Sunday, August 29, 2010

Promoting Homeownership Is Not Only Un-American: It Contributed to the Housing Bubble

From the article "The Un-American Dream":

"For nearly a century it has been the policy of the U.S. government to increase American homeownership. Its efforts include (but aren't limited to) bouts of easy money from the Fed, the mortgage-interest deduction, the exclusion of capital gains on primary residence sales, direct and indirect subsidies from the Department of Housing and Urban Development, and artificial liquidity pumped into the mortgage market via government sponsored entities Fannie and Freddie.

Policymakers assure us that the next generation of government housing programs will be "carefully designed" (bring on the next five-year plan, Comrade!). But the real question is why the government should be doing anything to promote homeownership.

"I do believe in the American Dream," said President Bush in 2002. "Owning a home is a part of that dream, it just is. Right here in America, if you own your own home, you're realizing the American dream." Bush was echoing a theme that reaches back at least to Herbert Hoover: When the government encourages homeownership, the story goes, it strengthens individuals and communities and thereby fosters the American Dream. They're wrong. A government crusade to promote homeownership is un-American.

America's distinction is that it was the first nation founded on the principle that you have a right to pursue your own happiness without government interference. But the government's homeownership crusade means it gets to decide how you should live, and stick-and-carrot you into living that way.

Here's the real lesson: The American Dream is not some government-subsidized house foisted on you by George W. Bush or Barney Frank. It's the undiluted freedom to decide how you want to live--and, if you want to own a home, it's the freedom to work, save, establish credit, and earn one. In America, the government's job is to protect our freedom to pursue our values, not to dictate what our values are. Its homeownership policy should be the same as its toaster oven policy: laissez-faire.

Government intervention in housing runs deep, and it can't be eliminated overnight. But the government should make its long-term goal to fully extricate itself from the housing market. It can then start gradually dismantling Fannie, Freddie, tax preferences for homeowners, and every other government housing program."

MP: You can add the government's role in promoting fixed-rate 30-year mortgages, and subsidizing FHA mortgages that only require a 3.5% down payment to the list of policies that the government has used to increase homeownership. 

The chart above shows how the political promotion of homeownership in the U.S. may have contributed to the housing bubble.  The blue line is the quarterly homeownership rate from the Census Bureau (data here) going back to 1991, which went from 64% in the early 1990s to a record high of more than 69% in 2004.  During that same time period, the Federal Housing Finance Agency's (FHFA) Home Price Index (data here) doubled from 100 in 1991 to 200 in 2005, before reaching a peak of more than 222 at the height of the real estate bubble in 2007. 

In the aftermath of  the real estate bubble's crash, the homeownership rate has fallen to a 10-year low of 66.9% (QII 2010) and the FHFA home price has fallen back to 2004 levels.   Promoting homeownership is not only un-American, but it helped create an unsustainable real estate bubble, which turned the "American dream" into an "American nightmare" for millions of Americans by turning "good renters into terrible homeowners."


At 8/29/2010 2:03 PM, Blogger PeakTrader said...

However, it was necessary for the U.S. government to distribute the vast capital that flowed into U.S. Treasury bonds back to the U.S. masses.

That would've been the appropriate U.S. response to the economic policies of export-led governments.

At 8/29/2010 2:22 PM, Blogger Jason said...

These policies were racially charged as well. Having more minority homeowners was a contributor in the formulation of the policies.

And now minority families are being crushed as a result.

Good one, US government, remember, you only hurt the ones you help.

At 8/29/2010 2:35 PM, Blogger morganovich said...

the simple fact is that buying a home is likely the single most levered transaction most people ever do.

where else can you get the 9:1 leverage of a 10% downpayment?

hell, it was easy to put down a lot less than that. 0 down was not uncommon.

to then tax advantage such leverage with both deductible interest and tax free cap gains makes such an investment irresistible.

Americans used their homes as their primary savings vehicle. it was better than an IRA.

so, we drive down the US savings rate while simultaneously pushing americans into saving using a massively levered asset with less and less money down, then we are surprised when the whole thing blows up?


you are spot on with the CRA. if i were looking for the single most damaging piece of legislation for minorities in the past 30 years, i doubt i could find anything to top it.

