A new paper authored by Associate Professor of Real Estate, Morris Davis, provides evidence of expensive, inefficient and poorly motivated U.S. housing policy, and calls on policymakers to radically reform efforts to stabilize housing markets and promote home-ownership.
“We need to ask: What do we want? Why doesn’t the market provide it? And—given the way our federal government currently functions—can government intervention change housing market outcomes for the overall betterment of society?”
Davis, who currently serves as academic director of the James A. Graaskamp Center for Real Estate, presented his research at the first annual “Eye on Washington” conference in Washington, D.C., sponsored by BNP Paribas, which is one of the best-rated banks in the world, operating in over 80 countries, one of the largest international networks.
Davis notes that federal housing policy in practice has two main objectives: stabilize housing markets and promote home-ownership. Based a review of policies during the housing boom and bust, he concludes housing market policies have likely made housing markets more volatile.
Davis remarks, “Federal housing policy may have actually increased the volatility of housing markets. That is, if the housing boom was caused by the easing of mortgage credit by private market participants, policymakers may have amplified the boom by encouraging the further easing of credit.”
He cites the U.S. Department of Housing and Urban Development’s (HUD) intervention in Fannie Mae and Freddie Mac’s mortgage purchases as a key trigger in magnifying the housing boom.
“HUD encouraged Fannie [Mae] and Freddie [Mac] to expand mortgage credit and assume an increasingly risky portfolio by escalating its affordable housing targets. These targets were increased at the height of the largest housing boom the U.S. has experienced in the past fifty years -- which itself was likely caused by the expansion of mortgage credit by private lenders,” Davis adds. Data show low-income mortgage targets for the government-sponsored agencies Fannie and Freddie changed overtime from a HUD-mandated 30 percent in 1992 to 55 percent in 2007. “Because HUD encouraged more risky mortgage lending when risky mortgages were unusually widely available … federal policymakers amplified the housing boom.”
Davis goes on to show that policies designed to promote homeownership have been expensive and ineffective. He draws in data that show homeownership rates have remained stable since 1970 and shows that public policy has not boosted homeownership rate because it has been poorly designed. He shows that the tax code largely subsidizes homeownership for people who should be able to afford to buy a house anyway. Davis also argues that Fannie Mae and Freddie Mac have not materially lowered mortgage interest rates for homeowners, especially when viewed with overall macro trends in interest rates in mind.
Davis concludes that homeownership is a poorly motivated public policy. Housing is a risky asset, and not all people are in a position to optimally want to assume the risk. Further, across countries, home-ownership is not related to standard of living: Greece and Spain have low standards of living and high homeownership rates, and Germany and Switzerland have high standards of living and low homeownership rates.
For a more in depth look at Davis’ research, click here.