Government Policies Are Responsible for the American Housing Crisis That Is Crowding Lower Income Households out of the Housing Market

This page includes the executive summary of Ed Pinto’s testimony to the House Ways and Means Committee. To read the full testimony, please click here.

Chairman Neal and Ranking Member Brady, and distinguished Members of the Committee, thank you for the opportunity to testify today.

Executive Summary:

The housing market is changing and the real culprit is a massive house price boom fueled by federal housing and monetary policies, which is increasingly crowding out lower-income Americans out of the housing market.

The current single-family housing boom, which began in 2012, was entirely foreseeable and was first noted by the AEI Housing Center in 2013. Since then, the housing market has been marked by too much demand chasing too little supply. Yet the policy response has been to boost demand even more: Federal housing agencies have loosened underwriting and the Fed has pursued zero interest rates and multiple rounds of quantitative easing, continuing even when the housing market began to appreciate at 16% in July 2021. In May 2022, home price gains were 17% and are only now expected to slow down as the Fed reverses these policies.

As a result, homeownership has gotten further out of reach for many lower-income and minority Americans. Consider that since 2012 wages have grown by 38%, but entry-level home prices have increased about 160%.[1]

This out-of-control price spiral means increased competition for fewer and fewer affordable homes. Potential entry-level buyers are increasingly pushed to the sidelines as they cannot afford to compete with more deep pocketed individuals, who experience the same competition, but higher up the price spectrum.

This is creating knock-off effects for people downstream. Left unable to buy a home, they remain in the rental pool, helping to drive up rents, which are now increasing at 16% nationwide. Many who cannot afford these rent hikes will be pushed into homelessness.

If that were not enough, inflation is now running between 8% and 9% and a Gallup survey from Jun. 1-20, 2022 finds that the Gallup Economic Confidence Index is now at its lowest level since 2009[2]

Inflation is a regressive tax and getting by – not to mention building savings to buy a home – is becoming increasingly difficult. Thus, misguided policies have severely hamstrung lower-income Americans, in particular minorities, who severely lag White Americans in homeownership and intergenerational wealth. If they can no longer reach the first rung of the housing ladder, how will they ever catch up?

The solutions are straightforward.

First, do not repeat the mistakes of the past.

Congress has undertaken 70 years of efforts involving many trillions of dollars in program expenditures, tax benefits, and government guaranteed financing. Yet neither the goal of making owner-occupied and rental homes affordable for low-income households, nor the goal of achieving generational wealth for low-income homeowners have been met.

The Build Back Better Act (BBBA) provides $184 billion in new housing related program expenditures, confirming that we have not learned from these failures.

As a cautionary tale, let’s examine the Housing and Community Development Act of 1968 and its aftermath. By 1975 its devastating inflationary impact and ineffectiveness were clear as these two books so forcefully document.

The first, “Cities Destroyed for Cash: The FHA Scandal at HUD”, was written by a reporter at the Detroit Free Press in 1973. As the title indicates, in the aftermath of the 1968 act, neighborhood after neighborhood was ruined as they were “FHA’d”. Many of these neighborhoods have yet to recover.

The second, “Housing Markets and Congressional Goals” (1975), was written by Ernest Fisher, one of the nation’s leading housing economists for 50 years. Fisher noted that the 1968 act and its goals “were unrealistic as a quota of production, and…were inappropriate and would probably prove as disappointing as had many of the programs presented to and adopted by Congress over the past two and a half decades.”

He observed:

[F]rom 1967 to 1971…the Boeckh index of cost of residential construction rose by nearly 33%, and the average sales price of new houses purchased with the assistance of FHA mortgage insurance rose by 28%, from $18,611 in 1967 to $23,835 in 1971.

[Expanding leverage] so as to make home purchase “possible for lower income prospective purchasers” may bring greater profits and wages to builders, building suppliers, and building labor rather than assisting lower-income households compete in the market.

There you have it: the 1968 act led to neighborhood ruination, scandal, housing inflation, and government profit seeking.

In my view, BBBA would have the same unrealistic and disappointing results.

Next, with regard to zoning, the federal government has again had a sordid past. The federal government back in 1921 led a national effort to implement exclusionary zoning and land use policies designed to make newly built homes too expensive for racial and ethnic groups to afford and we are still living with the consequences.

There is no denying that we need more market rate supply. But subsidies and easy credit are not the solutions. There is a growing consensus that to make housing more affordable we must increase supply, not ease credit or increase government subsidies or suppress interest rates. In order to stop the price spiral that is pricing lower-income Americans out of the housing market and driving up rents we need more market-rate supply. Let me add, zoning and land use policies are fundamentally a state and local issue and should be addressed at those levels. We are already seeing promise across the country, even in California, where the legislature has recently passed laws, which could meaningfully encourage new construction activity.

Next, federal policies to boost demand have been shown to be counterproductive. The Fed has belatedly realized that it needs to tighten the monetary spigot. But its policies have already done a lot of damage and will continue to haunt lower income Americans in the form of higher home prices, inflation, and rents for years to come.

The compounding effect of these changes will mean less resiliency for borrowers and neighborhoods, many of which are lower-income and minority, to withstand an economic stress event. With many economic dangers from rising interest rates, inflation, and sky-high home prices, lurking, regulators should do more to protect borrowers and taxpayers, rather than lowering lending standards. We have seen this movie before and we should not allow it to happen again.

What should be done beyond state and local actions to add to supply? Congress should set a policy goal of reliably building sustainable generational wealth for lower-income and minority Americans. Build intergenerational wealth and neighborhood and borrower resiliency by reducing the loan term 20- or 15-years on high-risk loans (Low-Income First Time Homebuyers (LIFT Home)):[3]

The FHA should implement Low-Income First Time Homebuyers (LIFT Home) for low-income, first-time, first-generation home buyers.[4]
The GSEs should implement the Wealth Building Home Loan to reduce risk to taxpayers and to encourage borrowers to build equity.[5]
Congress should consider funding the Low-Income First-Time Homebuyer tax credit (LIFT Home).[6] U.S. Senator Mark R. Warner (D-VA) and colleagues in 2021 introduced the Low-Income First Time Homebuyers (LIFT) Act to establish a new program to help first-time, first-generation homebuyers – predominately Americans of color – build wealth much more rapidly. By offering new homeowners a 20-year mortgage for roughly the same monthly payment as a traditional 30-year loan, LIFT will allow them to grow equity twice as fast.[7]

Footnotes:

[1] https://www.epi.org/nominal-wage-tracker/ and https://www.aei.org/housing [2] https://news.gallup.com/poll/148613/economic-confidence-sinks-lowest-level-march.aspx

[2] https://news.gallup.com/poll/148613/economic-confidence-sinks-lowest-level-march.aspx

[3] Wealth Building Home Loan and LIFT Home

[4] LIFT loans should be structured as an interest rate buy down on a 20-year loan made to first-generation homebuyers, rather than down payment assistance. The rate buy down, combined with a slightly lower rate due to the shorter term, along with a lower mortgage insurance cost, allows LIFT Home to have the same buying power as a 30-year loan. For the rate buy down, assistance should be provided as compensation to HUD/Rural Housing/Treasury for buying a below market yield Ginnie MBS.

[5] Applies the same concepts as LIFT Home, but runs through conventional loans and without federal subsidy.

[6] BBBA provided $5 billion for Lift Home.

[7] https://www.warner.senate.gov/public/index.cfm/2021/9/warner-colleagues-introduce-legislation-to-assist-first

To read the full testimony, please click here.