At 8/29/2010 3:07 PM, Blogger bix1951 said...

And thanks also to the army of real estate brokers who lobby congress for laws that help them to make money.

At 8/29/2010 4:48 PM, Blogger Benjamin Cole said...

The biggest villain in the picture is not Fannie or Freddie--though I would be happy if they were phased out--but the home mortgage interest tax deduction (HMITD).

The HMITD it encourages (nearly compels) the wealthy to overallocate resources to housing. .

Housing is a wonderful investment. You can leverage 10-to-1, yet never have to meet a margin call, if the investment goes south. Your loan is non-recourse, meaning limited to your equity. If the property increases in value, your equity balloons–a mere 10 percent rise in the value of the house, and your equity doubles. Nearly risk-free leverage!

All the while, your buying of the house is tax-subsidized, and you can live in it to boot. No matter how wealthy you are, nor how many “homes” you buy, the federal government will help you invest in this manner. As marginal tax rates rise, the better sense it makes to buy.

Like many before me, and surely many to follow, I call for simplified taxes, that encourage work and investment, and tax pollution, consumption, gasoline and sin (except for horseracing).

Odd, isn't it, in all the posturing and ranting about Fannie and Freddie, the bigger villain of the home mortgage interest tax deduction is rarely mentioned.

Milton Friedman thought the home mortgage interest tax deduction a bad idea.

At 8/29/2010 5:03 PM, Blogger Ed Dolan said...

Good post. Seems to me that now would be just the right timing to downsize the government role in promoting home ownership. When data on housing starts or sales are down (which they have been much of the time lately), we still hear the old refrain that the economy won't recover until the housing market gets "back to normal." However, many of the people who say this really are hoping to get back to an artificially pumped up level. I think it would be closer to the truth to say that the economy won't really recover without significant restructuring, which means a smaller housing sector. This post makes a good contribution by showing how past housing policies have only caused structural distortion, not real stimulus.

At 8/29/2010 7:53 PM, Blogger Unknown said...

I amn shocked Benji, that was a good comment, baby. right on.

At 8/29/2010 8:16 PM, Blogger Benjamin Cole said...


Hey, I am just repeating what Milton Friedman would say 90 percent of the time. On foreign policy, I quote Paul, the libertarian.

Being a true conservative means Republicans hate me.

At 8/29/2010 9:03 PM, Blogger juandos said...

"Being a true conservative means Republicans hate me"...

No pseudo benny, no one actually hates you, they just laugh at you...

From Real Clear Politics: Barney Frank Comes Home to the Facts

August 21, 2010
By Larry Kudlow

Can you teach an old dog new tricks? In politics, the answer is usually no. Most elected officials cling to their ideological biases, despite the real-world facts that disprove their theories time and again. Most have no common sense, and most never acknowledge that they were wrong.

But one huge exception to this rule is Democrat Barney Frank, chairman of the House Financial Services Committee.

For years, Frank was a staunch supporter of Fannie Mae and Freddie Mac, the giant government housing agencies that played such an enormous role in the financial meltdown that thrust the economy into the Great Recession. But in a recent CNBC interview, Frank told me that he was ready to say goodbye to Fannie and Freddie.

"I hope by next year we'll have abolished Fannie and Freddie," he said. Remarkable. And he went on to say that "it was a great mistake to push lower-income people into housing they couldn't afford and couldn't really handle once they had it." He then added, "I had been too sanguine about Fannie and Freddie."(there's a bit more)

At 8/29/2010 9:49 PM, Blogger Ron H. said...

"From Real Clear Politics: Barney Frank Comes Home to the Facts"

I wouldn't give Frank too much credit for seeing the light. More likely he's realized that he can't continue with his same line of BS any longer. The winds have changed & he is trimming his sail accordingly.

I've never believed he was stupid, just dishonest.

The same goes for anyone else in the current administration who now "sees the light".

At 8/29/2010 10:00 PM, Blogger Ron H. said...

"Being a true conservative means..."

...calling for the Fed to run the presses until they catch fire, then dumping money out of airplanes.

Is that about right, Inconsistent Benji?

