance, the millions of postwar ramblers or small brick colonials originally bought by newlywed veterans with the GI Bill — you know, the houses that made the baby boom?
Well, they still exist, but it’s very hard to get a mortgage for them. Why would a small mortgage be harder to get to than a bigger mortgage? Again, regulation is a culprit — specifically, the Dodd-Frank bill that then-President Barack Obama signed as “consumer protection” after the financial crisis and the bailouts.
Economist Craig Richardson makes the case in a new paper published at the Cato Institute.
In short, Dodd-Frank’s regulations, as regulations tend to do, add to the fixed costs of issuing a mortgage. For lenders, the regulatory burden in dollars is about the same for a $60,000 mortgage as it is for a $400,000 mortgage, and so the profit margins on small mortgages disappear.
Also, Dodd-Frank caused consolidation in the banking industry as small banks merged or went out of business. Small banks with local knowledge were always a chief source of low-dollar financing in small towns.
Richardson writes:
“Buying an inexpensive starter home has been an important stepping stone for many families seeking to move from a rental to feeling more vested in their community, as well as potentially building wealth to pass along to their heirs.”
“The Dodd-Frank Banking Act has broken off some of these bottom rungs of the economic ladder by making it very difficult to obtain mortgages for the millions of inexpensive homes across the United States. Meant to protect potential homeowners, the legislation’s sweeping regulations treat all banks the same, regardless of their size or history. As a result, the act’s regulations have raised the fixed cost of originating a mortgage and put price caps on closing costs and fees, making issuing small mortgages unprofitable for most commercial banks.”
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One result: Large landlords or investors buy up the shrinking supply of starter homes with straight cash and rent them out without a strong incentive to improve the property.
This makes it harder for young people to build wealth and contributes to the baby bust and our retreat from marriage.