Government, Not Investors, to Blame for Affordable Housing Crisis

With so much attention fixed on soaring prices for gasoline and groceries, one can almost overlook the fact that we’re also enduring an affordable housing crisis. The question is, why?

Spanning the pandemic era from February 2020 through May 2022, home prices soared 43.5%. Over the past 12 months, home prices are up 19.7%, while residential property prices in the United States, adjusted for inflation, are now 6.7% above the prior all-time record levels of the 2006 bubble.

Home prices are increasing far greater than family income growth is. The home-price-to-median-income ratio now stands at more than 8.1, significantly higher than the levels of well under 5.0 experienced from 1980 to 2000. The mortgage-payment-to-income ratio hit 42% in May—tied for the highest level since the creation of the index in 2006.

The mortgage payment on a median-priced home with a 20% down payment jumped from under $1,300 to more than $2,000 in just the past year as interest rates and home prices surged—a whopping 56% increase.

Median apartment rental costs, meanwhile, have jumped 12% this past year. Because leases often roll over annually, the Consumer Price Index data from the Bureau of Labor Statistics does not yet fully reflect this surge. Since March 2020, numerous cities experienced rent increases well over 30%.

So what’s to blame for these surging prices? Politicians are scapegoating “institutional owners” and other investors in rental properties. But the evidence doesn’t support this. According to mortgage giant Freddie Mac, “Overall investor share of home sales stands at 27.6% in December 2021, which is only slightly higher than 26.7% in 2019.”

Large investors (10 or more homes) account for only 6% of all home purchases. The proportion of home sales to investors is actually smaller today than in 2006. CoreLogic reports that from 1999-2018, “mom and pop” investors actually accounted for a growing portion of the homes purchased relative to private equity investors. Although the share of sales to institutional investors (pension funds, insurance companies, banks) and iBuyers (large corporate buyers that often remodel and flip) rose from under 2% in 2018 to 4% of home sales since 2021—this is still only a small portion of all rental homes purchased.

Institutional investors own just two out of every 1,000 (0.21%) of all residential real estate, and just 1% of all single-family rental homes nationwide. Over the past five years, rental housing as a share of total housing declined.

Far from leading the surge in home prices, both institutional and smaller investors are alleviating the affordable housing shortage. And by often paying below list price —29.4% less, according to a recent RealtyTrac report—institutional investors may actually be a counterweight to home price appreciation.

So who are the main culprits? Government mortgage subsidies, the Federal Reserve and local regulations.

Government-sponsored enterprises (GSEs)—namely, Fannie Mae and Freddie Mac—continue to dominate the mortgage market. Investors who purchase GSE bonds and mortgage-backed securities (MBSs) ultimately provide funds for people to finance homes, and these bondholders and MBS investors enjoy implicit government backing.

Approximately 90% of GSE volume is currently devoted to refinances, investor purchases, lower loan-to-value loans and pricier homes purchased by higher-income earners. Government-subsidized GSEs enable borrowers to take on bigger loans and spur housing demand, leading to higher home prices and increased taxpayer risk.

Since March 2020, the Federal Reserve has driven down mortgage interest rates and fueled a rise in housing costs by purchasing $1.3 trillion of MBSs from Fannie Mae, Freddie Mac and Ginnie Mae. The $2.7 trillion the Federal Reserve now owns is nearly double the levels of March 2020. Artificially increasing the amount of capital available for the residential home mortgage market and distorting interest rates has exacerbated home unaffordability.

On the local level, stringent zoning restrictions, density limitations and aggressive environmental regulation limit the supply of housing while increasing the costs of construction. Regulations often account for more than 30% of the costs of rental housing construction. Rent control further compounds the problem by deterring new construction, giving landlords fewer incentives to spend on upkeep and remodeling, and reducing the future supply of housing. New construction the past decade remains far lower than in the decade preceding the prior housing price bubble in part because of these restrictions.

Blaming real estate investors for the resulting misery may score political points. But demagoguery does nothing to alleviate it. Lawmakers can start to restore this bedrock of the American dream by removing federal subsidies from the housing market, restricting the Federal Reserve’s power to purchase a limitless quantity of mortgages, and eliminating the artificial barriers to housing supply erected by local leaders. It’s time to stop home prices from going through the roof.

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‘Inflation Reduction Act’ Should Be Renamed Economic Freedom Reduction Act

On Sunday, all 50 Senate Democrats voted in lockstep to push through the so-called Inflation Reduction Act, the Biden administration’s big government tax-and-spending bill that will unambiguously undermine America’s economic freedom.

