The National Housing Act indirectly promoted the idea of lenders offering much longer-term mortgages with the currently accepted concept of monthly payments with the dual interest and principal payment scale. Amortized real estate mortgages opened the door for an average person to purchase and own a single family home.
As a result of the National Housing Act, the United States government inadvertently committed itself along with private lenders to insure long-term mortgages that could be held for as long as twenty or more years at an interest rate that was affordable. Although the process at first was bogged down by paperwork and bureaucracy it eventually caught on.
Part of the reason the process took hold was because in addition to guaranteeing the loans, the National Housing Act through the formation of the Federal Housing Administration also investigated properties and neighborhoods which added an extra measure of security and guaranteed real-estate properties on government backed notes. "If for any reason a homeowner fell behind on a mortgage guaranteed by the FHA, the agency would take over the debt, thereby insulating the mortgage holder from almost all risk. In effect, the government had made it much safer for an investor to put his money into FHA mortgages written by any small, local bank or savings and loan than to own stock in even the largest, most secure corporations." (Longman)
Since opportunities pertaining to a reliable financing process was in place, the post World War II veterans were then in a position to purchase single family homes. However, because of the combination of a weak economy during the depression and the man power shortage due to the World War II, construction output was low and therefore there was an inadequate supply of homes and demand surged proportionately. The result of these new demands coupled with the inadequate supply needed and thus created an immediate surge in the single family home construction markets.
Housing Construction, Federal Republic of Germany, 1950-1988
Year Number of Newly Constructed Per 1,000
Dwelling Units Inhabitants
The fact that personal savings from war-based salaries were high and the government had also recently instituted the new Veterans Administration loan guarantee program combined with the already successful FHA loan protection process paid off and Americans bought single family homes at unprecedented rates. The surge to suburbia was on. "The number of houses built rose from 114,000 in 1944 to 937,000 in 1946 and a peak of 1,692,000 in 1950. Overall, a yearly average of 1.4 million houses were built between 1945 and 1965. These new homes were, by the standards of the past, both relatively easy to afford and generally of high quality." (Longman)
For maybe the first time in American history, there was a trade off because of the housing boom as almost over night the nation began to incur long-term debt at the same time as their personal savings became depleted. "Between 1945 and 1965 mortgage debt for houses increased from $18.6 billion to $212.9 billion. As a percentage of the nation's gross national product, this was an increase from 9 to more than 30%." (Longman)
Post World War II economics has been built on the fact that since around 1965, our nation's volume of mortgage debt has continued to climb and is currently well over a trillion dollars. "From more than 20% of GDP in the 1960s and 1970s, gross saving in the United States has fallen to roughly 15% of GDP in the 1990s. " (Browne and Hellerstein)
As more homes sold the United States household debt was raised proportionately. To put things into perspective, residential real estate as a percent of disposable personal income is at a post-WWII high and household debt as a percent of household net worth is neat twenty percent. "The picture is somewhat less clear when one looks at the cost of borrowing. Nominal interest rates today are low compared to rates through most of the 1970s and 1980s, but to the firm contemplating a long-term investment, the relevant concept is the rate of interest adjusted for expected inflation. A high nominal rate will not be an impediment to investment if inflation is expected to be high, since the income stream generated by the asset will grow over time with inflation." (Browne and Hellerstein)
United States Daily Economic Commentary)
As a result, households have no option other than to borrow more against their already heavily burdened disposable personal income. Although we are seeing the lowest interest rates on household borrowing in the history of the nation, households are still faced with unbearable financial obligations due to mortgage principal and interest, taxes, insurance, and of course payments for the Hummers. "A home ownership opportunity divide that now seems quite small threatens to grow into a huge gap. At least one major sector already has grown smaller. More younger people -- 35 years of age and under -- face serious affordability problems. Among such households, the rate of ownership dropped from 45% in 1979 to 37.3% in 1987 and has recovered to only 39.7% in 1999. Home ownership rates for African-American households, meanwhile, are 27 points below white non-Hispanics, and Hispanic home ownership rates are 28 points lower than white non-Hispanics." (Peterson)
United States Daily Economic Commentary)
In addtion, there are basically two different markets when one considers the single family home. There is new construction homes which create jobs and new economic opportunities through material, construction and labor and there are also existing home resale which adds much less value to the nation in an economic sense as compared to new construction. For example, realtors distinguish between the two distinctions, new and resale, as if they were completely different markets.
Based on news releases by the National Association of Realtors, existing single family homes sales have been rising and new monthly records were being produced with signs of continued success and strong gains. "Existing-home sales increased 3.0% in January to a seasonally adjusted annual rate of 6.09 million units from an upwardly revised level of 5.91 million in December. Last month's sales activity was 2.2% above the previous record high of 5.96 million units in January 2002." (Existing home sales hit new record in January)
But there is an economy of scale here. In other words, when we invest in one thing that capital can not be invested somewhere else.
Low interest rates will continue to help new and resale home sales well into the future as well as assist existing home owners to lower their mortgage payments through the refinancing process. "In contrast, there is little doubt that the U.S. housing market today is being driven by the fundamentals, particularly if one includes the stock market as a fundamental. Employment has been rising at a healthy rate in most metropolitan areas, pushing the unemployment: rate below 3% in many. Personal income growth has been extraordinary, and the gains in stock market wealth have already been discussed." (Case)
The refinancing process also adds value in the sense that an existing home owner's equity is instantly increased. "In turn, this process pours money directly into the economy since it frees up consumers' resources for discretionary spending." (NAHB)
As the National Association of Builders show, demographic forces will continue to contribute to increased demand for new homes in the future. Our population has been growing due to factors such as increased birth rates and higher percentages of legal immigration and migration.
Even with the inherent concerns about the baby boomer generation nearing retirement age, the nation's growth expectations over the next one to two decades continues to look promising in the terms of demand on new construction of single family homes. "Although the U.S. is by any standard the best housed nation in the world, it still faces a critical shortage of affordable housing. Almost 14 million households have "critical housing needs," meaning that they spend more than half of their income on housing or live in seriously substandard conditions. One in every seven renter households (5.3 million Americans) is included in this group, and they receive no government assistance." (NAHB)
Gross Domestic Product
The Gross Domestic Product is a governmentally standardized tool that measures our nation's income by evaluating the values of goods and services produced within the nation. When evaluated in detail, Gross Domestic Product should never be calculated with depreciation and is should signify only income generated from national resources within the United States even when income is earned in a foreign currency. The foreign currency can only be counted toward the Gross Domestic Product if it was earned within the country. and, the Gross Domestic Product should on take into consideration the final goods and services within the country.
To compute the Gross Domestic Product, one needs to perform three basic components:
personal consumption expenditure gross private domestic investments government purchases