October 21, 2024
The Misdiagnosed Cause of Unaffordable Home Prices
In her recent interview with Bret Baier on Fox News, Democratic presidential candidate Kamala Harris said that she would solve the housing affordability crisis by lowering home prices, which she proposes to do by increasing the supply of houses.
That alone reveals her economic ignorance. The reason housing costs are so high is not a lack of supply. There are plenty of houses. They are just unaffordable.
In fact, there is a housing surplus remaining from the building boom that occurred during the housing bubble that burst in 2007, which precipitated the 2008 financial crisis. In the wake of the bubble, because there were already so many new vacant homes, there was necessarily a reduction in construction activity relative to growth in households. The vacancy rate naturally decreased as the supply and demand moved toward equilibrium-which was, of course, a good thing.
The argument that the problem is a "housing shortage", however, treats that reduction as though it were a bad thing, as if construction activity should have just continued along the same trajectory it was on during the bubble.
The misconception that the problem is a housing shortage is propagated by the Federal Home Loan Mortgage Corporation, or "Freddie Mac", which is a "government sponsored enterprise" (GSE) that was established in 1970 to create what the government considers to be "competition" with its sister organization, the Federal National Mortgage Association, or "Fannie Mae".
Fannie Mae was established as part of "the New Deal" in 1938 to provide liquidity to the fractional reserve banking system, the goal of which was to ensure that the banks had enough capital on hand to be able to make more loans. Why? Because clueless politicians believed then, as they do today, that economic growth comes from mere borrowing and spending as opposed to being a product of savings and capital investment.
Government policymakers also perpetually fail to understand the critical role in the economy of market prices, which are the signals that investors and entrepreneurs use to make decisions about how to efficiently direct scarce resources toward the most productive ends as determined by the will of consumers, which is to say, by all of us. The bureaucrats think that they know better than we do how our hard-earned dollars out to be spent, and they utilize the monopoly on violence known as "government" to get their way.
The "government sponsored enterprises" are a manifestation of this belief in the use of force to achieve aims, which contrasts with the belief in the non-aggression principle and the free market principle of engaging in voluntary exchange for mutual benefit.
Fannie Mae and Freddie Mac buy mortgages from lenders and bundle them into mortgage-backed securities (MBS), which they then sell to investors. This is how the desired liquidity is provided to the banks to ensure that more people go into debt.
It should not be too surprising, therefore, that, instead of recognizing that the housing surplus resulting from the construction boom during the 2000s housing bubble was part of the problem, Freddie Mac misdiagnoses the problem as being the subsequent market correction. The government-backed mortgage industry points to the decrease in vacancy rates as evidence of a "housing shortage".
Financial "experts", including analysts within the Federal Reserve banking system, then cite Freddie Mac's assessment as though it were flawless, and government officials and the mainstream media then propagate the claim while conveniently seeming to forget that there had even been a housing bubble.
This institutionalized myopia becomes even less surprising when one considers how that earlier housing bubble was in no small part a consequence of the government's policy of encouraging homeownership, which tied directly into the role of the "government sponsored enterprises" in buying, bundling, and reselling subprime mortgages.
The other primary cause of the housing bubble was the Federal Reserve's inflationary monetary policy aimed at keeping interest rates artificially low, by which I mean lower than they otherwise would have been if determined by the market-by the supply and demand for capital-rather than by central planners engaged in the price fixing of interest rates.
Naturally, when the government royally screws up the economy, policymakers have only the free market to blame.
So, instead of recognizing the problem as being the government's massive interventions into the housing market, politicians instead blame the market for its ostensible failure to provide a sufficient supply of homes, which phantom menace they then say they will solve with-what else?-even more government intervention.
How the Crisis Was Caused by Policies Kamala Harris Supported
Besides citing Freddie Mac to support the claim that the problem is the market's failure to provide a sufficient supply of houses, regime apologists point to how there have been relatively fewer homes on the market in recent years compared to historical seasonal averages, which is largely because so many existing homeowners have been reluctant to sell. But this is, again, not because there are not enough houses.
Instead, one of the major reasons for it is that it just doesn't make much sense for owners who are locked into a historically low mortgage rate to sell their current home and buy a new one at today's higher rates.
The reason mortgage rates have been higher in the past couple of years than they were for the preceding decade is because the government responded to the COVID‑19 pandemic by deliberately shutting down the economy while the Federal Reserve dutifully acted to try to paper over the extreme economic harms caused by the lockdown madness by creating trillions of new dollars out of thin air.
This is not unlike how the Fed responded to the bursting of the housing bubble in 2007 by doing more of the same as what caused it, only on a massively greater scale. In essence, the Fed responded to the bursting of the housing bubble by trying to blow it back up again (including by adding mortgage-backed securities to its balance sheet).
To inflate the money supply, of course, all else remaining the same, necessarily equates to a reduction in the value that is represented by each dollar, which represents a certain amount of labor to those of us who can't just counterfeit our way into money and actually have to work for it. Because of the monetary inflation during the lockdown madness, coupled with the supply chain disruptions, prices for goods and services throughout the economy rose dramatically, and the housing market was certainly no exception.
