Owning a home is a big part of the American Dream. Families work and save for years in order to build capital for the down payment on a home where children can be raised in a nurturing environment. Today, however, for too many the home ownership dream is a dream never to be realized.
Instead, given the size of the federal deficit, each person is burdened with federal debt to the tune of about $100,000. While the government continues to print money, home prices keep rising. Wages do not keep pace.
Buying conditions to purchase a new home are the poorest in 40 years. Excess fiscal stimulus and too loose monetary policy have created a housing inflation crisis. And the nation faces a shortage of housing. The country needs over 4 million new homes. The country needs fundamental residential housing reform.
The Federal Reserve raised interest rates in order to maintain price stability which is essential to a growing economy. Interest rates increased at the fastest pace in recent history and caused rates on 30 year fixed rate mortgages to reach their highest level in 23 years. The excess stimulus also set off an inflation spiral in wages for construction workers and home-building materials. But the Federal Reserve is nearing the end of its program of tight monetary policy. The market expectation is that the Federal Reserve will soon begin to cut rates.
When that happens, mortgage rates will begin to fall. The price of the 30-year fixed mortgage is priced off the yield of the 10-year Treasury, which in turn moves on expectations about future interest rate policy. Lower interest rates are undoubtedly the most important step in making home ownership more affordable, and an easier monetary policy will go a long way to making home ownership again achievable. But lower rates won’t be enough. The residential housing market must be weaned off of government subsidies and unburdened from unnecessary regulations. We must refocus on supply.
Restrictive zoning requirements across the country make home ownership unaffordable. Zoning reduces supply.‘Not In My Back Yard’ denies too many people the fundamental right to own a home when they can afford a home.
The federal government each year transfers a very large amount of money to the states, particularly for Medicaid programs which have no meaningful effects on the health of the public. The federal government should use that leverage to pressure state governments to pass legislation requiring local governments to institute common sense, non-exclusionary zoning policy. Policy should encourage construction of multiple-unit housing, townhouses, for example. That would mean lower land acquisition costs. Remove unnecessary parking restrictions. Use land for homes, not vehicles.
The real estate industry should undertake a program publicizing the benefits of buying a modular home; not a mobile home, but a home constructed in a factory and then transported in units to the residential housing site. Modular home construction technologies significantly reduce the cost of home ownership. When a modular home is finished few can tell the difference. Resale value is not affected. Home ownership can be made more affordable without government intervention and without more subsidies.
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Unfortunately, many on the political left are addicted to policies that stimulate demand and do nothing about supply. They ignore the fact that when the supply of homes increases, prices will fall. They ignore economics 101.
We should let a freer housing market find the supply-demand equilibrium. By that course of action, the American dream of owning a home will be more easily in reach.
James Rogan is a former U.S. foreign service officer who later worked in finance and law for 30 years. He writes a daily note on the markets, politics, and society.