The deal between Senate Majority Leader Chuck Schumer, D-N.Y., and Sen. Joe Manchin, D-W.Va.,  resuscitated key elements of President Joe Biden’s euphemistically named Build Back Better plan. The final vote on what should be called the Build Back Broke bill was 51-50, with Vice President Kamala Harris casting the tie-breaking vote.

The Inflation Reduction Act is the legislative embodiment of big government socialism that undercuts America’s fiscal health and overall economic freedom.

If it were accurately titled, it would be the Economic Freedom Reduction Act.

Amid a cost-of-living crisis that is getting worse, with soaring year-over-year inflation of more than 9%, the Inflation Reduction Act would do great harm to our economy by imposing tax increases, manipulative federal subsidies, and price controls on every American family.

The Senate-passed bill would deepen the growing recession, continue to depress household incomes, and continue to increase overall price levels.

In other words, America’s already deteriorating level of economic freedom and vitality will be further debilitated by bad policy choices that have been knowingly made.

As succinctly noted by my colleagues at The Heritage Foundation:

The Biden administration and its liberal allies in Congress have gone out of their way to impose new burdens and to bloat the government.

The result has been the ensuing inflationary crisis and now a recession.

Instead of heeding the economic warning lights, they have offered this bill, which is identical in purpose and philosophy to what created the current economic mess.

If enacted into law, this bill would exacerbate the economic crisis and lead to a longer and much more painful stagflation.

(The Daily Signal is the news outlet of The Heritage Foundation.)

For more than a quarter-century, The Heritage Foundation’s annual Index of Economic Freedom has measured the impact of free enterprise buttressed by the rule of law, limited government, regulatory efficiency, and market openness in countries around the globe. The strongly positive correlation between a nation’s level of economic freedom and its citizens’ overall standard of living and competitiveness underscores just how critical economic freedom is in practice.

Yet, after reaching a high score in 2006, the United States fell from the “Free” category to “Mostly Free” in 2010. Economic freedom has continued to slide, hitting an all-time low this year, ranking America behind 24 other nations.

America’s economic freedom is under assault from massive government spending bills that drive the country and its citizens deeper into ever-growing debt. The taxes that must ultimately pay for the government’s spending spree shift the freedom to choose from the individual to the government.

The latest example of that is the Inflation Reduction Act. According to Heritage research, the politically driven tax-and-spend bill would hike taxes on Americans making less than $400,000 a year, with the act disproportionately raising taxes coming from people making less than $75,000 a year by $136 billion.

Economic freedom is also eroded through numerous layers of politically motivated regulations. Contrary to what some politicians argue, America’s competitive position is not threatened because the federal government is not spending or regulating enough. Instead, the problem is that government has grown too big in terms of its scale, scope, and power over people’s daily lives.

America needs limited government, not expanded and expensive government, to ensure a transparent and competitive economic environment in which citizens enjoy the freedom and opportunity to prosper to the fullest possible extent.

As Heritage Foundation President Kevin Roberts pointed out, “Support for the Inflation Reduction Act from [Sen. Kyrsten Sinema, D-Ariz.], Manchin, and Schumer is further evidence that the Left has lost sight of the broader goal of public policy: improving the lives of real Americans.”

This should be the year to correct that regrettable, often-trod path of Washington’s policymaking, and now is the time to do that to restore America’s economic freedom.

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Biden to tout bill’s prescription drug prices, energy provisions in pitch to Americans, aide says

President Biden plans to use upcoming travel to tout the $740 billion climate, health and tax reconciliation bill passed by Senate Democrats on Sunday, a top White House official said.

“The president will — our entire team will be out making the case,” National Economic Council Director Brian Deese said on CNN’s “New Day” on Monday.

Deese said in upcoming trips Biden will work to sell the bill to the American people “to explain in very practical terms why this matters for people’s lives” and how the provisions will apply to everyday Americans.

Senate Democrats passed the Inflation Reduction Act (IRA) on Sunday, with Vice President Harris casting a tie-breaking vote. All Republicans voted against the measure.

The House is expected to take up the bill later this week before sending it to Biden’s desk for his signature.

The bill will, among other provisions, allow Medicare to negotiate the price of prescription drugs and set aside billions for investments aimed at combatting climate change.

Deese said the climate provisions will allow families to access “lower energy costs, lower utility bills, making it easier to access things like energy-efficient upgrades for their homes, energy-efficient appliances and the like.”

While some lawmakers have questioned the bill’s impact on battling inflation, Deese said the administration will make the case that the legislation will help lower prices for many Americans.

Biden has praised passage of the bill in the Senate — where his push for major spending on climate and other priorities stalled for months — and urged the House to quickly approve the bill.

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