The central planners who caused the problem first tried to fool everyone into believing that the price inflation was no big deal, that it would be "transitory"; but that, of course, proved to be ridiculous nonsense, and because of the incredible financial hardships it created for so many Americans, the Fed was eventually forced to reduce its balance sheet and let interest rates rise in an effort to reduce the rate of at which prices were increasing.
It is critical to understand that the Federal Reserve is a government-legislated private monopoly over the supply of currency that exists to manipulate the economy through legalized counterfeiting. Its massive monetary inflation both in the wake of the 2000s housing bubble and the COVID‑19 lockdowns served to rob Americans of their purchasing power-effecting an upwards transfer of wealth from the hard-working masses to the parasite class of politically connected financial elites.
How the Fed Manipulates Interest Rates
The Fed doesn't directly determine mortgage rates, but they are affected by Fed policy, including the "federal funds rate", which is the rate at which banks with excess reserves lend to other banks overnight so the borrowing banks can meet their legal reserve requirement. The Fed sets a target rate and tries to reach it by engaging in market manipulation, buying or selling government debt instruments like 10-year Treasury bonds.
When the Fed buys government securities from other banks, it increases those banks' reserves, enabling them to lend more and reducing the need for overnight borrowing. Due to the reduced demand for overnight loans, the federal funds rate falls. To increase the rate, the Fed does the opposite, selling government securities to other banks and thus increasing demand for this interbank lending.
When banks have cheaper borrowing costs of their own and greater reserves, it is in their financial interests to attract more borrowers by offering loans at lower rates, and the Fed's monetary manipulation thus affects interest rates on bank loans to businesses and consumers, including mortgages.
In essence, to lower interest rates and encourage borrowing, the Fed greatly expanded the money supply, which monetary inflation was the primary cause of the price inflation that has been so greatly harming most Americans. The housing market, of course, was not immune to this price inflation, which is why housing prices have also soared.
Just last month, under the presumption that the "transitory" price inflation is back under control, the Federal Reserve cut the federal funds rate for the first time since its emergency response to the government's forced economic shutdown. This rate cut was anticipated to push mortgage rates down, but so far that hasn't happened. In fact, mortgage rates have been ticking back upwards in recent weeks, although they are still below where they were at this time last year.
The weekly average interest rate for a 30-year fixed-rate mortgage peaked near 7.8% last October, was down to about 6.1% last month, and is presently at 6.4%, according to data from Freddie Mac.
This has incentivized more owners who bought when rates were even higher to put their homes on the market, but home sales remain at a low level largely because, as CNN puts it, the housing market "remains paralyzed by high prices".
Obligatorily, CNN adds that the market is also paralyzed by "chronically low supply", but at least it got the part about high prices right.
How Would Kamala Harris Increase the Housing Supply?
During her interview with Bret Baier, Kamala Harris did not explain how she intended to increase the supply of homes. Her campaign has, however, issued the sketch of a plan, the first goal of which is to incentivize the construction of 3 million new homes.
To achieve that goal, the plan calls for a tax incentive to homebuilders plus subsidies for rental housing construction. In other words, the proposed solution to the problems caused by government intervention is the usual plan for even more government intervention.
Additionally, the Harris campaign aims to "Cut Red Tape and Needless Bureaucracy". That part doesn't sound so bad, but the plan doesn't specify what federal regulations would be rolled back to eliminate obstacles and reduce the total cost of constructing a new housing unit. Is the aim to have the federal government dictate to the states and municipalities how residential properties ought to be regulated? Will it mean cutting corners on safety and quality? Less energy efficiency? Your guess is as good as mine.
A second goal of Harris's plan is ostensibly aimed at making rent more affordable by "Lowering the Rent for Hardworking Americans by Taking on Corporate and Major Landlords." The ostensible problem that this is intended to solve is what the plan calls " predatory investing", which refers in this case to major investors who buy up single-family homes to rent them out, outbidding families seeking a primary residence in the process.
It is true that there has been a trend of investors buying up homes to rent out, but this is not in itself necessarily a problem. Moreover, it is not the fundamental cause of the housing affordability crisis. Instead, this, too, is largely a consequence of the government screwing up the housing market so badly in the first place. It's another symptom, not the disease.
This trend began in earnest in the wake of the 2000s housing bubble, when institutional investors bought up foreclosed homes to turn them into rental properties. Far from viewing this as an inherent problem, analysts within the Federal Reserve banking system credit such investors with improving the quality of the housing stock and stabilizing prices, thus contributing to what is described as the housing "recovery".
The downside, as already mentioned, is that such investors have been outbidding people seeking to buy a home to use as their own primary residence.
Since the housing "recovery", the institutional investment in existing single-family homes has continued to be incentivized by factors including the historically low interest rates that persisted until a rapid increase during 2022, an increased demand for housing, the supply chain problems caused by the lockdown madness that contributed to soaring construction costs, and the rising value of homes in dollar terms resulting from all the dollar devaluation. Basically, investors have understandably viewed rental properties as a means to protect their wealth from the dollar devaluation by generating recurring income and taking advantage of the asset inflation to build equity.
