Commentary
After the Second World War, a major priority for American policymakers was to push home ownership for as broad a swath of the population as possible. In many ways, the agenda was a success. Happy families living in fine homes all over America, one income from a stable job and two cars, became the mark of prosperity, and a point of advertising for the American experiment the world over.
Every TV show featured exactly this.
Two decades into the 21st century that dream is broken, as most people cannot even think about home ownership even with two incomes. The latest trends show skyrocketing prices and, unlike 2008, this seems less like a bubble than pure inflation with little hope of falling prices. Existing owners of course do not want price declines in any case.
Many people look at this situation and wonder what the point is. There are ways to use whatever liquid assets you have to earn money rather than spend it this way.
In the last few months, I’ve heard many suggestions for fixing this problem. None of them are promising.
Some make matters worse.
First, people suggest more Federal Reserve interventions. Keep in mind, however, that the Fed can only control one rate—that which is charged to member banks. That rate will influence others down the line within the yield curve structure. The influence is not always predictable. In fact, it can sometimes result in a steeper curve, presenting a bitter problem: lower short-term rates combined with higher rates. This result reflects expectations of the future.
This is precisely what is happening right now. The Fed keeps lowering the federal funds rate even as mortgage rates increase.
(Data: Federal Reserve Economic Data (FRED), St. Louis Fed; Chart: Jeffrey A. Tucker)
The other problem is that lower rates feed inflation and thus threaten to increase housing prices, insurance costs, and therefore also property taxes. Therefore, Fed intervention will not fix any existing problem and contributes to making the situation worse rather than better.
Second, people are suggesting restrictions on institutions buying with cash offers. This is designed to address what intuitively strikes everyone as unfair and unjust. You are negotiating on a house, lining up your borrowing, selling assets for a downpayment, and out of nowhere some cash buyer comes along and snatches it away.
No question that this is happening, with the largest financial firms buying the asset they believe to be the most lucrative on the market right now, which is housing. But how in the world would one restrict such purchases? Owners want to sell to the best buyer regardless. It seems strange to intervene in property rights in ways that would make that impossible.
It’s also not clear how that would affect home prices. Whether a home is purchased with cash or borrowed money does not affect housing prices overall. Such interventions would likely create unanticipated problems. For example, it would certainly reduce the number of rental units available and thus make the housing problem worse, not better.
Third, people are suggesting that the federal government make special mortgage rates available for borrowers of a certain sort, perhaps families with children or teachers or some other class. I’ve heard numbers being thrown around like 3 percent. This is not a good idea. It would end up subsidizing the most risky borrowers and recreate the very conditions that led to the housing crisis of 2008. It would also increase demand for housing and apply upward rather than downward pressure on prices.
The same can be said of the idea of granting tax write-offs or outright subsidies for down payments. That would worsen the deficit and only drive up prices to the point of the subsidy itself.
Fourth, we hear talk of dramatically increasing the supply of housing in underdeveloped areas. Trump administration teams have floated the idea of freedom cities, for example, with huge development subsidies. Again, this amounts to yet another public expenditure that adds to the fiscal problem, and does not address the real problem, which is that people want housing close to their places of work. It achieves nothing to build huge developments in places without enterprise infrastructure, as China has learned over several decades of boondoggles.
Fifth, people suggest public housing and outright price control, both truly terrible options. In the 1930s, there was a great deal of optimism about the idea of government-provided housing for everyone but those dreams died by the 1970s. Government can neither build nor manage housing, and even existing units reveal the problem. Every major city has a blighted area filled with public housing that everyone despises. No one wants more of that in their area.
If none of these solutions are right, what can be done?
We need to fix the problem of inflation above all else, because that is what is driving insurance costs so high. Insurance is a pricing of risk and the rising prices in every area of repair, including labor costs, has made it unaffordable in many locations. In fact, this is a major reason why cash purchases are so popular: you don’t have to pay for broad insurance coverage. Fixing inflation will require restraint on money printing. Nothing else gets to the heart of the problem.
Property taxes should be reduced or abolished but that is a matter for states and localities, not the federal government. And many cities and states are faced with impossible fiscal cages: lowering property taxes means less revenue for schooling and crime control, the result of which is to drive residents out rather than attract them. There is no easy solution to this, though state-level vouchers for private forms of schooling are promising. But there again, we have a solution that is several stages removed from the problem we are trying to address.
Regulations on development at the federal level have become a terrible cost that has inhibited building and expansion of the housing stock. These days, it is nearly impossible even for an individual to build without fitting the new home to green-energy-compliant standards, for example. All of this needs to go. If it were my choice, I would completely defund the Department of Housing and Urban Development. It has been a very long menace and serves no other function than to feed tax dollars to large developers—a classic example of a captured agency.
All of these solutions can help but there is no magic answer to restoring the 1950s-era dream of universal housing ownership. It’s not even clear that it makes much sense anymore, as most young people prefer the flexibility of renting. They can find better uses for liquid funds than tying them up in property that carries huge liabilities in taxes, interest, and insurance.
Meanwhile, focusing reform efforts on regulatory costs, inflation, and schooling options could end up doing more to repair the housing problem than any direct interventions in the market as it currently functions.
Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.
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