The American Housing Crisis

When a society agrees that housing should be the primary vehicle of retirement funds, you can expect a complete disaster down the road.

Very recently, DJT announced that he intends to take Freddie Mac and Fannie Mae public with explicit government guarantees. As all young men with a Twitter do, they immediately sent this nonsense to their very political group chat with buddies who engage in lots of lively chats. Often times, there are contrasting opinions. But not today. There was agreement that this was a world class disaster idea.

Freddie Mac and Fannie Mae are government-sponsored enterprises that buy mortgages from private lenders and package them into mortgage-backed securities. They don't give out loans directly, but they make it possible for banks to give out more loans by absorbing the risk. Fannie Mae has been around since 1938, Freddie Mac since 1970. The government has been distorting the mortgage market for almost 90 years. After the housing crisis in '08, both were placed into federal conservatorship and have operated under explicit government backing ever since. The result? Private lenders hand out optimistic mortgages knowing the risk lands on the taxpayer. For decades, this system has been putting people in homes they can't afford at the expense of the taxpayer. Not only is the expense in covering the underwater loans, but by increasing demand for housing, the market is now inflated. So, people pay taxes which are then used to increase demand, inflating the cost of housing so they can't afford it. A double kick in the nuts.

I don't want to focus on Trump's proposition too much (because it is so insane there is no way it actually happens), but the idea is essentially that Mac/Mae would operate as publicly traded companies who are still funded by the federal government to provide dog shit loans. Note: if what Trump actually meant was the government will guarantee all existing loans while Mae/Mac now have no federal backing for new loans, that's a different story (and a nightmarish story to try to decipher).

Why These Loans Are Garbage

The system enables loans to people who really can't afford them, at subsidized rates. GSE-backed loans actually defaulted at lowerrates than private-label mortgages during the '08 crisis. It was Wall Street's unregulated mortgage-backed securities that blew up the worst. But the GSEs' problem was sheer scale: they guaranteed trillionsin mortgages, so even a modest default rate required a $190 billion taxpayer bailout. And when things go south, the government bends over backwards to prevent defaults. During COVID, borrowers could pause payments for up to 18 months with no penalty. Missed payments were simply tacked onto the end of the loan. No change in principal, no rate change, just good old fashioned taxpayer absorbing the risk for people who took on debt they couldn't pay down.

So not only does the federal government use your taxes to pay for bad mortgages for others, but by doing so it inflates the value of the home you want to purchase so it is unattainable. Moral of the story? The government should have stayed out of housing financing, and now is a better time than later to start correcting its mistake. The government should instead focus on deregulating building permitting and zoning so that we can actually build new, dense housing to accommodate population growth and live in nicer places for less money. But they won't. No shot. And here is why.

Why Nothing Will Change

First, people who own homes (a lot of people) need their home to rise in value for their retirement funds. Housing equity makes up a majority of the median retirement portfolio in America. Any politician who threatens that is dead on arrival.

Second, if the cost of housing came down, so would assets. Let's say I get my way and good old free market capitalism sweeps over the housing market and government actually allows us to build new shit. The housing market will collapse. I mean collapse. 30%+. Assets are correlated, and other assets will plummet, which will not make the donor class very happy at all. It will cause a gigantic recession. Even considering this outcome, I am hoping for the correction. Every single young person in this country should be hoping for it as well. Not because they need extra help, or they are "socialist," but because they want to bring back free market capitalism to American assets.

The Tools That Don't Work

You may say: why can't we just get more people into homes using different tools? Why do we need to collapse the housing market? Let's look at what's available. Specifically, how can we make housing more attainable and affordable while ensuring that the market continues to rise?

Interest Rates

This has been the bread and butter of this country for the better part of the last 50 years. Just a bunch of people on their knees begging for ZIRP. Begging for low rates. Here is what low rates actually do.

Mortgage payments come down. The sticker price goes up, and monthly payments go down. A win for retirement accounts and for buyers, supposedly. But if everyone who owns a home now has a 3% rate (because you can refinance a fixed rate mortgage for the remainder of its length), and current rates are at 8%, then who can afford the homes? If all the home owners value their homes at 3% rates, and the buyers value the same home at 8% rates, the discrepancy will be massive. This is what creates a housing bubble and it is causing the exact one we are seeing right now.

And why can't we just have low rates? Low rates lead to rampant inflation and wild leveraging sprees. It creates an economy that devalues productive work and incentivizes just owning as much as absolutely possible because inflation will turn the same payment from a burden to a light dent in a matter of just a few years. It encourages all the wrong things in an economy.

