There was, apparently, an earthquake in Washington DC not too long ago. Thankfully, no one was hurt, and no serious property damage occurred as the 3.6 magnitude tremor rolled through. Mere days later, however, I learned that another tremor — this one not registered on any geological survey — centered around Washington DC occurred. From the Washington Post:
Responding to the collapse in home prices and the huge number of foreclosures, the Obama administration is pursuing an overhaul of government policy that could diverge from the emphasis on homeownership embraced by former administrations.
“In previous eras, we haven’t seen people question whether homeownership was the right decision. It was just assumed that’s where you want to go,” said Raphael Bostic, a senior official in the Department of Housing and Urban Development. “You’re not going to hear us say that.”
While this particular tremor hasn’t developed yet into anything earth-shattering just yet, and there are absolutely no details available just yet, for anyone even remotely connected to the real estate industry, these statements amount to a tectonic shift of realignment.
What rough beast, its hour come around at last, slouches towards DC to be born?
Early Warning Signs
To be fair, I haven’t personally paid attention to the debates going on around federal housing policy until I saw this article, and I’m catching up on some reading. There are likely a number of people — some of whom work at NAR — who have been on this for a while now.
But one early warning sign I found comes from the June 29, 2009 speech by Bruce Katz of the Brookings Institute. In it, Katz argues for a new direction in federal housing policy, saying:
I am here to celebrate the awakening of the federal government from the dead and its reemergence as a positive force for change in housing policy.
Like the Great Depression, the Great Recession is forcing the national government to both respond aggressively to the current foreclosure crisis while resetting the rules of the market going forward in order to minimize the potential for abuse and maximize consumer knowledge and choice.
At the same time, energy and environmental imperatives, fiscal constraints, the aging of our population, immigration and the structural gap between worker incomes and housing prices are driving a fundamental rethink of federal policy that builds upon the innovations pursued by states and localities over the past two decade. (Emphasis mine)
Reset the rules of the market. Fundamental rethink of federal policy. Got that? And what drives Mr. Katz to argue for a reset of the rules and a fundamental rethink?
The Great Recession was precipitated by madness in the mortgage market, a spurt of reckless lending and regulatory abdication that has wreaked colossal havoc on people, on communities, on institutions.
We cannot just dwell on what caused this crisis—we need to distill the lessons learned for policy going forward:
- Markets are not self policing and that sound and sensible regulation and oversight is part of healthy capitalism
- The financial literacy of many consumers has not kept pace with innovation in mortgage finance
- The US has underestimated the costs of homeownership and oversold the benefits
- And we have tilted the policy playing field too much to homeownership, denigrating rental housing in the process.
But the excesses of the past half decade only explain part of what is driving—and must drive—housing policy going forward.
Despite the decline in housing prices, the United States continues to face a stark disconnect between wages and the cost of owning and renting a home. This is not rocket science—workers earn too little and housing still costs too much, because the supply at the low end is inadequate.
Huh. There are places where a reasonable person might disagree with Mr. Katz on his casus belli. For example, one doesn’t have to agree that markets are not self-policing; an argument could be made that were it not for all the stimulus and bailouts, the banking system would have bankrupted those banks that were insolvent, gone through pain, then emerged out the other end by now. Of course, there are disagreements on such statements.
But the point of this post isn’t to engage in lengthy debates about political economy, but about looking at where U.S. housing policy might be headed.
Among the various things that Mr. Katz recommends are:
- A housing policy that embraces markets as a way to spur innovation and spread benefits, but also respects and reflects the critical role of regulation and oversight.
- A housing policy that understands that national challenges like resolving global warming or catalyzing a green economy require close linkages related policies on transportation, energy, labor and the environment.
- A housing policy that is evidence-based and performance-driven.
- A housing policy that is both federal and federalist—galvanizing the network of highly skilled state and local housing agencies, nonprofit intermediaries and private sector actors that has emerged in the absence of federal direction.
And he ends with this clarion call for action:
Most importantly, we need a housing policy that gets us closer to achieving the national goal set 60 years ago: to ensure that every American has access to a decent and affordable home in a suitable living environment. [Emphasis mine]
I emphasized the word “access to” because it suggests something rather different than the classic American Dream of homeownership.
The Gathering Storm
That speech was over a year ago. Fast forward to today, and we see this:
The decision to focus more on rental housing and less on homeownership differs in many ways from the Bush and Clinton administrations. President Bush touted an “ownership society” that sought to increase homeownership rates, specifically for low-income people. President Clinton had a “National Homeownership Strategy” that advocated for a specific homeownership rate.
HUD Secretary Shaun Donovan has been most out front in the administration in advocating a new approach. “While we continue to promote affordable homeownership, for many Americans, renting will continue to be the only or preferred option,” he told lawmakers recently.
Officials in a new Office of Capital Markets and Housing Finance set up in Treasury are studying options for reform, and generally have concluded that federal policy should focus on what they call “sustainable homeownership” and not on simply boosting the homeownership rate.
