Michael Hoffman | United States
The privatization of Fannie Mae and Freddie Mac seems to be on the U.S. Treasury and Trump administration’s agenda, and with everyone predicting that a recession is on the horizon, it’s starting to feel like 2008 again.
From the Austrian perspective, allowing the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation to revert back to quasi-market-based institutions is optimal because it will open up competition and more realistic price discovery in terms of home financing and real estate prices (though not as much as we’d like to see).
With over 50 proposals to overhaul the real estate market, including a “smaller” role in the housing market for the Federal Housing Administration (FHA), the plan seeks to aid those who want to see housing become more affordable. Sounds good right? Not so fast. As the proverbial saying goes, be sure to read the fine print, since no one will be more affected by these potential political and economic changes than prospective American homeowners.
The Faults of Fannie Mae and Freddie Mac
Recall that Fannie Mae and Freddie Mac are, at their core, Government Sponsored Enterprises (GSE). Both are never far from government interference and entanglement. In fact, it looks as if both of them will be paying fees to the American taxpayer through the Department of Housing and Urban Development (HUD) for their protection by the U.S. government. In other words, a bailout.
While some may claim that this is positive news because it makes these two institutions more accountable to Americans, there are two problems. On the one hand, the taxpaying public being accommodated is not a bad thing… assuming that compensation actually reaches their wallets. “But fees paid by the companies would inevitably be absorbed into HUD’s budget rather than going directly to help low-income borrowers,” according to the chief executive of the National Housing Conference, David M. Dworkin.
More importantly, it still leaves room for moral hazard and thus bailouts. A company that believes, or in this case knows, that it will be protected by the government should it get into financial trouble will take on more risk relative to potential profits. These two housing giants have a deep history of dancing with the risk-taking devil, so one should be more than skeptical of any proposal that allows for a de facto bailout.
But wait, there’s more. It’s been argued that these plans are “shameful” and will make housing less affordable. Mortgages will, allegedly, be more difficult to obtain for credit-worthy borrowers. Does this ring a bell?
The Necessity of a Sustainable Economy
The U.S. is now in the longest economic boom in its history, and any Austrian economist worth his salt who’s been paying attention for the last decade knows that this false boom is a bubble just waiting to pop. Rising housing prices are an indication of a lack of supply of affordable housing, and artificially low-interest rates influenced by Federal Reserve monetary policy. This has created a boom in housing which has seen an immense rise in mortgages and rents.
The question, therefore shouldn’t be whether housing is affordable. It should be whether housing prices are sustainable. In the Austrian theory of the business cycle, resource constraints and relative prices reveal that the pattern of investment in industries such as real estate has been mistaken, and this malinvestment must be liquidated in order for labor and capital to be reallocated to industries that in more need of such services. It’s become evident that current housing prices cannot be justified with the supply of moderately-priced housing inadequate with the current demand.
The only way for housing to be more affordable in the long-run is to let the price mechanism work without interference from central banking or government policy, even if their aim is to increase homeownership. The plans of the U.S. Treasury and Trump administration seem to bring the economy closer to this ideal, which does sound enticing. But if history is any lesson, the government should sever its ties with these institutions entirely because if it doesn’t, we’ll repeat the housing crises of the past.
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