A key insight of economics is to focus on the marginal (or “next step”) costs and benefits of a given action. Say that you’re going to buy a new car. You may be willing to pay another $5,000 for a better vehicle, but at another $5,001–that extra dollar–you start to reconsider.
The same logic works in public policy and in the economy generally. We stop and say “Is this increase in benefit really worth the cost?”
In the last few years we’ve seen record levels of home ownership. Oh yes, the American dream, spread wider (a greater percentage of the population and deeper (with second homes) across the country than ever before.
“Subprime Aftermath: Losing the Family Home,” A recent article in the Wall Street Journal provides a look at the marginal costs of expanding the ownership base.
“In 2006 alone, subprime investors from all over the world injected more than a billion dollars into 22 ZIP Codes in Detroit, where home values were falling, unemployment was rising and the foreclosure rate was already the nation’s highest, according to an analysis of data from First American LoanPerformance. Fourteen ZIP Codes in Memphis, Tenn., attracted an estimated $460 million. Seventeen ZIP Codes in Newark, N.J., pulled in about $1.5 billion. In all of those ZIP Codes, subprime mortgages comprised more than half of all home loans made.
The figures show the extent to which the new world of mortgage finance has made the American dream of homeownership accessible to folks in previously underserved communities.By some estimates, subprime lending has accounted for as much as half of the past decade’s rise in the U.S. homeownership rate to 69% from 65%. But as the experience of West Outer Drive illustrates, the flood of cash has also encouraged people to get into financially precarious positions, often precisely at the time when they were least able to afford it. In doing so, it may have temporarily alleviated — but ultimately worsened — some of the nation’s most acute economic problems.”
By definition subprime lending means loans that are, on an economic analysis, the least justified. They’re to people who are stretching themselves to the limits of their abilities to repay–and as it turns out, sometimes beyond that. The article emphasizes the stories of a neighborhood in Detroit which is experiencing a rush of foreclosures now that adjustable rate mortgages are adjusting … up. Unfortunately, there are (literally) neighborhood effects at play:
“Kevin Lightsey, a local agent at Keller Williams Realty, says he doubts such foreclosed homes are likely to find new owners willing to live there. ‘Nobody’s going to want to buy into a neighborhood with 20% foreclosures,’ he says. ‘You end up with no neighborhood.'”