Lawmakers in Congress are exhibiting a rare fit of bipartisanship and working to reform Fannie Mae and Freddie Mac. Of five separate bills attempting to address the challenge, the one furthest along is the handiwork of Senators Tim Johnson and Mike Crapo, which calls for private firms to perform the securitization role now carried out by the giant Government Sponsored Enterprises and for the eventual phase-out of Fannie and Freddie. The securities created by the new firms would carry an explicit government guarantee, but the creators of those mortgage-backed securities would also be required to maintain higher capital ratios to cushion taxpayers against possible losses.
Needless to say, all the usual suspects are outraged. Hedge funds that bought the GSE shares on the cheap after the companies went into conservatorship are irate that they might be cheated of gains now that Fannie and Freddie are again profitable. Community groups don’t like other rules, such as requiring homebuyers to cough up a sizeable down payment, which they think might make homes unaffordable for low-income Americans or people of color. Realtors are complaining that the Johnson-Crapo bill will likely drive up mortgage rates, damping demand. And so on.
It’s time for everyone to step back a pace or two and reconsider our love affair with home ownership. We are still recovering from a cataclysmic financial crisis brought on by excess investment in the housing market; this is hardly the time to reassemble the incentives and enablers that led to the crash. Let’s ask some important questions, such as, why encourage Americans to invest in homes when, according to Robert Shiller, the real rate of return on owning a home has historically been close to zero, substantially less than in the stock market? And, shouldn’t we be directing our investment capital into more urgent needs—such as infrastructure?
As a nation, we have equated owning a home with stability and prosperity. It has long been a cornerstone of the American dream – like sending your kids to college or saving for retirement. It is worth noting that not all successful countries share this fixation. The percentage of Americans owning homes peaked at 69 percent in 2004, and has since fallen to 65 percent. That puts us 33rd of 41 nations.
The nations that have lower rates include Switzerland and Germany – among the most prosperous countries on earth. It is typically the least urbanized countries (Romania, Croatia) that have the highest rate of home ownership; in an agrarian society owning your land equates to wealth. It may be that Americans’ fondness for owning a house harks from the time when farming played a larger role in our economy.
Today, there are signs that American society is moving ahead of its legislators and bankers. In 2012 only 45 percent of the country declared owning a home essential to middle class life, down from 70 percent in 1991. It turns out many young people don’t necessarily want to invest their money in a house. That’s one explanation for the sluggish rebound in housing.
Speaking this week at the Milken Global Conference, famed real estate investor Sam Zell observed that Millennials are reluctant to commit—to marriage, to jobs, or to owning a home. He thinks changing demographics in the U.S. are all-important, and he could be right. The 71 million Baby Boomers on the cusp of retirement will soon be selling their homes, while 74 million Millennials may choose to rent, to maintain their flexibility. They have discovered that owning a home, among other things, may make it more difficult to move in search of jobs. As Zell noted, that quest for flexibility is even leading women to freeze their eggs in order to better juggle careers and biological clocks. That points to a likely postponement of household formations, the bread and butter of new home building.
Another reason young people may not be keen to purchase a home is that they are no longer convinced it will be a good investment. There is no overstating how damaging the great recession has been to confidence in our economy, our institutions – or in the inevitability of rising home values. It is important to remember that never before in the country’s post-war history had home prices declined across the country. True, there had been regional sell-offs, but one of the reasons investors and regulators -- and the GSEs-- were blindsided by the frailty of securities built on mortgages is that so few had ever lost money on single family mortgages.
Though the U.S. has underinvested in housing in recent years, to compensate for a decade of overbuilding, it is not clear that demand will return to historic norms. As recently noted in The New York Times, “Investment in residential real property remains a smaller share of the overall economy than at any time since World War II.” Sputtering home building has slowed the recovery without a doubt, depressing growth by one to two percentage points.
Still, it is unclear whether we need to build at yesterday’s rates. The average size of houses has increased enormously over the past several decades, from 983 square feet in 1950 to more than 2300 square feet in the mid-2000s—even as family size has shrunk. For all the complaining about kids moving back in with mom and dad, the truth is some of those Boomers might welcome an opportunity to defray some of the cost of owning too much home.
We need to get this right. For starters, the United States, as is well known, faces an enormous backlog of infrastructure projects. For too many years we have funneled money into housing – arguably too much. Why not create incentives to promote public-private partnerships to rebuild our bridges and tunnels instead of continuing to underwrite securities and provide tax incentives tied to housing? Infrastructure spending will create jobs and, perhaps more important, improve the county’s productivity and competitiveness. No such claim can be made for home building.
Moreover, there are worrisome signs that putting Fannie and Freddie back on their feet, or replacing them with another government-supported system, could soon lead to another credit collapse. Speaking at the Milken Global Conference, Gene Sperling, former director of the National Economic Council under President Obama, derided the notion that it was the “mission” of affordable housing and Congress’ mandate that the GSEs loosen credit rules and bulk up on subprime mortgages that caused the housing collapse. He is also incensed that only borrowers with FICO scored above 700 are currently able to get mortgages. In other words, some of us haven’t learned a thing.
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