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Author Topic: US Housing Policies and its role in the current economic crises  (Read 8058 times)
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« on: 2011 Jun 11, 03:06:02 pm »

US Housing policies

- Increased homeownership rates at any cost?  
Governmental intervention in the housing market
and its role in the current economic crises.

This paper investigates the relationship between US housing policies and the financial crises triggered by the burst of the "housing bubble" and following subprime mortgage crises in 2006-2008. It argues that demand for homeownership in the US is strong due to cultural, political and economical drivers and that US housing policy measures leading up to the housing bubble was predominantly directed to increase homeownership by facilitating lending opportunities both through government sponsored enterprises (GSEs), the private financial sector, and through subsidized federal programs. These measures contributed to increased demand for homeownership leading up to the crises and were introduced despite record high homeownership rates. In hindsight it seems appropriate to question the success of such a demand side policy measure bias, and ask if not supply side measures to a greater extent could be used. US housing policies seem to equate providing shelter and housing to that of homeownership, thus overly focus on increasing homeownership rates, despite other available alternatives such as publicly sponsored rental units or public housing. Lastly it concludes with some remarks for investors as on what can be learned from the "housing case" of governmental intervention.


The paper does not offer a discussion or comparison of welfare regimes based on classical theory; it's point of departure is that US welfare policies are to some extent liberal in nature and means-tested in practice, based on residual entitlements and predominantly use of market or non-for profit provision. However we still see a great deal of governmental intervention when it comes to enabling market provided welfare. The paper's intention is to offer criticism of the effects of US housing policy by pointing to unintended consequences that occur when government relies predominantly on stimulating demand for market based supply of basic welfare goods such as housing. These consequences are amplified when housing and shelter is made the equivalent to homeownership by politicians. What needs to be recognized is that real estate is a commodity traded in markets which value is determined and subject to economic shocks, supply and demand, it therefore entails risk of devaluation or possibilities of profits. Promoting homeownership by subsidized lending facilities in order to meet societal and political goals is thus far from the de-commoditization of basic needs that characterizes other welfare policies, quite the opposite. When citizen's are turned into real estate speculators with governmental support, the risk of real effects on welfare deviating from intended effects can be exorbitant, as this paper will show.

The first section of the paper explains the origin of US society's unquenchable appetite for homeownership and argues that it is caused by political, social and economical acclaimed benefits of being a homeowner and therefore reaps broad support from voters, industry and politicians. However, the validity of the acclaimed benefits attached to homeownership can be questioned on a pure causality basis. It seems plausible that agents with economic interests in the housing industry have influenced policies to promote homeownership.
The second section investigates the effects of housing policies on homeownership rates since the late sixties and finds that rates has increased mainly as a result of demand stimulation, as opposed to previous periods where both supply and demand measures were utilized.

The third section argues that housing policies played a part in the overinvestment in housing in the decades prior to the burst of the housing bubble and questions if the timing of further demand stimulation policies in the mid 2000s was appropriate and sound policy.

The paper ends by discussing the implications of the housing market's close relationship with the current economic crises on future housing policies.  The argument is made that housing policies, in a welfare policy setting, should be market-neutral and to a larger extent utilize both supply and demand measures than has been the case in US.  


1. Homeownership - fulfilling the "American Dream"?
The seemingly insatiable demand for homeownership is explained in the literature from a broad field of sciences. Arguments supporting the idea of societal benefits from increased homeownership can be found in social, cultural, economical, health and environmental, and political research. Social anthropologist Perin (1977) argues that homeownership is strongly pegged to realization of the "American dream" and is the symbolically equivalent to citizenship, Shlay (2006) argues that homeownership is so entangled with American ideas and social status that it is not possible to separate if federal policies reflects prevailing culture, or if homeownership is manifested in political ideological desires, and as a result, politicians' and citizens' aligned preferences have contributed to "homeownership's enormous popularity in the US."

Wright (1981), in her architectural and social work describing the history of US housing, writes about the "longstanding national tendency to view the home as the expression of the self". Demand is thus explained by sociological incentives; seen as a dividing socioeconomic marker in society, a vehicle for social mobility and arguably dividing the "have" and "have not's" to such an extent that tenancy status is elevated way above providing shelter and being a basic element in the "food, clothing and shelter" triumvirate. Socioeconomic benefits from increased homeownership include: Higher academic achievements by children of homeowners, higher voting participation, higher scores in general quality of life surveys, reduced crime rates, and enhanced neighborhood values (NRA 2010, Dietz 2003).

