Rethinking U.S. Housing Policy: How to Make Sure the Housing Bubble Doesn't Pop Again
The federal government’s policies that both encouraged and subsidized homeownership played no small part in fostering the Great Recession. The Federal Reserve’s excessively-low interest rates, the mortgage interest deduction, and the Community Reinvestment Act all fostered a climate that privileged homeownership over renting. Far too many people who could not afford to purchase homes ended up with mortgages that they could no longer pay back.
It is time to rethink the federal government’s role in the housing market. The Federal Housing Administration’s (FHA) recent announcement that it would continue to suspend anti-flipping regulations that prevented the agency from insuring mortgages on homes purchased and then resold within 90 days is instructive in this regard. Subject to certain limitations, individuals in 2012 can flip houses with mortgages explicitly insured by the U.S. government.
The goal of this waiver is to speed up the resale of foreclosed properties, particularly in low-income neighborhoods and areas susceptible to blight. This policy, while admirable in its intent, represents continuity with the past, rather than an attempt to rework U.S. housing policy for the 21st century.
The FHA was created during the Great Depression in order to insure certain mortgages. It has done good work in assisting lower-income persons afford homes. Significantly, the FHA is self-funded, which makes it notably different from the GSE (government-sponsored enterprise), Fannie Mae, which operated on a business model of privatized gains and socialized losses.
Nevertheless, it is worth reconsidering whether the government should continue to play such a prominent role in fostering homeownership. By promoting homeownership over renting, the federal government is implicitly making the labor market less mobile. While individuals will likely feel initial pride at owning their own home, it comes at the cost of not being able to relocate as easily to cities and states with more robust job markets, lower taxation, and fewer burdensome regulations.
Lower-class beneficiaries of government homeownership policies will not easily be able to sell homes in blighted neighborhoods. While the federal government may assist in helping people obtain homes, it is the local government that is responsible for public services. Those agencies that promote homeownership are not responsible when community services fail, local schools remain subpar, or crime rises.
The mortgage interest tax deduction also unnecessarily privileges owning one’s home over renting. It should be phased out within the next few years, if not sooner. Not only does it not increase homeownership rates as intended, it also represents a transfer of wealth to persons who are far from the most needy members of society.
Given the debacle of the housing boom, and subsequent bust, of the past decade, and empirical evidence that suggests that housing is not a good investment, it is time to fundamentally rethink how we, as Americans, understand the housing market and homeownership. People should be free to choose their own housing options without the federal government tilting the scale one way or the other.
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