The capital structure of US real estate assets has been in a long process of change. By subsidizing real estate and making mortgage debt artificially cheaper than equity capital, the US government has been effectively transferring real estate ownership from individuals to lending institutions and the Federal Reserve. Here’s how this game has been unfolding, and a warning to Americans that they will one day wake up in a country where most people live as feudalistic peasants, beholden to their banking and political overlords.

As recent as 1945, homeowners owned 84% of their homes, meaning they had 84% equity in their properties with only 16% mortgage debt financing. Fast forward 65 years to 2010, and we now live in a country where the average homeowner has only a 38% equity stake in his property. How did this happen, and what does it mean for real estate markets?

They say that a picture is worth a thousand words (Data Source: Federal Reserve Flow Of Funds):

You can click on the picture to enlarge it, but even from this vantage point we can see the general trends of declining equity ownership. The blue line represents the rate of change in equity positions, which highlights the problem periods. From 1945 to 2006 the homeowner equity rate declined by an annual average -0.4%. The Housing Bubble crash accelerated that rate to an insane -7.2% in 2007 and -11.4% in 2008, as property markets across the country collapsed.

We can explain the rapid declines in homeowner wealth with the real estate bubble bursting in 2007, but how can we explain the general shifting in real estate capital structures going from 84% equity in 1945 to a mere 38% in 2010?

The answer is that the federal government has aggressively promoted mortgage debt over equity investment starting in the 1930’s with the creation of the Homeowners’ Loan Corporation (HOLC), Federal National Mortgage Association (Fannie Mae), and the Federal Housing Administration (FHA). These institutions were created and perpetuated for the sole purpose of reducing the cost of debt capital for financing real estate purchases.

Since then you can add mortgage interest tax write-off legislation that lowers the cost of real estate debt capital through preferential tax treatment, Ginnie Mae, Freddie Mac, the Federal Housing Finance Agency, and the Department of Housing And Urban Development (HUD).

All of these entities serve to reduce the cost of mortgage capital relative to equity by transferring risks from lenders to taxpayers. Not all of these institutions are public, but they have been created, supported, and perpetuated beyond economic sanity by deliberate public policies.

This is how the federal government has methodically transferred ownership of real estate assets from individuals to lending institutions, publicly sponsored intermediaries, and ultimately, to itself (or rather, the Federal Reserve, which is not even formally part of the government). A finer conspiracy could not have been dreamed up!

The ultimate consequences for real estate are markets bereft of the stability provided by individual stake in losses. When people have little to lose by walking from their homes, you can bet many will. The people living in America’s homes are increasingly disenfranchised from the financial outcomes of their values. Delinquency rates will remain high, if not methodically creep higher.

Banks and mortgage lending institutions have a 62% stake in national real estate assets, the downside risk being shifted to taxpayers through federal guarantee and insurance programs, and to US dollar users through Federal Reserve secondary mortgage market purchasing programs.

Sadly, it looks like America has long been marching down the road to serfdom.

This article was originally featured in our Manhattan Beach Real Estate site here.