From a political economy perspective popularity of increased homeownership policies are explained by the many constituencies that benefit from its implementation; developers, the financial service industry, the real estate industry, construction companies, raw material and infrastructure -providers and planners (Buchholtz 2002). Homeownership has also been used to gain voter's support and has been seen as a policy area effective to both reach out to minorities, the voters most disenfranchised from house ownership, and to offer favorable policies to the important middle class through tax subsidies by allowing for deduction of mortgage rates on income taxes.
Economic arguments for promoting homeownership include improved economical behavior by citizens, known as environmental determinism (Hoffman 1996), where homeownership  is believed to increase incentives to invest in neighborhood appreciation and improve living conditions. Possibly the strongest economic argument is that homeownership is the preferable strategy for households to build equity through paying down mortgages. Turner and Luea (2009) argue that homeownership directly increase low-and moderate income households ability to accumulate wealth and base their claims on data on tenure choices from 1994 to 2001. Di et al (2007) finds the same positive effect in their study covering the period from 1989 to 2001.

Promotion of homeownership is arguably seen as an investment benefitting all layers of society in a Rawlsian-like manner, lifting the lower parts of society and decreasing the burdens on the middle and upper classes. Arguments promoting homeownership are amplified by broad coverage in the news media, by governmental agencies through policies, and also by industry's marketing efforts. In addition lobbying from the "homeowner alliances" sphere adds to the belief that homeownership is some sort of panacea for a vast array of social problems and an important contributor to a democratic welfare state.

However, some researchers warn about overemphasizing the positive economic externalities of homeownership and also the macroeconomic effects of redirection of capital into housing from other investments (Slivinski 2008, Glaeser and Shapiro 2002).  Further, the argument often made that rental housing depress neighborhood values are challenged by empirical studies (Ellen et al 2003). Experiences drawn from public housing projects and previous housing bubbles could provide sobering perspectives and curtail the demand for homeownership, but in retrospect these arguments clearly was ignored in the decade long housing frenzy leading up the current economic crises.

So isn't homeownership all what its cranked up to be? The relationship between tenure status and negative societal externalities are subjects of dispute amongst social scientists; clearly a causal direction between positive effects of homeownership, and the negative effects of homelessness or rental tenure status, are questionable. Is it so that a former renter or homeless, household or individual, can be saved from negative social behavior related to infrequent permanency of tenure by homeownership? Can societal problems ranging from higher suicide rates to increased participation in prostitution be mitigated by being turned into a homeowner? Or is it so that the tenure status is the result of several aggregated variables, or what has been called "a conjunction of unfortunate circumstances", like personal vulnerabilities, institutional experiences or inadequate buffers?

If the latter represent the true direction of causation then the idea of mitigating social negative externalities by increasing homeownership rates rightfully can be questioned, at least for parts of the population, even though there seem to be little academic consensus as to where the threshold for intervention should be drawn (Lee et al 2010). Regardless, at some point the marginal benefit for society of additional homeownership may not be worth the cost, especially if the means needed create systemic risks in the economy as a whole.

Hoffman (1996) argues that policies supporting good low-income housing should present programs not as panaceas for deep-rooted social problems, but rather as elements in social welfare policy. Landis and McClure (2010) argue that housing policies should avoid "grandiose and ideological ambitions", although it's fair to say that housing policies generally has been sold to voters as such, frequently using acronyms like "HOPE" and programs such as "American Dream Downpayment Initiative".  

It becomes evident that the issue of homeownership is a complex phenomenon touching upon a great variety of variables linked to both the perception and provision of "a good society". Simultaneously, although some research are skeptical to the broad belief that homeownership brings about societal benefits that legitimize policies promoting increased participation in the private housing market, or at least questions where the sustainable limit for promotion of participation should be, the prevailing arguments and have been in favor of such policies. And the policies certainly have found support with agents which interests are tied to property development and increased investment in housing, such as the National Association of Realtors (NAR 2010). These agents lobby extensively by presenting research they claim manage to isolate homeownership as the contributing variable on reducing social negative phenomena like crime rates, or increase benefits such as health and education and the like. A brief look at societal development in these areas, compared to development within homeownership rates, raises legitimate questions about how influenced by economic interests their arguments are. One descriptive statistic regarding the supposedly positive impact on reducing crime rates that increased homeownership are argued to have is  presented and discussed below.  

