Unlocking the Potential of Small-Dollar Homes: Reviving the American Dream

America is facing a profound housing crisis, with a severe shortage of affordable homes. While building new homes is crucial, it is often expensive and time-consuming. However, a solution may lie in the millions of small-dollar homes that already exist across the country. These homes have long served as a gateway to economic mobility for countless American families, but recent banking reforms have made it increasingly difficult for regular people to purchase them. To address the housing crisis, we must find a way to make it easier for individuals to acquire these small-dollar homes.

Unlocking the Potential of Affordable Homes

The Shrinking Availability of Small-Dollar Mortgages

One in five owner-occupied homes nationwide is valued at less than $150,000, known as "small-dollar homes." These homes have traditionally been a crucial first step on the economic ladder for many American families. However, over the past 15 years, the availability of mortgages for these small-dollar homes has declined dramatically. Pew Charitable Trusts estimates that from 2004 to 2021, small-mortgage lending fell by nearly 70 percent.This decline is largely an unintended consequence of regulations passed after the 2008 financial crisis, which were intended to protect low-income borrowers. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and increased scrutiny of Federal Housing Administration (F.H.A.) loans have made it less profitable for most banks to work with small loans. These changes have disproportionately hurt community banks, which have long served lower-income homebuyers.

The Challenges of Aging and Neglected Small-Dollar Homes

Even where loans are theoretically available, small-dollar homes often don't qualify for them because they are too old and in disrepair. This is a growing problem because developers have largely stopped building these types of homes, citing the rising costs of land, materials, and permits, as well as increasing zoning and homeowners association restrictions. In 2022, only 8 percent of newly built homes were 1,400 square feet or less, compared to nearly 70 percent in 1940.As a result, many small-dollar homes have fallen into neglect, further exacerbating the housing crisis. These homes, which were once a vital part of the American Dream, are now slipping out of reach for the very people they were meant to serve.

The Shift Towards Investor-Owned Homes

With the decline in small-mortgage lending and the aging of small-dollar homes, these properties are increasingly being snapped up by investors rather than individual buyers. This trend has significant implications for the housing market and the broader economy.When homes are purchased by investors rather than owner-occupants, it can lead to higher rents, reduced homeownership rates, and a widening of the wealth gap. Investors often have access to capital and financing that individual buyers do not, giving them a significant advantage in the market.Moreover, the rise of investor-owned homes can have a ripple effect on the local community, as neighborhoods become less stable and diverse. This can lead to a decline in community engagement, reduced investment in local businesses, and a loss of the sense of ownership and pride that comes with homeownership.

Reviving the American Dream

To address the housing crisis and revive the American Dream of homeownership, we must find ways to make it easier for regular people to purchase small-dollar homes. This will require a multi-faceted approach that addresses the underlying issues driving the decline in small-mortgage lending and the aging of small-dollar homes.One potential solution is to provide targeted financial incentives and support for community banks and other lenders to offer more small-dollar mortgages. This could include tax credits, loan guarantees, or other forms of assistance to help offset the costs and risks associated with these types of loans.Additionally, policymakers could explore ways to encourage the rehabilitation and preservation of existing small-dollar homes, such as through tax credits, grants, or low-interest loan programs. This would not only help to preserve these homes as affordable housing options but also create jobs and stimulate local economies.Finally, it may be necessary to revisit and potentially modify some of the regulations put in place after the financial crisis, to ensure that they are not inadvertently hindering the availability of small-dollar mortgages. This would require a careful balancing act, as the goal should be to protect borrowers while also ensuring that they have access to the financing they need to achieve the American Dream of homeownership.By taking these steps, we can unlock the potential of small-dollar homes and help to address the housing crisis that is currently gripping the nation. This would not only benefit individual homebuyers but also strengthen local communities and the broader economy.