February 19, 2008 / 8:20 PM / in 10 years

Comment: What was lost when home values soared

(Nicolas Retsinas is the director of Harvard’s Joint Center for Housing Studies and a guest columnist on reuters.com. The opinions expressed are his own)

By Nicolas Retsinas

BOSTON (Reuters.com) - For the past decade the financial “value” of housing soared. People who lacked the savvy to pick a Google or Amazon could reap double-digit returns by signing on the bottom line of a mortgage. A new occupation (and cable television show) - flippers - emerged, consisting of people who bought to sell. Long-standing owners turned their homes into ATM machines, borrowing against the seemingly ever-rising equity. The mortgage industry spawned not just a cadre of new products, but a new generation of mortgage brokers, who earned commissions by peddling those products. And the investors who bought the securitized mortgages - including investment banks and the central banks of Asia - earned billions.

If moviemakers had updated 1967’s “The Graduate,” Benjamin would have heard “housing,” not “plastics.”

This past year, though, the financial “value” of housing has fallen in most markets. Today the center hall colonial is no longer an ATM machine. For recent homebuyers, an owner’s equity may have disappeared with the plummeting market. Foreclosures are up. “Flipper” once again means a whale. The hedge funds, banks, and investment empires are scurrying to explain and document their losses.

Even as Americans lament the declining value - dollar-wise - of housing, we should recognize that historically the value of housing did not reflect its prospects for monetary appreciation.

From the Mayflower colonists to the succeeding surges of immigrants, a house was a sanctuary, safety in a new land. Until after the Great Depression, few people owned their homes. Banks, which wrote five-year loans, demanded a 50 percent down payment with a balloon payment at the end. Few families qualified. For the most part, we were a nation of renters.

When the federal government introduced longer-term mortgages, Americans could own their domiciles. Americans seized the chance. Thanks to the GI bill and the Federal Housing Administration, World War II veterans rushed to buy three bedroom expandable Capes in a Levittown or its ilk. We were turning into a nation of homeowners.

That home, though, represented a stake in the community - not the linchpin of an investment strategy. A promotion, or a new baby, propelled some families to move (or to expand that dormer); but most families stayed rooted. Indeed, throughout the world, most families stay in the homes they own. Before the surge in the “value” of housing, a house’s “value” lay in its capacity to nurture a family. Admittedly, a home was an asset, but an illiquid one that few owners expected to appreciate beyond inflation. Many families, coping with repairs and taxes, saw their homes as money-pits, not wealth- creating investments.

As the despair over falling values reaches higher crescendos, it is useful to remember that the value of housing - measured in its role as safe anchor in a community, a place to raise families, a home - remains strong. For a decade, we turned “housing” into the “plastics” opportunity for mega-wealth. Successive generations may wonder why.

Nicolas Retsinas is director of the Harvard Joint Center for Housing Studies.

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