THE real lessons of America’s housing crisis have gotten lost. It’s portrayed as the financial system run amok; the housing market became a casino. The remedy is to enact rules that prevent a repetition. All this is partly true. But it ignores a larger truth: our infatuation with homeownership, embedded in dozens of government policies, has turned housing into something of a National Nightmare.
As a society, we’re overinvesting in real estate. We build too many McMansions. They use too much energy, and their carrying costs absorb too much of Americans’ incomes. We think everyone should become a homeowner, when many families can’t or shouldn’t. The result is to encourage lending to weak borrowers who are likely to default. The avid pursuit of a few more percentage points on the homeownership rate (it rose from 64 per cent of households in 1994 to 69 per cent in 2005) has condoned enormously damaging policies.
Does every house need a ‘home entertainment centre’? Well, no. But when you subsidise something, you get more of it than you otherwise would. That’s our housing policy. Let’s count the conspicuous subsidies. The biggest favour the upper-middle class. Homeowners can deduct interest on mortgages of up to US$1 million on their taxes; they can deduct local property taxes; profits from home sales are mostly shielded from taxes. In 2008, these tax breaks are worth about US$145 billion. Next, government funnels cheap credit into housing through Congressionally chartered Fannie Mae and Freddie Mac. Perceived as being backed by the US Treasury, Fannie and Freddie can borrow at preferential rates; they now hold or guarantee US$5.2 trillion of mortgages, two-fifths of the total. Finally, the Federal Housing Administration (FHA) insures mortgages for low- and moderate-income families that require only a 3 per cent down payment.
Congress’ response to the present crisis is, not surprisingly, more of the same. The legislation enacted last week adds new subsidies to the old. It creates more tax breaks; most first-time homebuyers could receive a US$7,500 tax credit. It expands the lending authority of Fannie Mae and Freddie Mac. Previously, the permanent ceiling on their mortgages was US$417,000; now that would go as high as US$625,500. And the FHA would be authorised to support, at much lower monthly payments, the refinancing of mortgages of an estimated 400,000 homeowners in danger of default.
More subsidies may - or may not - stabilise the housing market in the short run. But there are long-term hazards. Make no mistake: I’m not anti-housing. I believe that homeownership strengthens neighbourhoods and encourages people to maintain their property. It’s also true, as economist Mark Zandi shows in his book Financial Shock, that today’s housing collapse had multiple causes: overconfidence about rising home prices; cheap credit; lax lending practices; inept government regulation; speculative fever; sheer fraud.
Still, the government’s pro-housing policies contributed in two crucial ways. First, they raised demand for now suspect ’sub-prime’ mortgages. The Department of Housing and Urban Development sets ‘affordable’ housing goals for Fannie Mae and Freddie Mac to dedicate a given amount of credit to poorer homeowners. One way Fannie and Freddie fulfilled these goals was to buy sub-prime mortgage securities - many of which have now gone bad. Second, government’s housing bias created a permissive climate for lax lending. Both the Clinton and present Bush administrations bragged about boosting homeownership. Regulators who resisted the agenda risked being ’roundly criticised’, notes Zandi.
Good intentions led to bad outcomes: an old story. Fannie’s and Freddie’s losses impelled the Treasury Department to propose a rescue for the companies; given their size and the government’s implicit backing of their debt, doing otherwise would have risked a financial panic. Personal savings have been skewed toward housing. Many Americans approaching retirement ‘have accumulated little wealth outside their homes’, concludes a study by economists Annamaria Lusardi of Dartmouth College and Olivia S Mitchell of the University of Pennsylvania.
We might curtail housing subsidies without exposing the economy to the disruption of outright elimination. The mortgage interest deduction could be converted to a less generous credit; Fannie’s and Freddie’s expanded powers could be made temporary; FHA’s minimum down payment could be set at a more sensible 5 per cent. But even these modest steps would require recognising that the homeownership obsession has gone too far. It would require a willingness to confront the huge constituency of homeowners, builders, realtors and mortgage bankers. There is no sign of either. When tomorrow’s housing crisis occurs, we will probably find its seeds in the ’solution’ to today’s. — The Washington Post Writers Group
By ROBERT SAMUELSON
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