Now that the pandemic is easing across much of the country, prices are skyrocketing — just like at the peak of the housing bubble, houses are being

America needs to change how we think about housing

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2021-06-21 22:30:05

Now that the pandemic is easing across much of the country, prices are skyrocketing — just like at the peak of the housing bubble, houses are being snapped up for well over the asking price in a matter of hours. The Case-Shiller home price index saw an annualized growth rate of 13.3 percent in March, the highest figure in more than seven years.

All this is a consequence of the American idea, and the goofy system we've constructed to prop it up, that homes are a form of wealth that must get more valuable over time. It's a bad system that should be overhauled.

Most Americans take it for granted that home prices should generally go up. But if you think about it for a moment, there is no inherent reason to expect this. A land with a house on it does not somehow increase in productivity to produce more housing, like a share of Apple generally does with smartphones. It's just a pile of concrete, steel, wood, bricks, and so forth that slowly falls apart over time. Buying a house ought to be roughly analogous to buying a car — a thing that (with rare exceptions) decreases in value over time, because it wears out. Indeed, that is how it works in countries like Japan.

But this doesn't happen in the U.S. because of government policy that heavily influences both supply and demand. On the demand side, a complex of state-backed institutions underpins the traditional 30-year mortgage (which did not exist before the New Deal in the 1930s). Loan insurance through the Federal Housing Administration drastically reduces the financial risk of mortgage lending, while the companies Fannie Mae, Freddie Mac (formerly semi-private, but owned outright by the government since 2008), and Ginnie Mae buy up loans in the secondary market, which frees up bank capital for more loans. Then the mortgage interest deduction provides another big homeownership subsidy (though it was cut substantially as part of the Trump tax cuts).

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