Crime rates are increasing from 1960 to 1985, then accelerating to a peak in 1990 and decreasing thereafter. Homeownership rates should therefore be expected to decrease from 1960 to 1995, and increase thereafter.

What we find is that homeownership rates are steady at around 64 % from 1968 to 1994, i.e. in a period where crime rates are increasing significantly.  From 1995 to 2005 a 5 percentage points increase in ownership rates occurs, but then crime has already been declining for five years since 1990. Furthermore, the decline in homeownership since 2004 are not found to increase crime rates in the period that follows, on the contrary, crime rates continue to decline in that period.  There seems to be a period in the 1990s where increased homeownership rates and decreased crimes rates occur simultaneously, but for the long period before and short period after, there does not seem to be a constant correlation between the two.

Accepting that these are complex social phenomena this comparison's only purpose is to show that there are contradictions between what is observed in society, and the relationships that are promoted by the "pro-ownership" sphere. It is plausible that the promotion of social benefits attached to homeownership, when combined with economic interests, can have been exaggerated and contributed to a policy favoring increased homeownership. An example of such is found in NAR's publication "Social Benefits of Homeownership and Stable Housing" from August 2010:

"Homeownership boosts the educational performance of children, induces higher participation in civic and volunteering activity, improves health care outcomes, lowers crime rates and lessens welfare dependency".

" Given such an opportunity, public policy makers would be wise to consider the immense social benefits of homeownership for families, local communities and the nation".

Surely homeownership is here promoted as a panacea against deep social problems. This paper argue that these issues most probably are not resolved by participation in the private real estate market alone, and that a causality bias is plausible. It seems doubtful that any child's performance at school is to be "boosted" if the only change in the child's upbringing is whether or not the parents are in possession of a mortgage, as the statement claims. Stable and good housing probably affect children's well being and  performance, but could be provided in other ways than through homeownership.

2. Housing Policy history: Demand side politics.
Since the end of the great depression US housing policies have to a large extent been focusing on one dominant objective; increased homeownership rates (Shlay 2006). This has led to governmental intervention in markets, the housing finance industry and a policy that links homeownership to increased welfare, stimulating consumption, production and improving housing conditions (Carliner 1998). Policies intended to increase homeownership has arguably become an important political objective since the birth of the New Deal's "property-owning democracy". The potential acclaimed benefits for voters and industry as presented in the previous section provides explanation for the degree of governmental intervention in the housing market, and housing policies becoming integrated in the larger social and welfare policy sphere.

This section argues that although the political objective has been consistent, policy measures have shifted over time and in the latter period, post the 1990s, also to some extent regardless of ideological dominance, even if some differences can be observed earlier in the period. From the  1930s to the 1970s a dual approach was used; both stimulating the supply side, e.g. through providing public housing and rental units, and stimulating demand, e.g. through facilitating lending through governmental insurance and liberalizing financial markets. Post the 1970s measures have increasingly depended on the latter, also when addressing low income households, the prime consumer of public provided housing. Evidence for this can be found by assessing US policies since the great depression and by looking at the amount of public housing projects funded in the period. This section first address the ideological differences, then presents the major housing policies in the period, statistics on the decreased provision of public housing during the period and lastly describes US housing policy as it appeared in 2008.

US housing policy measures can, albeit weakly, be divided along an ideological axis. The dividing factors being level of governmental involvement, at the expense or promotion of  higher degree of reliance on private provision, and policy measures, either focusing on demand side stimulation (e.g. making financing of homeownership more accessible), or supply side stimulation (e.g. by providing public housing). Republican policies have mainly supported low governmental involvement, but when so policies have been directed to stimulate housing demand through facilitating lending instruments, or vouchers systems towards low income citizens. Democrat's policies have increasingly favored government involvement through both supporting supply side policies through developing public housing projects to low income citizens, but also supporting demand stimulating measures and financial subsidizes. However, arguments have been made that either side's policies do not differentiate much; both parties' policies have been substantially oriented towards market based housing provision and allocation (Stone 2006). In addition, when provision of public housing projects have been undertaken the political objectives have been of a broader kind; aimed directly at reducing poverty and as a response to the problems of the urban poor (Hoffman 1996).The policy method of choice for increasing homeownership rates in general have nevertheless been through increasing access to credit through mortgages and liberalizing financial markets. For low-income households the trend in policy measures, since the first policies directed to provide housing for the group was initiated,  has been one of decreasing public provision and rental units, and increasing use of subsidized credit for either renting from for profit landlords, or subsidizing mortgages to increase participation in the private housing market.

