America is in the throes of a deep housing shortage. Building new homes is important but also expensive and slow. And in the meantime, millions of affordable homes already exist. The problem is that well-meaning banking reforms — created to protect Americans — are pushing these places out of buyers’ reach and into the coffers of investors.
If we want to fix the housing crisis, we must make it easier for regular people to buy these homes.
Currently, one in five owner-occupied homes nationwide is valued at less than $150,000. These “small-dollar homes” have long served as a first rung on the economic mobility ladder for millions of American families. But over the past 15 years, the availability of mortgages for small-dollar homes — the mortgages overwhelmingly relied on to buy these homes — has shrunk dramatically. Pew Charitable Trusts estimates that from 2004 to 2021, small-mortgage lending fell by nearly 70 percent.
The withering of the small-dollar mortgage is largely an unintended consequence of regulations passed after the financial crisis that were intended to help low-income households.
After the housing bubble burst in 2007, several hundred banks collapsed, sparking a global financial meltdown, and millions of homeowners lost their homes in foreclosure. In response, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and increased its scrutiny of Federal Housing Administration (F.H.A.) loans, which primarily serve low-income borrowers.
Provisions included stricter compliance guidelines and higher capital requirements, which would ostensibly make the banking system less prone to fail and protect borrowers from taking on mortgages they couldn’t afford. But the costs associated with adhering to Dodd-Frank’s more than 400 new rules and mandates make it less profitable for most banks to work with small loans. These changes disproportionately hurt community banks, which long served lower-income homebuyers.
Even where loans are theoretically available, small-dollar homes often don’t qualify for them because they are too old and in disrepair. That’s a growing problem because over the past century, developers have largely stopped building these homes, citing the rising costs of land, materials and permits, as well as rising zoning and homeowners association restrictions. In 2022, only 8 percent of newly built homes were 1,400 square feet or less, compared with nearly 70 percent in 1940.
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