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News Link • Domestic Policy

Oh, give me a home without a subsidized loan


During much of the last century the heavy hand of government has been used to turn the US into a nation of homeowners. It all began in 1913 with the inclusion of a deduction for mortgage interest when the federal income tax was enacted.

Two decades later, with the economy in the throes of the Great Depression, federal intervention exploded. Herbert Hoover signed the Federal Home Loan Bank Act in 1932. Over the next two years his successor, Franklin Roosevelt, created the Federal Home Owners' Loan Corporation and the Federal Housing Administration. Fannie Mae was established in 1938.

Centralization of housing policy in Washington gave rise to interest groups representing home building, mortgage lending, and the real estate industries that pressured politicians to shower a never-ending stream of subsidies on owner-occupied housing.

So successful was this effort that by the late 1990s it became difficult to subsidize homeownership anymore, short of loosening lending standards on federally backed loans. Under unrelenting pressure, those, too, eventually wilted, and a torrent of unqualified buyers flooded the market, fueling a bubble that sent home prices into the stratosphere.

When the bubble eventually burst in 2006, home prices plummeted and many faced financial ruin. The economy slipped into a severe recession and Americans lost some $14 trillion in household wealth. Big Housing, which had pocketed enormous gains during the boom, dumped tremendous losses on taxpayers.

In addition to having different dreams, Americans also have widely varying housing needs. Consider those whose jobs require frequent moves. Because agent fees and closing costs typically exceed any short-run appreciation in value, it makes no financial sense for such people to buy a home.

Yet government policy encourages them to do just that.

Indeed, the current recession has shown what an albatross a home can be. People who have lost jobs often need to move for new ones. But having bought houses they can't sell, many face the unattractive choice of remaining unemployed or abandoning their homes. By creating this labor market rigidity, housing subsidies have deepened and prolonged the downturn.

What have policymakers learned from all this? Apparently not much

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