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Randy Shumway: The power of the 30-year mortgage

Published: Tuesday, July 22 2014 7:00 a.m. MDT

Updated: Monday, July 21 2014 5:30 p.m. MDT

While home ownership is not a lone silver bullet to creating a thriving middle class, favorable mortgage terms are an important factor in middle-class success.

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Editor's note: This column was previously published in a newsletter produced by Zions Bank.

In the 1950s, the United States became one of only two countries in the world to make 30-year home mortgages available. Home ownership rates grew quickly, which helped promote a robust middle class.

The United States’ favorable mortgage terms — including low down payments, fixed interest rates and 30-year time frames — were unique globally for many years. These terms extended the opportunity for home ownership broadly across the American population, a prominent factor in promoting and facilitating the growth of a stable middle class in the U.S.

How does home ownership strengthen the middle class?

Financially, a home can store value like other traditional investments and provide a return for the homeowner. Citizens are motivated to take care of and invest in their homes through capital improvement, thereby increasing property values. In the U.S., middle-class home ownership stabilizes communities, increases socio-economic mobility and enables the population to accumulate wealth.

While favorable mortgage policies have sustained a thriving middle class in the U.S. for over 60 years, citizens of other countries with limited access to mortgages haven’t fared as well. For example, in recent weeks, the eyes of the world have focused intently on Brazil, host of the World Cup.

Home to beautiful coastlines, dense jungles and lush mountains, Brazil boasts some of the richest resources in the world. Over the years, however, its citizens have suffered widespread poverty and extreme economic inequality. Similar to Brazil in size and resource abundance, the United States has mitigated these issues by having a strong middle class and favorable mortgage terms.

Brazil has a significantly smaller middle class that lacks feasible access to home ownership. Often, mortgages in Brazil historically have only been accessible to the wealthiest citizens, and decades of high inflation and interest rates (over 20 percent during some periods) have only worsened the situation.

In Brazil, the top 20 percent of the population is 22 times wealthier than the bottom 20 percent (a ratio almost 3 times greater than that of the United States). This income gap enables the wealthy to purchase homes as investments and denies many citizens the financial benefits of owning a home.

Often, families in Brazil rent or squat simply because the income disparity and shorter-term mortgages put home ownership out of reach. When citizens are unable to secure affordable mortgages, the middle class stagnates.

Recently, policymakers in Brazil have been working to build a stronger middle class by updating mortgage terms to make home ownership more feasible.

In 2008, Brazil extended mortgages to a 30-year term, and its mortgage market jumped from just 1.5 percent of GDP in 2007 to 6.2 percent of GDP in 2012. Seeing that positive impact, Brazil extended mortgages to a 35-year term in 2012.

This further ignited demand for affordable homes — by the end of 2014, more than 2 million such homes will have been constructed. In fact, economists predict that 60 percent of Brazilians could join the middle class by 2018, compared with only 34 percent in 2004 before the extended mortgage terms went into effect.

While home ownership is not a lone silver bullet to creating a thriving middle class, favorable mortgage terms are an important factor in middle-class success, and these factors have served as prominent drivers of the growth and stability of the middle class in the United States.

Combined with other factors, such as a strong public education system, longer mortgages with favorable terms foster growth of the middle class and help transform economic and social conditions.

Randy Shumway is the CEO of the Cicero Group and is the Economic Advisor to Zions Bank.

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