When the housing boom went bust and mortgage giants Fannie Mae andFreddie Mac failed, forcing taxpayers to cough up $150 billion and counting, Washington should have reconsidered its policy of promoting homeownership. It hasn’t.
Last Tuesday, Tim Geithner led a summit to determine the future of Fannie and Freddie. According to Geithner, “We will not support returning Fannie and Freddie to the role they played before conservatorship.”
We should hope not. But Geithner hastened to add that Washington would still play an important role in housing. “I believe there is a strong case to be made for a carefully designed guarantee in a reformed system, with the objective of providing stability in access to mortgages, even in future downturns.” HUD secretary Shaun Donovan put it this way: “The government’s footprint in housing finance needs to be much smaller than it is today.” Smaller? At a time when government backs 97% of new mortgages, it would be hard to make its footprint any larger.
For nearly a century it has been the policy of the U.S. government to increase American homeownership. Its efforts include (but aren’t limited to) bouts of easy money from the Fed, the mortgage-interest deduction, the exclusion of capital gains on primary residence sales, direct and indirect subsidies from the Department of Housing and Urban Development, and artificial liquidity pumped into the mortgage market via government sponsored entities Fannie and Freddie.
Policymakers assure us that the next generation of government housing programs will be “carefully designed” (bring on the next five-year plan, Comrade!). But the real question is why the government should be doing anything to promote homeownership.
“I do believe in the American Dream,” said President Bush in 2002. “Owning a home is a part of that dream, it just is. Right here in America, if you own your own home, you’re realizing the American dream.” Bush was echoing a theme that reaches back at least to Herbert Hoover: When the government encourages homeownership, the story goes, it strengthens individuals and communities and thereby fosters the American Dream.
They’re wrong. A government crusade to promote homeownership is un-American.
America’s distinction is that it was the first nation founded on the principle that you have a right to pursue your own happiness without government interference. But the government’s homeownership crusade means it gets to decide how you should live, and stick-and-carrot you into living that way.
Take the mortgage interest deduction. It so happens that Yaron has a mortgage and Don rents. Both of us have good reasons for our respective choices, but because the government has decided everyone should buy a home, for each dollar Yaron pays on his mortgage, he saves a few pennies on taxes, while Don does not. Instead of playing the role of impartial umpire, the government is playing the role of paternalistic master: “To keep more of your money, do what I want.”
And if that weren’t enough, the government also uses your money to get your neighbors to do what it wants. Welcome to the wild world of subsidies, where the government effectively robs Peter to house Paul. Typically these subsidies were indirect, as in the case of Fannie and Freddie. Their implicit government guarantee meant that you (and your kids) were forced to cosign on Fannie’s and Freddie’s debt in order to lower the cost of mortgages. This was supposed to benefit the people who did their duty and took out home loans, although it turned out to be a bad deal for everyone. Now, however, a number of policymakers, including the former patron saint of Fannie and Freddie, Barney Frank, are calling for direct subsidies to home buyers.
Here’s the real lesson: The American Dream is not some government-subsidized house foisted on you by George W. Bush or Barney Frank. It’s the undiluted freedom to decide how you want to live–and, if you want to own a home, it’s the freedom to work, save, establish credit, and earn one. In America, the government’s job is to protect our freedom to pursue our values, not to dictate what our values are. Its homeownership policy should be the same as its toaster oven policy: laissez-faire.
Government intervention in housing runs deep, and it can’t be eliminated overnight. But the government should make its long-term goal to fully extricate itself from the housing market. It can then start gradually dismantling Fannie, Freddie, tax preferences for homeowners, and every other government housing program.
Some say we can’t begin to accomplish this in the era of Obama. Our response: Yes, we can.