The government's harmful, costly obsession with homeownership

The government's harmful, costly obsession with homeownership

fannie1_300x200The federal government has spent vast sums of money promoting homeownership through subsidies, tax exemptions and credits, and bailouts. For example, in wealthy Alexandria, Virginia, certain people who never saved up enough money for a down payment received interest-free loans from the federal government to enable them to make a down payment, loans they never have to repay until they sell their home.

Thrifty people with savings were not eligible for such a handout, effectively punishing them for being financially responsible. Advocates of taxpayer subsidies for homeownership falsely claim they promote stability and prosperity.

But they do just the opposite. As George Mason University’s Michael Greve notes, “there’s actually very little support that home ownership correlates with—let alone promotes—democratic stability. If anything, the data suggest that ownership rates are inversely correlated with political stability and the rule of law.” Bankrupt, unstable Greece has a much higher homeownership rate than does the United States. Stable, prosperous Germany and Switzerland have much lower homeownership rates than the U.S. does. European countries facing fiscal crises, like Italy, Spain, and Portugal, have higher homeownership rates.

Similarly, The Washington Post reports that a recent study found that “higher levels of homeownership can kill jobs”:

Andrew Oswald and Dartmouth’s David G. Blanchflower have a brand new working paper (pdf) suggesting that homeownership has an even bigger and wider effect on unemployment than anyone has realized. Here are the key points:

“We find that rises in the home-ownership rate in a US state are a precursor to eventual sharp rises in unemployment in that state. …A doubling of the rate of home-ownership in a US state is followed in the long-run by more than a doubling of the later unemployment rate.”

. . .the authors argue that homeownership has a much broader — and negative — impact on the labor market as a whole.

Why is that? The authors find that higher levels of homeownership in a state appear to be associated with lower levels of labor mobility, higher commute times, and fewer new businesses created. Taken together, those three factors tend to increase the unemployment rate.

As the Washington Post notes, “Economists have long wondered whether higher rates of homeownership can actually make unemployment even worse. One possibility is that if people are tied down to their homes, it’s harder to move to find a suitable job. Back in the 1990s, British economist Andrew Oswald first showed that higher levels of homeownership were correlated with higher levels of unemployment across European countries and within the United States.”

Taxpayers have spent countless billions bailing out the government-backed mortgage giants, Fannie Mae and Freddie Mac, which are known as the Government-Sponsored Enterprises (“GSEs”). These entities were earlier spawned and indirectly subsidized by the government (through special privileges, such as immunities from taxation, and other hidden taxpayer subsidies worth perhaps $10 billion annually) under the assumption that their existence was necessary to maximize home ownership levels, noted financial regulation expert Alex Pollock in congressional testimony. But as Pollock notes, ”The experiences of other countries make it obvious that high home ownership levels can be attained without GSEs,” and “without government orders to make ‘creative’—that is riskier—mortgage loans, which were part of being a GSE.” As Greve notes, these other countries have more of a “private housing finance market” than we do, thanks to the GSEs and other forms of government involvement in our mortgage markets.  So even if you think promoting homeownership is a good thing, using government-sponsored mortgage giants isn’t the way to do it.

In The Wall Street Journal, Peter Wallison, who prophetically warned against the risky practices of mortgage giant Fannie Mae, described the key role it played in spawning the recent financial crisis, in an article entitled “Government-Sponsored Meltdown.” He cited a recent book about the causes of the crisis by New York Times business reporter Gretchen Morgenson and financial analyst Josh Rosner, a book called “Reckless Endangerment,” which chronicled how “it was Fannie Mae and the government housing policies it supported, pursued, and exploited that brought the financial system to a halt in 2008.”

But federal officials don’t seem to have learned anything from this. They are still seeking to expand the homeownership rate through taxpayer subsidies and risky mortgage loans to people who may never be able to repay them. As The Washington Post reported, “The Obama administration is engaged in a broad push to make more home loans available to people with weaker credit, an effort that. . . skeptics say could open the door to the risky lending that caused the housing crash in the first place. . . . administration officials say they are working to get banks to lend to a wider range of borrowers by taking advantage of taxpayer-backed programs — including those offered by the Federal Housing Administration — that insure home loans against default.” Previously, the administration bailed out some real estate speculators and flippers, as well as some deadbeats who had high-incomes and modest mortgage payments, and thus could easily have afforded their mortgages had they only been financially responsible.

Hans Bader

Hans Bader

Hans Bader practices law in Washington, D.C. After studying economics and history at the University of Virginia and law at Harvard, he practiced civil-rights, international-trade, and constitutional law. He also once worked in the Education Department. Hans writes for and has appeared on C-SPAN’s “Washington Journal.” Contact him at


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