And still more:
Supporters of rental housing say they perceive an early but markedly different tone from the Obama administration. “My impression is that the administration at pretty much every level is serious about a balanced policy,” said Vincent O’Donnell of the Local Initiatives Support Corp. “Their purpose is to look at and make more workable rental housing programs.”
The Obama Administration has asked for public comments on seven broad questions on housing policy (no, it didn’t make big news three months ago, so yes, I missed it). But they’re interesting ones; read the whole thing. Just an example:
How should federal housing finance objectives be prioritized in the context of the broader objectives of housing policy?
Commentary could address: policy for sustainable homeownership; rental policy; balancing rental and ownership; how to account for regional differences; and affordability goals.
To me, there is a direct connection between the Katz speech from a year ago to these questions by HUD and Treasury. It seems to me that denying that the people within the Obama HUD and Treasury are indeed influenced by folks like Katz, and think tanks like Brookings is silly. Of course they’re influenced. The wording and the tenor of the “broad questions” suggest as much.
“Prioritizing” federal housing finance “objectives” clearly suggests a “fundamental rethink”, for example. If the fundamental policy remained promotion of homeownership, there is little reason to prioritize objectives. Bringing up rental policy, phrases like “sustainable homeownership”, and such strike me as almost a cheat-sheet providing clear hints as to what sorts of answers the Treasury and HUD are seeking here.
The NAR Response
As one might expect, the largest trade association in the country happens to be one that is directly involved with the housing market: NAR. It goes without saying that NAR has already responded to the seven questions (PDF). The response is also worth reading in full. A fuller discussion of the NAR positions will need to wait for a future post, but the answers are interesting at a high level.
For example, NAR argues (unsurprisingly) for homeownership to be the primary goal of housing policy, but appears to recognize that it cannot fight the “reprioritization” directly. So, for example, the language goes like this:
Establish: (a) reasonable housing affordability goals so all qualified borrowers, including low- and moderate-income households, have an opportunity to realize the dream of homeownership; and (b) reasonable multifamily rental housing affordability goals to increase the availability of financing for rental housing.
For what it’s worth, I think this is smart drafting. NAR has some good lobbyists, for sure. Note the phrase “dream of homeownership”, which stands in direct contrast to the Katz/HUD phrasing of “sustainable homeownership”.
In other answers, NAR is directly and forthrightly arguing for continued support for homeownership. To the extent that NAR appears to nod towards a federal rental policy, it looks to me like lip service. For example, here are a couple of answers from NAR:
1. Ensure an active secondary mortgage market by facilitating the flow of capital into the mortgage market for all types of housing, in all market conditions.
8. Ensure there is sufficient capital to support mortgage lending for all types of housing, in all market conditions.
Note the language: “all types of housing, in all market conditions”.
The bottomline recommendation from NAR is that Fannie Mae and Freddie Mac be turned into government-chartered entities with explicit guarantees by the United States, as opposed to the government-sponsored entities they are now. This way, Fannie/Freddie will become essentially a “wholly-owned” tool of the Federal government, even if legally separate. Existing government chartered entities include the FDIC, Corporation for Public Broadcasting, and the Tennessee Valley Authority.
There are further interesting points and suggestions in the NAR response, such as a nationalized loan underwriting standard. We’ll discuss them in the near future.
Some Questions & Implications
As I started writing this, I realized that the topic is huge. It’s hard to know even where to begin to ask questions or consider implications, even on a purely conjectural basis. I’ll be trying to tease those out in future days, weeks, and months myself.
But the central question is one of causation. Did the Federal housing policy evolve to meet the American Dream of homeownership? Or did the American Dream of homeownership evolve as a response to Federal housing policy?
Before the New Deal, mortgages often required 50% down payment on a 5 year loan, and interest rates floated with the market. Were it not for the Great Depression, it isn’t clear that institutions like the FHA, Fannie Mae, and others that support the contemporary housing market would have developed.
For the past couple of decades (if not more), the explicit policy of the United States was to encourage homeownership across the economic spectrum. The current mood in the Obama Administration and intellectuals like those at Brookings appears to be fairly hostile to the notion of homeownership as a public good in and of itself.
There are immediate political questions, of course. Given the current political environment, would Congress and the Administration really go after homeownership the way it appears to want to go after it? By emphasizing the “rental policy” as strongly as it does, is the Administration considering a set of national regulations over rental properties? Could we possibly be looking at a form of national rent control, or is that overly paranoid thinking?
The implications for the industry could not be bigger. Should the Federal government truly pursue a “sustainable homeownership” policy while boosting affordable rentals, it seems to me that the relatively low down-payment, low-interest 30-year fixed mortgages may be headed the way of the dodo bird. ”Sustainable” at a minimum suggests greater equity stake for the homeowner, combined with affordable payments. That the pool of potential buyers would shrink is a given; what such a drop in demand might do to home prices is fairly obvious.
And of course, what such an environment augurs for the real estate brokerage industry is… tectonic in scope. It would be nothing short of a new era in real estate. Existing business models may or may not survive such a paradigm shift. Things that seem impossible today may become not just reality, but a new normal.
I’ll be thinking and reading and writing about this; I hope you will too.