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Cathy Reisenwitz: Millennials' Failure To Launch Is A Function Of Poor U.S. Housing Policy

Posted on 02-Nov-2013
Topics: Economic Warnings  

From Forbes:

USA Today just reported that U.S. home prices were up 1.3% in August from July. “Data through August shows that prices were up 12.8% year over year.” In August as well the Huffington Post reported more than one in three Millennials were living at home with their parents. “Some 36 percent of 18- to 31-year-olds have opted to make home home again as of March 2012, up from 32 percent prior to the Great Recession in 2007, according to a new Pew Research Center report out Thursday.”

Millennials face scarce job prospects, low wages, astronomical student debt, and exploding health insurance costs. But they also face extremely expensive housing. And it’s the result of U.S housing programs and policies aimed at getting more Americans to buy homes and keeping home prices high.

The entirety of U.S. housing policy has been aimed at extending the possibility of homeownership to more Americans. It’s theoretically a laudable goal, as homeownership has been linked to a solid middle-class existence, and remains in many people’s minds a cornerstone of “the American dream.” Still, should the federal government be subsidizing economy-suffocating consumption?

Toward this end of offering up the ‘American dream’ with the money of others, the federal government has thrown many, many policies at getting more Americans to buy homes. These kinds of initiatives include changes to the tax code to stimulate mortgage borrowing, mandating that lenders lower their lending requirements, and backing risky loans to boost mortgage lending. Today, the federal government currently backs more than 90% of all mortgages issued.

Federal housing programs did succeed, at least for a time, in getting more Americans to buy homes. And as happens when demand increases and increased supply lags behind, home prices rose. A lot. In fact they rose far, far more than rates of homeownership. Mean housing prices tripled starting around 1997. By contrast, from 1995 to 2011, the cost of a new car rose by 50%, from $20,000 to $30,000.

But while U.S. housing policy has been very effective (cheap dollar policies another large factor here) at raising home prices, it’s utterly failed at actually raising rates of homeownership. Homeownership rates rose an entire 5.2 percentage points, from 64% in 1994 to an all-time high of 69.2% in 2004. And yet today, homeownership rates are back to 1995 levels.

Unfortunately, the federal government is still implementing policies aimed at keeping housing prices high. As a result, housing prices, and rent, remain way above where they would be without these policies.

For example, in April of this year, President Obama worried that not enough people were buying houses, and pushed to have the government guarantee even more home loans. Reason’s Anthony Randazzo looked at the Obama Administration’s mortgage programs and found a “clearly visible bump in the [price of housing] starting in March 2009 when a number of the programs to help housing started to kick in, including low interest rates and the first-time homebuyers credit.”

The President justified the move by claiming that more homebuying will help power the economic recovery. It’s a view shared by many, with CBS News reporting as fact that “Steady price increases [for houses] are the latest sign of a recovery in housing.” The New York Times wrote that “Higher home prices help the economy not just by strengthening the construction and real estate industries, but by making homeowners feel wealthier and more likely to spend.”

But the issue with this view is that it confuses cause and effect. Home buying is associated with prosperity because in the past, only prosperous people with good jobs bought homes. Home loans were hard to get. You needed a sizable down payment and a steady job to borrow. In the past, people bought homes when they were wealthier, not to feel wealthier.

Simply making home loans easier to get doesn’t make anyone richer. It does, however, make housing less affordable. And it doesn’t just hurt homebuyers. As more people are put off buying by sticker shock, or have to rent because they default on their mortgages, they’re dumped into a more competitive rental market.

...

Sources:

[1] "Millennials' Failure To Launch Is A Function Of Poor U.S. Housing Policy", Cathy Reisenwitz, Forbes, 31-Oct-2013

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