The National Housing Act of 1934 was passed "to encourage improvement in housing standards and conditions, to provide a system of mutual mortgage insurance, and for other purposes" and laid grown for the public housing programs of 1937. The housing act of 1949 states the objective “(to provide) a decent home and a suitable living environment for every American family ”, and expanded public housing targets, whilst also created the Federal Housing Administration mortgage insurance to facilitate lending. The Fair Housing Act of 1968 was aimed at abolishing discrimination of minorities access to housing. All these policies included both provision of public housing, and facilitating lending (Lea 1996).

However, a shift towards demand stimulation can be found in 1977 and the introduction of the Community Reinvestment Act (CRA). The act allowed community groups to intervene in banking mergers. Banks that wanted to grow their operations between states were acquired to document that they had provided credit and mortgages to low income groups and minorities before entering new markets. At first the policy had little effect, but eventually banks wanting to expand negotiated with community groups and provided lending facilities, by 2002 agreements had been signed totaling 1,5 trillion USD in loans. The act was deemed a great success in providing loans to qualified minority households, with as low as 1% default rate (Landis and McClure 2010). Inspired by the policy's results the Clinton administration wanted to increase the lending volume and imposed specific targets for Fannie Mae and Freddie Mac to purchase securitized mortgages from minority homebuyers, a policy which continued during the Bush administration. But not only public lenders were invited to and encouraged to increase lending, private banks also wanted to participate in a growing market, and the Financial Services Modernization Act of 1999  opened up for investment banks, commercial banks and insurance companies to merge their operations, something they were restrained from doing under the Glass-Steagall act from 1933. This reform opened up for market participation in the growing mortgage industry by the creative minds of Wall Street and increased lending facilities further. Some questioned the demand side policies already in 1997 and found that governmental subsidies did not increase homeownership, but rather accelerated it amongst citizens that would enter the market regardless (Goodman and Nichols 1997), needless to say their findings did not affect policies.
The deregulation of the financial sector combined with the CRA have been seen as a major contributor to accelerate homeownerships rates from 64 % in 1990 to 69 % in 2004 (Quercia and Ratcliffe 2008, Landis and McClure 2010). Although the period did see some programs directed towards public housing, e.g. HOPE VI, facilitating lending and stimulating demand had increasingly become the policy of choice, at the expense of public provided housing.  Quigley's (2000) statistics confirms the decreased supply of public housing in figure 3.

Total inventory shows growth in units from 1950 to 1970s, and little growth thereafter, since the mid 90s public units decline. Addition of units shows the same tendency. Taken into consideration that homeownership rates increased in the end of the period demand must have been met by private supply, i.e. participation in the private market.

Landis and McClure (2010) presents an overview of federal housing programs in 2008 were they have categorized the expenditures according to, amongst other variables, subsidy approach, meaning either supply or demand side stimulation. Their data strengthens the argument that demand side measures represents both the majority of programs and outlays. Of the 21 programs 12 is categorized as stimulating demand, four as both stimulating demand and supply and only two as pure supply side stimulating measures. In terms of expenditures pure demand side programs represent 196.970 million USD of a total outlay of 213.545 million, or more than 92 % of total expenditures for all programs. This shows that current policies is heavily biased towards demand side stimulation.

This section has argued that US housing policy is biased towards homeownership, also for lower income households, further that the major trend in policy measures undertaken to increase homeownership rates has been to stimulate demand through increased lending facilities amongst the population, at the expense of public provided housing projects. As shown in figure two in section one, homeownership rates experienced little growth from the late 60s to the mid 90s, but started to accelerate in the 90s. It has been argued that the increase was predominantly a result of increased lending facilities to qualified minorities under the CRA and the many reforms of that policy. The question that arises is to what extent housing policies contributed to the overinvestment in housing starting in the late 90s and resulting in the burst of the housing bubble in 2006. The next section will explore two other main drivers for house prices; interest rates and real wages, and the characteristics of the financial products that enabled increased participation in the real estate market.  

