A couple of weeks ago, I noted that Fannie Mae and Freddie Mac are partially returning to their old tricks of promoting home ownership at all costs. By backing loans to "qualified first-time homebuyers" who put down as little as 3 percent of the value of a home, they're taking a step back toward the Clinton-era and Bush-era policies that led so directly to the mortgage meltdown.
Why would they do this?
Because government officials have long been hung up on the idea that home ownership is a good thing in itself, and that rising housing prices are a sign of increasing prosperity. Last year, President Obama went to Arizona (not quite ground zero for the last housing bubble, but close enough) to boast, "our housing market is beginning to heal. Home prices are rising at the fastest pace in seven years."
He added, "We've got to give more hardworking Americans the chance to buy their first home."
Well…That's not really happening. The Federal Reserve Bank of St. Louis reported yesterday that home ownership rates are dropping "in particular for first-time buyers or households headed by individuals age 35 and under."
That's not really a shocker when home prices are rising amidst presidential cheerleading—to the point where they're only 11 percent below the 2007 peak. If you raise the price on something, demand is likely to decline, especially when the bubble mentality of the last decade has evaporated (at least among the general public).
Notes the St. Louis Fed's Carlos Garriga, "housing demand and house prices have become disconnected since the financial crisis…This current episode could solidify the idea that it is possible to have housing booms driven entirely by investors."
So we may be back to the bubble, but this time without quite so many actual families' prosperity on the hook. With prices soaring back to the stratosphere, that declining home ownership rate is not only a natural reaction to the market, but very likely beneficial since it reduces exposure to the fallout when the new bubble pops.
Home ownership isn't inherently a good thing, anyway. It can be a good thing, but research suggests that it can also damage employment by reducing people's mobility. It can also be risky in other ways, argues Adam Posen of the Peterson Institute for International Economics, who objected to "the cult of home ownership" in a 2013 op-ed in the Financial Times:
in a free society, people who want to own homes and have the means should be able to purchase them, just as they would any other luxury item. But our governments do not need to subsidise that purchase. Increasing home ownership does not increase housing, least of all for the poor. Increasing home ownership in the US and Britain beyond what the free market would generate does, however, distort capital allocation, put a large share of household savings at unnecessary risk, impede mobility, and creates a powerful lobby for government transfers to the wealthy. And it creates housing bubbles to devastating effect.
So home prices are back up, this time driven by investors instead of families convinced by you-must-own-a-home happy talk. The federal government, Fannie Mae, and Freddie Mac are now doing their best to lure regular Americans back to the party.
Unless they've really thought through both the benefits and risks, Americans shouldn't take the bait.