Ending Homeownership Support

According to Tim Fernholz’s reporting, everyone is still really jazzed about the idea that government intervention into the economy is necessary to promote homeownership. Also according to Fernholz, this consensus is a good thing. I’m really dubious. He does make the very good point, however, that you can’t just lazily assert that you want to see the government get out of this business and “leave it to the private sector.” If we leave it to the private sector, things will look very different:

Before the government became involved in the mortgage market, homeownership was largely based on down payments and five-year mortgage loans that put borrowers at the mercy of short-term economic changes; in short, homeownership was for the wealthy. [...] Were the United States to ditch federal involvement in housing finance completely, as some critics have suggested, some of the trade-offs would include rising mortgage interest rates, reduced access to home loans and a dearth of long-term credit for home loans; not to mention that doing so immediately would lead to irrevocable economic damage.

I think it’s important here to distinguish between the short-term and long-term issue. I think introducing a chaotic reorganization of housing finance into the current economic mess would be an unwise risk.

But think about the long-run equilibrium here. There’s all this housing stock in the United States. And there are all these households in the United States. Households will want to live in houses and will be willing to pay for the privilege of doing so. And housing stock exists in which for them to live. If it’s not feasible for non-wealthy households to borrow funds to purchase homes, but non-wealthy households still have income they’re willing to spend on housing, then it will become profitable for cash-rich firms or individuals to start (or invest in) businesses that pay cash for houses and then rent them to non-wealthy families. The current existence of large subsidies for homeownership means that the rental market is dominated by efforts to serve the non-creditworthy with low-quality housing, and by amateurs engaged in small-scale landlording spurred by temporary relocation or as part of some kind of speculative scheme.

Absent such subsidies, there would be an obvious business opportunity for larger-scale professionalized residential property management companies. The analogy would be, I think, to the current market for office space which firms generally lease from other firms that specialize in the field of owning and renting office space. It’s a perfectly workable system, and shifting housing in that direction would inject some much-needed flexibility into the economy. It would also appropriately shift risk off the shoulders of middle class families and onto the shoulders of larger firms who are more capable of hedging and managing that risk.