Is that some of the 90% that comes from MF? You know, I've read quite a bit of Friedman, and I don't think I ever came across that bit. Can you point me to a reference for that?

At 8/29/2010 10:57 PM, Blogger juandos said...

Hey Ron H...

"I wouldn't give Frank too much credit for seeing the light. More likely he's realized that he can't continue with his same line of BS any longer"...

I wouldn't give him credit for honesty in the least...

The irony of that whole piece was so thick one could cut with a knife...

At 8/30/2010 6:04 AM, Blogger Paul said...

Ron H,

"Can you point me to a reference for that?"

I think it was in "Free to Choose." It was right after the chapter that said a True Conservative looks to the Fed to inflate away his bad real estate investments. Unless, you're a farmer, of course.

At 8/30/2010 8:28 AM, Blogger Cooper said...

I'll add that in my experiance I can't even find a home I can afford. Being fiscially sound I was looking for something only 2x my anual wages (expecting 20% of my income to go to morgage) but nobody could find a decent 80-100k dollar home. Now with the bubble popped I've started to see them again, but durring the 2000's the average new construction home was getting quite large.

If somebody could find the statistices I think I read that the average home size of a first time homebuyer had reached 2,100 sqft. That's crazy! Bigger then the house I grew up with.

The need for choice has left the marketplace, forcing people into the sad state of buyign too much house and not being able to afford it a few years latter.

At 8/30/2010 10:59 AM, Blogger Ron H. said...

Thanks, paul, My copy of 'Free To Choose' had some pages missing. That must be why I missed it. I'll have to quit buying those used books from Amazon sellers.

I think I found the core reason for the True Economic Conservative's call for inflation at the reference you gave me:

"Another reality is that the SBA, or anybody else, will not lend to a small business w/o collateral. That means property, usually. Who has equity when property is going down, not up?

Another failing business asking for a government bailout at our expense.

At 8/30/2010 11:21 AM, Blogger Benjamin Cole said...

Ron H:

I don't know if you are still reading, but believe me, printing money now would be Friedmanesque.

Inflation is a monetary phenomenom, said MF.

Now, we are teetering on the edge of a very injurious deflation. Ergo?

Print money, baby, and lots of it. Deflation is a monetary phenomenom.

Japan has followed tight money policy for 20 years. Result? A strong yen, and stock and property markets that are down 75 percent, and no inflation and minor deflation. Great results, if you like long torture.

At 8/30/2010 1:10 PM, Blogger Paul said...


Milton Friedman would never agree with your money mischief nonsense.

He would, however, call on your boyfriend to stop his staggeringly wasteful spending, and get his foot off the throat of private enterprise.

At 8/30/2010 9:57 PM, Blogger Hydra said...

I would argue that antihousing and antidensity efforts also contributed to the bubble. Exclusionary zoning and extraordinary regulations and fees drove up housing prices with no underlying value to support the prices.

With antihousing efforts preventing physical construction and prohousing efforts promoting easy money, there wasa perfect pushmepullyou in the housing market.

At 8/30/2010 10:01 PM, Blogger Hydra said...


Large houses were a response to restrictive housing regulations: by the time you fulfilled all the government mandates, a house had to be large or youcould not cover the costs.

Stangely, efforts to prevent big developers from producing more sprawl, resulted in rules that only big developers could comply with, driving many small local builders out.

At 8/30/2010 10:42 PM, Blogger Ron H. said...

"Inflation is a monetary phenomenom, said MF."

Well of course it is. It's an increase in the money supply.

"Deflation is a monetary phenomenom."

Well of course it is. It's a decrease in the money supply.

"Now, we are teetering on the edge of a very injurious deflation. Ergo?

Print money, baby, and lots of it.

Japan has followed tight money policy for 20 years. Result? A strong yen, and stock and property markets that are down 75 percent, and no inflation and minor deflation. Great results, if you like long torture.

You keep repeating these same nonsensical ideas over & over even after others have patiently explained to you that you are wrong, and why you are wrong.

Don't you pay attention?

At 8/31/2010 12:51 PM, Blogger Benjamin Cole said...

Ron H:

Who is wrong? Go move to Japan, and enjoy the fruits of tight money.


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