The American dream of homeownership is alive and well in 2021. But there’s a big problem and it’s hard to ignore. The price of owning a home is ridiculously expensive.
The pandemic has finally begun to ease up around the US and the world, and because of it, housing prices have spiked to a large degree. This is reminiscent of property prices during the peak of the most recent housing bubble. All over the country, a house will hit the market in a few hours, bidders are bidding up the price and houses are selling much higher than the initial asking price.
In March, housing prices rose by 13.3% according to the Case-Shiller home price index. This figure hasn’t been this high for 7 years.
All this is happening because of the idea of the American dream, the crazy system that we’ve created to keep it vibrant, and looking at homes as a type of wealth that accrues value with time. The system is unhealthy and overhauling it should be a major priority.
The wide majority of Americans believe that the value of a home should rise with time. But if you consider this thought for a moment, there is no real reason to maintain this expectation. Owning a house and the surrounding land doesn’t create more housing productivity, similar to owning Apple shares and investing in a company to help them create more smartphones.
A house is simply made of bricks, concrete, wood, steel, and other materials that eventually deteriorate as time passes. Buying a house should be very similar to buying a car. Over time, the value of the house should decrease with few exceptions just like a car, because wear and tear cause it to break down. In Japan, this is precisely how their housing market works.
But government policies prevent this from happening in the US. These policies are related to supply and demand. As far as demand is concerned, institutions backed by the government supports 30-year mortgages – this didn’t actually exist before the 1930s when the New Deal was introduced.
Loan insurance provided by the FHA reduces mortgage lending risk, and organizations like Ginnie Mae, Fannie May, and Freddie Mac purchase these loans on the secondary market. This allows banks to free up additional capital to make even more loans. Then there’s mortgage interest deduction which is a homeownership subsidy but Trump’s tax cuts diminished it substantially.
Adding everything up means big homeowner subsidies, which was a lot harder to accomplish prior to this setup. In the 1920s, as an example, a potential homeowner needed a 50% down payment to obtain a five-year loan with a balloon payment at the end, meaning they had to pay off the full principle on the remaining loan after five years.
Subsidies created by the New Deal certainly were not a bad thing, and this is especially true when home prices weren’t outrageously expensive and cities around the country had lots of room to expand. But this isn’t the case any longer right now, because most places have major construction restrictions in place. San Jose, New York City, and San Francisco are examples of places where it’s nearly impossible to build a new home. The wide majority of proposed developments goes to a year-long political and legal process consisting of local residents who strongly believe that new construction will diminish and deflate the value of their home, in conjunction with an unspoken desire to continue with racial segregation.
Severely diminished supply and subsidies demands means that the price of housing will continue to go up, which definitely has wide-ranging effects on economic and social situations in the United States. As prices steadily increase, this means a bigger share of the overall population is restricted from homeownership. It makes it harder for otherwise potential buyers to accumulate a big enough down payment. And another irony is that some baby boomers are having trouble selling their property at inflated prices in retirement. Slowing down new residential construction also means higher paying higher rent for individuals who do not own homes. These skyrocketing prices create destabilization in neighborhoods, because asset speculation becomes a deciding factor on where someone should live.
Also, using homes as a way to create profits means taking away this investment capital from other areas of growth that could be more productive, like green energy as an example. Recently, private equity firms have started investing heavily into buying up single-family homes.
This is an especially worrisome phenomenon. Wall Street still owns a tiny share of the housing market for single-family homes. But the overall problem is that large investments from financiers and individuals, is turning into what appears to be a Ponzi scheme. They are driving up prices because there’s another sucker born yesterday willing to pay the inflated amounts.
What can be done about this situation? It should make perfect sense for regular people to have the opportunity to own a home without paying outrageous prices. But at the same time, trying to get stable home prices is a goal that’s far wiser and definitely worth pursuing, and much better than trying to create a wealthier middle-class because of the appreciation of home prices.
There would need to be a number of different policies shifts to make this happen. In one example, renters would have equal policy priority along with the owners. They ought to boost rental vouchers to a similar amount that homeowners get for tax subsidies, while the worst ownership subsidies including the deduction of mortgage interest, which rich people claim, produces much larger homes at the top end and should be removed altogether. There should be rent control, to create stability in neighborhoods, and this will give renters a much more level playing field with homeowners, since a 30-year mortgage is similar to rent control for the upper and middle class.
Alternatively, there is a really big need for more houses in many of the biggest and most sought-after cities in the US. We can achieve this by altering zoning rules and beginning more construction on new houses instead of stopping new housing construction altogether in certain places. Social housing is another excellent opportunity to level the playing field. These are state owned apartments and houses that anyone could move into at any time. And constructing new homes will always be an expensive proposition at all times, and the biggest landlords will always attempt to aim to gain control of the market. On the other hand, social housing could set housing units aside for poor people at market rate, as well as folks with middle-class incomes. This will create a supply of new houses where it is definitely needed the most – across the entire spectrum of incomes, including rich people, poor people, and everyone in between.
Furthermore, the housing system on the whole will become more stabilized with social housing in place. Since the wide majority of housing construction is privately funded in America, after the Great Recession residential investments collapsed and it took years and years for it to recover, remaining at record lows for quite a while. This created a huge housing shortage and a shortage of apartments. Many of today’s young people are actually flush with cash right now because of the pandemic and rescue payments, so there aren’t enough homes for everyone to buy, and the home construction industry which has been devastated because of the housing downturn, is trying to scramble to rebuild itself and get back on track.
These are just some of the much-needed policy changes that must take place. But we’d also need to make a major mindset shift in order to make these changes. For many decades, the American people were taught that buying a home is a sensible investment and saving for a down payment is the most sensible thing to do.
At this time, this is fictitious and it’s a foolish idea to continue to maintain. You’re better off believing that it’s certainly fine to buy a house if that’s what you want to do, but renting is just as fine as well.