Abstract

American Housing Financing Attempt at a Comparative Study

Within a single generation, American financing of housing has undergone a great change. Among the especially remarkable alterations are government insurance of housing mortgages, the general trend towards high, long-term, first mortgages, and the establishment of higher-level, mixed institutions which have given the housing sector access to the securities market. The financing of social housing construction is similarly in a state of flux. Although the term "social market economy" is unknown in America, the housing financing system there, as in nearly all progressive countries, has undoubtedly developed in that direction. In a country that still seems to be fettered ideologically to free competition, this is a revolutionary change. The comprehensive social security insurance and the plans for a guaranteed minimum income are further examples of a reality which has long since ceased to match up with the traditional ideology.

How efficient is American housing financing? There is no satisfactory answer to this question. It can be assumed that there is a logical connection between financing possibilities and the standard of housing. For all the notorious slums, the American standard is generally high and has improved substantially since World War. Roughly 80 per cent of owner-occupied homes and rented housing units are of acceptable or better quality, and the degree of crowding (persons per dwelling or room) is extraordinarily low as compared with other countries. The fact that 60 per cent of all families can afford owner-occupied homes (mostly on the instalment plan) is likewise indicative of a high standard, for owner-occupied homes are generally larger and better equipped than rented housing units. But it is impossible to say to what extent the high standard is attributable to the financing methods or to other circumstances such as, for instance, the high average income. Furthermore, there are other yardsticks which go beyond the quality of dwellings. For example, the benefit of owning one's own home has in many cases been bought at the cost of increasingly longer distances between home and job.

International comparisons are even more difficult. It might be assumed that the efficiency of housing financing is expressed by the difference between the mortgage interest rate and the interest rate for "riskless" investments of similar duration, e. g. government bonds. The narrower that margin, the more effective is the organization of the mortgage market. But the average mortgage interest rate in various countries is dependent among other things on the mix of large and small objects (owner-occupied homes), on the proportion of first-mortgage and lower-priority loans and on loan limits — factors which influence either the costs of the transaction or the risk. For other reasons the risk, too, is not the same everywhere. As mentioned at the beginning, the risk in America is greater than in Europe simply because urban districts, and hence real estate values, can change much more rapidly. Moreover, the margin between mortgage interest and interest on government long-term bonds is veryunstable in American experience; it depends on general credit conditions. Finally, there is still a great deal of preliminary statistical work that ought to be done to obtain reliable reports on mortgage interest rates. For similar reasons the margin between mortgage interest rates and the rates banks pay for their funds may be misleading for international comparisons. But perhaps a start could be made with relatively small experimental studies of certain institutions whose funktions are really highly similar.

The capital market study of the OECD states "the concept of the efficiency of a financial system is very difficult to define objectively". According to the standards applied in this study, however, American housing financing may be regarded as relatively efficient. "The principal determinant of a market's efficiency seems to be its 'fluidity' — a concept comprising a whole group of characteristics . . . which include active competition between financial intermediaries, a wide range of financial instruments and securities to meet the preferences of savers and users, mobility of funds between sectors, plentiful information, etc." The fluidity of the mortgage market has been enhanced by the two-level institutions which buy and sell mortgages. On the whole, competition between banks is active, with the exception of small towns in which borrowers find only a limited number of lenders. The recently achieved access to the securities market has opened up a new source of finance and will make a further contribution to the mobility of capital funds. American housing financing was historically very much localized and for that reason alone not optimal, but with government aid it has developed more and more into a national system.