Owning your own home has long been an integral part of the American Dream. Despite the recent recession and subsequent weak recovery, that dream lives on for many young adults. In the face of serious economic headwinds, especially for Millennials, nearly 7 in 10 Americans aged 18 to 29 don’t own a home, but plan on buying one in the next ten years.
Unfortunately, their ability to do so will largely depend on an improved economy, one that will begin to employ the constant churn of young graduates. To that problem, President Obama’s umpteenth “pivot” to the economy has offered few solutions. But, Obama was on the road again earlier this week to discuss ways to facilitate homeownership while also reducing the role of government players like Fannie Mae and Freddie Mac. It was a speech, unlike many of his others, that contained some positive steps forward in the debate over a federal housing policy.
“A home is supposed to be our ultimate evidence that in America, hard work pays off, and responsibility is rewarded,” the President said. “To [my grandfather] and to generations of Americans before and since, a home was more than just a house. A home was a source of pride and security. It was a place to raise children, put down roots and build up savings for college, or a business, or retirement.”
Many would quibble with Obama’s assessment. Many leading economists question whether it is event beneficial to promote the idea of homeownership as part of the “American Dream.” After all, is it really a wise strategy to encourage Americans to invest the majority of their income into an asset whose value is so volatile? As David Dayen asks in the New Republic, wouldn’t it be better to encourage more productive investments that don’t demonstrably diminish entrepreneurship and increase sprawl?
These are all valid questions. And any government “housing” policy shouldn’t be limited to expanding homeownership by injecting itself into what should be free market decisions. Indeed, if we’ve learned anything from the recession, it’s that Washington is excessively bad at picking winners and losers in the marketplace. As conservative economist Josh Barro wrote for Business Insider:
“Why not instead emphasize that renting—that is, not taking all the money you have in the world and putting it into a highly leveraged real estate investment—is a perfectly valid life choice, even for people leading prosperous, middle-class lives?”
But to the extent that young adults continue to want a home, even if it’s simply a form of “forced savings account” rather than a true “investment,” Obama’s speech was still a mixed bag.
On the positive side, the president said “we should simplify overlapping regulations and cut red tape for responsible families who want to get a mortgage.” Absolutely. Now, if only President Obama could see the need to trim the bureaucracy in nearly every other economic sector as a way of spurring economic growth. He also encouraged the winding down of Fannie Mae and Freddie Mac who created a “heads we win, tails you lose” system “knowing that if their bets went bad, taxpayers would be left holding the bag.” And perhaps most importantly, Obama recognized that the government aided in creating an asset bubble that should not just be reinflated.
But the speech was also riddled with negatives, many of which contradicted his stated goal that “private capital should take a bigger role in the mortgage market.” The most worrisome problem is that President Obama proposed to increase the role of the FHA, a government agency that has boomed following the demise of Fannie Mae and Freddie Mac. This, Edward Morrissey, warns in the Fiscal Times has the appearance of an elaborately rigged shell game:
FHA’s former chief credit officer Edward Pinto wrote last November that the FHA’s capital position turned negative nearly overnight, and that the FHA itself might need its own taxpayer bailout. The FY2012 actuarial study showed that the single-family program’s valuation dropped $23 billion in a year when the housing markets improved significantly, a serious red flag about the stability of its operation.
“If it were a private company,” Pinto warned, “it would be shut down.” Strengthening the FHA sounds suspiciously like a bailout to keep the path of intervention open in order to keep pursuing the kind of home-ownership political goals that shipwrecked Fannie and Freddie.
The president also foresees government involvement in insuring mortgage-backed securities (MBS), one of the main investor products that caused trouble in the housing implosion. According to Obama, Washington should insure MBSes by levying fees on investors. But as Heritage’s John Ligon asks, “[I]f a reinsurance guarantee is self-funding, then why is the government needed?”
The truth is: it’s not. Government isn’t needed to prop up home values or expand homeownership. What is really needed is for market forces to work, which will get taxpayers off the hook and the young adults who want them into homes.