3. The housing bubble:
From ownership dream to foreclosure nightmare and austerity

In the early 2000s the dot com bubble imploded leading the Federal Reserve to lower rates in an attempt to rescue investors by stimulating demand for stocks.

In this regard the monetary policy was successful, low interest rates managed to attract investors back to Wall Street, but decreasing rates also increased demand for all assets that acquire financing, including housing, and it also increases the willingness of financial institutions to lend. It also reduced incentives for savers in fixed rate assets or secure bank deposits, which again increases demand for alternative investments in more risky asset classes with higher returns. These relationships are all well understood by economists, but seemed to have little impact on policies regarding stimulating demand for homeownership. The combined result of  low interest rates and financial institutions' willingness to lend was a nation in increasing debt.

Household's outstanding debt increased parabolic post year 2000, as did housing prices.

Still governmental policies pursued increased homeownership rates by expanding credit, although the Federal Reserve increased interest rates beginning in 2004 to try to curve demand. One of the latest policies introduced before the crises was the  "A home of your own" policy of the Bush administration. It included the "The American Dream Down payment Initiative (ADDI)" signed into law in 2003 which  "aims to increase the homeownership rate, especially among lower income and minority households, and to revitalize and stabilize communities" (HUD 2010). This initiative challenged the property (and lending) industry to create 5.5 million new minority homeowners by the end of the decade. By 2007 minority ownership increased by 3.1 million, all financed by GSEs through sub-prime loans or private bank loans with teaser rates.  

How sound was this policy? Housing clearly is part of welfare politics, but homeownership need not be. Homeownership is a private financial transaction, one of the major outlays in citizens' lifetime and increasingly referred to as an "investment", where normally the "ownership" part does not occur until 20 or 30 years when the loan is paid back. There are no arguments that can equate housing and shelter with ownership. If any policy interventions should have been called for in the mid 2000s it should have been to decrease demand, tighten lending practices by increasing banks reserve limits to contract liquidity and dampen prices, not adding liquidity and credit extension through sub-prime lending facilities sponsored by government. If low income households were kept out of the ownership market due to high prices, that does not pose a welfare problem on its own, assuming they have shelter and access to rental units. In fact, the low income households that were subsidized into the housing market in the years 2000-2006 would have been better off by renting.

The purple graph shows the owner equivalent rent index, i.e. the return a homeowner could extract from renting out a home, which is equal to the cost for the renter of renting. An argument could be made that instead of subsidizing lending, housing polices would have been more effective if they subsidized renting, either from private or public housing. It becomes clear that US housing policies evolved in the 1990s from promoting homeownership and enabling lenders to sell fixed rate mortgages to aspiring homeowners, to push mortgage loans on high-risk borrowers. The level of debt and sub-prime debt in society made it particular vulnerable to any volatility in asset prices, or any changes in borrower's ability to keep their promises of paying back their loans, such as decreased real wages, or increased unemployment. Real wages in the US have been steadily declining since the 1970s, (figure 9)  a dangerous trend when combined with increased leverage (figure 6).  

Looking back at the data it becomes evident that the consequences and risk of mortgage default would result in severe consequences to a consumer driven economy, but politicians did not respond to the possible threat, quite the opposite.

Schiller (2005) describes what he calls the development towards an "ownership society", were people's livelihood depend on wealth highly unstable due to market changes and that these prices of assets matters increasingly in citizens' lives. People increasingly feel they must defend their private property and doubt they can depend on social institutions to save them. Schiller argues that this view of the world dominated the US society in early 2000s and refers to the increased media attention directed to asset prices as one indicator.  The psychological mass euphoria surrounding investment in housing should not be underestimated when the reasons for overinvestment in housing is explored.    
But psychology alone cannot explain the rise in house prices from 2000, as decreasing  interest rates from 2000 and low interest rates until 2005 correlates quite well with increasing house prices.  So apart from demand stimulating policies two other contributing factors led to the creation and burst of the housing bubble:

1) Expansionary monetary policies, including record low interest rates as a contrarian effort to rescue a declining stock market in the years 2000 to 2002, when the market declined at annual rate of approximately 30 percent.
2) Lack of regulation of the financial service sector and lending practices. This include securitization of mortgages and introduction of new financial products, such as credit default swaps designed to reallocate risk of borrower's default to investors seeking higher returns. The demand for higher return from investors were arguably fueled by  low interest rates. In addition, the incentives to sell products related to mortgage default risk was strongly affected by a remuneration structure that made perverse profits possible in an increasingly global market for financial products. This practice turned what could have been a "normal asset bubble", with limited geographical and institutional deflationary effects, to a global credit deflation crises that later affected the real economy globally.

The result of credit contraction due to falling house prices was decreased consumer demand that in the latter years of the boom had been financed by consumer loans where houses was used as equity, leaving businesses to reduce production and lay off workers. Ironically overinvestment in housing might have redirected capital from other non-housing investments that could have had a positive impact on productivity and economic growth, leaving an economy better prepared to handle the crises.

It is now evident that the increased linkage between US mortgages default risk, and the global financial markets through securitization and global investor's exposure to collateralized debt obligations, resulted in a global banking crises that later turned into a sovereign debt crises due to bailouts and increased outlays in social expenditure.  What is less agreed upon is how housing policies contributed to the crises. Conservatives blame governmental intervention in the market through GSEs, liberals blame regulatory capture and point to the strong linkage between the financial industry and government, others again blame too little governmental intervention; both lack of regulation and lack of public provision.

So what other policy measures could have been pursued to ensure housing, or increase homeownership? And what are the current capabilities of government for reform? The last section of the paper assesses some alternative policies, but leaves little hope for them becoming turned into policy in the near future.

4. Housing, homeownership and the cruel reality of economics

US policies seem to equate housing policies with policies directed to increase ownership, leading to a bias which in monetary terms have been estimated to the government subsidizing owners six times more than renters in 2008 (Landis and McClure 2010). Since the record high ownership rate in 2006, where two thirds of every American was defined as homeowners, two years later 5 million homeowners were in default or some stage of foreclosure (Quercia and Ratcliffe 2008). And the numbers are growing, an additional 1 million households went into foreclosure in 2010 and the prognosis for 2011 is an additional 1,2 million households expected to foreclose (msnbc 2011). And as figure two in section one showed the homeownership rates are now declining. It is hard to conclude otherwise that the policy has failed not only in providing housing, but that it has created some perverse disparities in wealth distribution and that the full effect is yet to be seen.

Firstly, what alternative policies could have been pursued? It seems appropriate to introduce a clearer separation between welfare political goals of providing housing, with that of social and economical goals of increasing homeownership. Increased homeownership must to a larger degree be seen as a result of a economic policy able to provide an egalitarian accumulation and distribution of wealth, and to a lesser extent as something that can be signed into law or subsidized using market provision. The amount of economic interests, including the financial service sector and construction industry benefitting from increased building and mortgage underwriting, has proven too strong in promoting homeownership as a mean of maximizing profits, not welfare.  

True, homeownership could very well be aspired to, science shows indeed that homeowners live happier lives, are healthier and exposed to fever risks than are renters or homeless, but the causal direction is probably so that they have become homeowners due to behavior and an economic system that have enabled them to acquire a home, not the other way around; that ownership itself has improved their level of welfare. Policies should be directed towards enabling citizens of practicing such behavior and creating such an economic system. The implications of such a housing policy approach means that practically all aspects of society are affected. A proper welfare system combined with sound economic policies would arguably mitigate the need for a national housing policy objective to increase homeownership rates.

Two policies that regrettably seem impossible to effectuate in US society under the current economic conditions, but that could have had a positive effect on homeownership for those left out of the real estate market are, i) the promotion of savings account in order to build up equity for first time buyers by tax deductions, and ii) publicly subsidized rental agreements where a proportion of the rent is allocated a savings account, forcing the tenant to build up equity. This two measures represent both supply and demand stimulation, with one great difference from previous US policies, it is based on savings and equity, not subsidized loan arrangements. Since it stimulates both supply and demand greater market neutrality is achieved, as opposed to overly focusing on stimulating the demand side. Market neutrality is important since it reduces price inflation thus disincentives speculation.  