Lots of people blame such investors for their role in the affordability crisis, but they can hardly be faulted for responding to the incentives created by the government's incessant meddling in the housing market.
The bottom line is that Kamala Harris's plan to build more houses won't solve the true underlying problems. It will just serve as a subsidy to wealthy real estate developers (who aren't going to be giving away the newly constructed homes for free).
Naturally, Harris points to an imagined failure of the market as the cause of the problem instead of explaining how the housing affordability crisis was really caused by the very policies that she has supported as vice president under the Biden administration.
Reducing Housing Prices by... Increasing Demand?
I said earlier that Kamala Harris's error in blaming the problem on a "housing shortage" is a sufficient illustration of her economic ignorance, but it gets worse.
While she did not explain during her interview with Bret Baier how she proposed to increase the housing supply, she did say that she aimed to provide "$25,000 down-payment assistance for first-time homebuyers".
So, she wants to lower home prices by forcibly reallocating scarce resources for the purpose of increasing demand for homes! Clearly, nobody ever explained to Harris how the law of supply and demand works.
Harris was referring to the third and final aspect of her campaign's plan to " Build the American Dream", which of course entails using the threat of government force to confiscate wealth from some Americans to redistribute it to others. What else would we need the government for?!
The released sketch of the plan rightly notes that many responsible and hard-working Americans simply cannot save enough money to make a down payment on a home. But it goes on to once again misdiagnose the real problem by proposing the following:
As the Harris-Walz plan starts to expand the supply of entry-level homes, they will, during their first term, provide working families who have paid their rent on time for two years and are buying their first home up to $25,000 in down-payment assistance, with more generous support for first-generation homeowners.
What the Harris campaign doesn't explain is how this wealth redistribution is supposed to fix the underlying problem.
For one, the high purchase price for a home is not the only obstacle. While mortgage rates have been much higher in the past, reaching over 18% in the early 1980s, and while rates have come down from their November 2023 peak of nearly 8%, younger generations of potential homeowners are still facing higher borrowing costs than they've seen since the 2008 financial crisis. Additionally, insurance costs and property taxes have increased, making monthly payments unaffordable even for people who've saved enough money for a 20% down payment on a decent single-family home.
Beyond that, there is the inherent self-contradiction between the mainstream narrative that the only way to solve the affordability crisis is to vastly expand the housing supply and the plan to subsidize first-time home buyers to the tune of $25,000, which logically would serve instead to increase the demand for homes.
As noted in an article from Realtor.com, which is a website of the National Association of Realtors, a trade association representing real estate brokers, Kamala Harris's plan "was light on specific details" and "quickly sparked heated debate, with some housing policy experts praising the proposal and others warning it could fuel runaway increases in home prices."
The article accepts the premise that there is a housing shortage based, of course, on the reduced construction activity following the 2000s housing bubble-the usual fallacy of failing to consider the fact that there was a housing bubble.
Naturally, the National Association of Home Builders "praised Harris" for misdiagnosing the cause of the problem as being a shortage of homes and promising to send construction companies a windfall of tax incentives and subsidies.
However, Kamala Harris's plan "could backfire", the article also notes, "by stoking demand in an already hot housing market, driving home prices even higher." In the words of Ken Johnson, a professor of finance at the University of Mississippi, Harris's plan would be like "throwing gasoline on an already on-fire housing market".
Matthew S. Roland, assistant dean for the Real Estate Development program at the University of Buffalo School of Architecture and Planning, additionally noted that, even with $25,000 in assistance, that would cover a 20% down payment for a home valued only up to $125,000, which is, Realtor.com observed, "a price range that is virtually nonexistent".
Totally incognizant of how the government caused the price inflation, Kamala Harris's plan goes on to propose resolving the problem of high food prices by blaming food producers and retailers for "unfair" pricing. Naturally, she refuses to take any responsibility for supporting the policies that caused the problem and instead blames the free market for its ostensible failure to prevent what she calls "price gouging".
This level of economic ignorance from someone seeking executive authority to achieve policy goals through the threat or use of state violence is sufficiently dangerous to disqualify any presidential candidate from consideration.
But that won't stop millions of Americans from rushing to legitimize their own disenfranchisement and servitude to the central banking cartel and the politically connected special interest groups who refuse to fairly compete in the marketplace and instead get the government to utilize force to expropriate wealth from certain groups of Americans to be redistributed for the purpose of serving their own financial interests.
The key lesson of the 2000s housing bubble has yet to be learned. As ever, the free market is blamed for the problems caused by harmful government intervention, and the proposed solutions offered by clueless politicians serving the criminal organization in Washington always involve even more harmful government interference into every aspect of our lives.
When will the American people ever awaken to the fact that central planning doesn't work and realize that economic freedom is infinitely better than servitude to the parasites whom they persist on voting into power?
This article was originally published at JeremyRHammond.com.