Federally Subsidized Housing

This is essentially what started this whole discussion. Freddie Mac and Fannie Mae use taxpayer dollars to subsidize home ownership for lower and middle class. Sounds great at first. But once again, this is a temporary, bullshit band-aid solution that will only make the root cause worse. Things like Section 8 or subsidized loans result in increased prices to rent or buy, while the underlying asset gains value at the expense of the taxpayer.

Why Housing as Retirement Is Broken

Why do we need housing to support retirement when there are a myriad of better options? If housing is cheaper, you don't need as much retirement saved up. You could be investing in the stock market, buying bonds, sending kids to school, starting a business, giving to charity.

The 30 year fixed rate mortgage essentially led people to purchase homes they couldn't afford, increasing demand and driving up prices. The 30 year fixed is almost uniquely American. Most countries use adjustable rate mortgages. The product only exists because of Fannie Mae and Freddie Mac, which created a secondary market large enough to make it viable for lenders. Without government backing, no private lender would take on 30 years of interest rate risk. So the very instrument that Americans consider a birthright is itself a product of the government distortion I've been describing.

These buyers add to those who need the housing market to go up because their retirement depends on it. It creates a musical chairs scenario where individuals need to get in on a home to ride the inflation wave and spiking asset values, but this dream has an ugly ending one way or another. So you better get off the ride before it crashes.

Potential Outcomes

Scenario 1: Permanent Inflation. House prices keep going up, so rates stay low. This causes massive inflation. Wages continue to be diminished as asset values skyrocket. This ultimately ends in normal people being unable to grow wealth because they can no longer afford any assets. In this scenario, expect the government to go deeper and deeper into debt to subsidize working and lower class housing at the expense of the middle class, who are now also completely priced out. This will cause an even larger increase in wealth inequality in the country and continue to encourage gambling as the better way to achieve wealth as opposed to productive work.

Scenario 2: The Correction. The painful yet necessary "coming to Jesus" moment for the entire US economy. The only way out is through. Someone, almost everyone, is going to take a loss. The reality is that people owe loans for assets that are worth significantly less than they would like to believe. When the market corrects, it will cause a massive economic collapse. If you're smart enough to develop an off-ramp to this disaster, my ears are open. But there will inevitably be pain.

What Would It Take?

So what actually gets the ball rolling? What policy changes would have to be enacted?

1. Building. This is likely the easiest one to get most people on board. Because while deregulating to allow denser building will bring down the value of homes, at least there is tangible and visible value in watching cities and suburbs modernize to allow for more housing, which brings in more shops, restaurants, and businesses. We need to go after the zoning and permitting restrictions enacted in the 1970s that are now a stranglehold on our ability to provide and improve housing in this country.

2. Eliminate the federal deficit. Mostly by raising taxes, especially in the upper brackets. You might think this is completely out of left field. For the last thousand words I have been bitching and moaning for the federal government to stay out of the loan business and deregulate the housing industry. You might paint me as a libertarian free market extremist. I wouldn't consider myself an extremist, but frankly I'm not that far off. So to suggest raising taxes on the rich may be a surprise.

But here is the reality. The larger the government deficit, the more they need to borrow money. When the government goes into debt to pay for services for the poor, they are doing so by paying for housing, healthcare, military funding, much of which funds the assets of those who own them. Essentially, the government borrows money from the wealthy with interest, and then uses that money to purchase services, rents, and research that increase the value of assets. Then, those bonds are paid back with interest. It is directly contributing to growing wealth inequality.

This is where I likely lose my conservative readers with claims like "this kid is just a socialist." Well, they are extremely wrong. It is the older asset holders that are the ones who beg for socialism. They want socialism in the form of federal bailouts when their assets collapse.

For the last few decades, interest rates have been at historically low levels, especially after the crisis in '08 and COVID. These incidents resulted in ZIRP, which causes runaway inflation. This inflation is a huge boon to assets while it punishes the working class whose wages cannot keep up. While individuals are working and losing access to building wealth, it is those who already own the assets who sit on them and watch them balloon in value while they add no value to the product.

This is the heart of the issue I take with the economy. If someone buys a run down home and either remodels or rebuilds it, preferably into something denser, they are providing a huge value to society by increasing the quality of life available at that location and they deserve to be paid appropriately by watching the value of that asset increase. Another legitimate form of value gain is demand. The demand to live in or around a major city has increased significantly in the last few decades. For the old couple that owns a home in an area that has seen increased demand, that is a legitimate gain in value because they held onto an asset that became inherently more valuable. The issue I take is the value gain that assets see from the manipulation of the dollar via low rates and quantitative easing.