If you think federal policies have caused sticker shock when you go to the department store or shop for groceries, expect even more effects in the housing market. Unlike most consumer goods and basic necessities for housing, what goes up can actually go down, and may in the relatively near future.
This is another example of a government causing a problem and then coming back with a “solution” that causes even more difficulty. The federal government has spent the past two years raising all kinds of asset prices – stocks, bonds, cryptocurrencies, you name it – through easy money policies. Because these asset bubbles have also affected house prices, Washington will now make housing more “affordable” by making the federal government take more risks.
We’ve seen this movie before: it sparked the 2008-09 financial crash. It might not end well this time around either.
Bailouts for wealthy communities
On November 30, the Federal Housing Finance Agency announced that Fannie Mae and Freddie Mac, the government-backed mortgage lenders, would acquire mortgages worth nearly $ 1 million ($ 970,800, to be exact) in some high cost locations (eg San Francisco, New York City, etc.) next year. In other areas, Fannie and Freddie will buy mortgages up to $ 647,200 in 2022. In both cases, the numbers represent an 18.05% increase in loan limits for 2022 over 2021.
Fannie and Freddie do not lend directly to the borrowers themselves; instead, they buy mortgages from banks, consolidate them, and sell them as securities to investors. But because the companies, which were put under trusteeship in the last housing crash, have access to more than $ 250 billion from the treasury – and implied collateral for additional bailouts on top of that – lenders typically offer lower rates and lower down payment requirements, for mortgages that meet Fannie and Freddie guidelines (ie âcompliantâ mortgages).
The Fed encourages asset bubbles
The increase in loan limits for Fannie and Freddie next year is due to soaring house prices this year. The National Association of Realtors reported that median prices for existing homes rose 16% in the third quarter from 2020 levels, the largest annual increase in home prices since the organization began keeping records there. over half a century ago. And the surge in house prices seems near universal: In the second quarter, median home prices rose at double-digit rates in 94% of metropolitan areas.
Part of the increase in house prices has stemmed from lifestyle adjustments since the coronavirus pandemic, with families seeking more space and often moving from urban to suburban environments. But much of home price inflation has the same source as other price inflation: the Federal Reserve’s policy of printing money.
Since the start of the pandemic, the Fed has bought $ 40 billion in mortgage-backed securities – the securities that Fannie and Freddie sell – every month. These monthly purchases have pushed mortgage rates to extremely low levels, encouraging individuals to refinance their homes or take on additional mortgage debt. The lower mortgage rates created by the Fed’s intervention also led to real estate auction wars which led to soaring house prices.
While it recently announced that it would start reducing the amount of its monthly asset purchases, the Fed still plans to continue these purchases until next June. In other words, it will continue to inflate the real estate bubble it created for another six months.
In the meantime, Fannie and Freddie – whose market share has already reached 60% of all new mortgages, up from 42% before the pandemic – will take more risks for the federal government by guaranteeing even bigger loans. If the Fed is to raise interest rates significantly to meet ever-rising inflation, the move could precipitate a housing crisis and financial crisis, much like those that hit when mortgage rates started rising in 2006- 08. Once again, the taxpayers – that is, you and me – could end up with the bag.
Solutions, not bailouts
Solving housing market problems requires a three-fold approach that addresses both housing demand and housing supply:
- End quantitative easing by the Fed, which artificially lowered mortgage rates, fueling bidding wars by encouraging borrowers to take out larger and larger loans;
- Zoning reforms and other laws that make it easier to build new homes or reuse existing buildings (eg, offices and commercial spaces) into homes and apartments; and
- The end of supply chain issues and other distortions that increase the price of supplies for homebuyers, like tariffs on Canadian lumber that the Biden administration recently doubled.
None of these real solutions involve increasing loan limits for Fannie Mae and Freddie Mac. If borrowers feel they need to take more financial risk to enter the housing market, then by all means go for it.
Corn taxpayers shouldn’t have to take that risk as well, which they currently do with every mortgage Fannie and Freddie take on. Healthier housing policy would see Fannie and Freddie step down – a move that, together with the above steps, would go a long way to ending the boom and bust problems in the housing market that could leave taxpayers holding the bag. for the second time in as many decades.