But for a long time, homeownership was the exception rather than the rule. Only farmers were likely to own land and a house during the country’s early days. With the coming of the Industrial Revolution, homeownership became more common for urban dwellers. Still, less than half of all Americans owned their homes until the late 1940s.
I’m sure you could write a doctoral thesis on the reasons for the growth of homeownership over time. I’m not going to do that. After several hours of research into the history of mortgages and the real-estate industry, I feel like we can summarize everything in a few paragraphs. This article — which is information-only — will serve as background for future Money Boss discussions about homeownership.
In the Beginning
During the 1800s, most folks had no way to own a house. They didn’t have the lump sum required to make the purchase, and banks wouldn’t lend money for average people to buy homes. Mortgages didn’t become common until the U.S. banking system was stabilized following the National Bank Acts of the 1860s.
After this reform, banks began to experiment with lending money for homes, and by the 1890s, mortgages were popular across the U.S — although not precisely as we know them today.
A typical mortgage in the early 1900s might have a term of five years and require a 50% down payment. Plus, they were usually structured with interest-only monthly payments and a balloon payment for the entire principal at the end of the term. Borrowers could (and did) renegotiate their loans every year.
Compare this to modern mortgages, which usually have 30-year terms and require a down payment of only five to twenty percent. (I bought my first home in 1993 with a down payment of less than one percent!)
These early mortgages worked fine until the Great Depression. When that crisis hit, banks had no money to lend — and the average borrower had no cash either. As a result, potential homeowners couldn’t afford to buy, and many existing homeowners defaulted. (At one point during the 1930s, nearly 10% of all homes were in foreclosure!) [Read more…]