However both of these policy measures seem highly unlikely. The latter policy is not suitable for  suburban single home neighborhoods predominant in the US, public ownership of single houses seems unrealistic and would impose great administration and maintenance costs. Both options include stimulating savings and subsequently tightening lending practices by reinstate some level of down payment threshold before issuing loans. Such a policy would depend on positive real interest rates, a policy highly unlikely taken into account the increased costs it would impose the treasury due to its already high expenses of managing existing debt as shown in figure 10.

The US is currently 15 trillion USD in debt and are using more than 10 % of its tax revenues on interests alone, the likelihood of seeing positive real interest rates in the US in the near future are slim, thus increased savings to provide equity for mortgages seem an unlikely policy. It's chances are further weakened by historical accounts, monetary historian Ferguson (2010, 2008) argues that throughout history economies of the same characteristics, facing the same predicaments, traditionally has chosen to print their way out their problems, in other words debasing the value of their currency by increasing money supply. So far this has materialized by quantitative easing and a never before seen in history expansion of the federal balance sheet. This might have a devastating redistributive effect on US consumers dependent on imported goods and energy as the value of their currency depreciates, and prices increase.  

The reader should have by this time raised issue as to whether this paper is drifting outside its scope, regrettably this sidetrack into real economics is highly intentional. It is to demonstrate that the real estate market is intertwined in the real economy and therefore not suitable for intervention of the magnitude that US housing policies pursued in the two decades leading up to the crises, regardless of benevolent intentions. It also serves a second purpose; to demonstrate the lack of economical resources available for any new grand publically funded housing policy. The point tried to make is that whilst homelessness, shelter, public housing projects for disabled, sick or elderly very well belong in the welfare policy sphere and that governmental intervention in these areas are granted, homeownership is not. Homeownership is a result of sound economic policy, both at individual and family level, and at governmental level. It can be promoted and stimulated by governmental intervention only by targeted programs for the needy, not broad subsidizes to the whole population, at least not to unsustainable levels and without risking severe unintended consequences. Regrettably the US economy is no longer capable of reforming its policy to pursue a more targeted strata of the population as the two policy proposals presented entails.  

In conclusion, US housing policy, when judged as a welfare policy, seems to have failed utterly. It has both promoted speculation and enabled it through increasing debt in its population by deregulating the financial sector and by direct subsidizes. When the bubble inevitably burst the financial sector was bailed out, increasing public debt further and reducing the fiscal maneuvering space for  implementing reform. The monetary policy pursued post crises have been to debase the value of the currency, leading to further decrease in real wages and inflationary pressure on food and energy costs that hurts the weakest in society, as they use more of disposable income on such items. It has also created a global increase in commodity prices, as they are traded in dollars,  affecting nations globally.

The dollar index measures the relative value of the dollar against a weighted basket of six other currencies. The value of the dollar has decreased by 35% since 2001.

Simultaneously the wealthiest one percent of the population now holds 225 times as much in assets than the median citizen. Note that this has increased after the financial crises by 44 times, in addition a substantial part of the increase inequalities can be traced to an increase in top earnings in the banking sector, where the crises originated (Fiorio and Saget 2010).

In addition food stamp participation rates are breaking new records. 44 million Americans are now receiving federal aid to purchase every day goods. The U.S. food stamp program, now called SNAP (Supplemental Nutrition Assistance Program), had 43.6 million participants in November 2010. That is a 5.3 million (14.3%) increase over last year.

Unfortunately it is plausible that the full extent on redistribution as a result of the current economic crises has yet to be played out. Politicians have not made any significant efforts to reduce spending or stop their devaluation of the dollar, thus future imposed austerity measures and further seinorage taxes levied the citizens are to be expected. This will, paradoxically, force housing policies to return to its original objectives of the 30s and 40s as the US is destined to face further economic turmoil and decrease of living standards.  

As for investors some key points should be learned from the housing story:
- Government intervention is to be expected in ALL markets in the US, if politicians see it fit and regardless of market signals.
- As of yet expansionary monetary policies seem to keep equity markets alive, but when they decline, further increases in precious metals are to be expected, i.e. we have not seen nothing yet.
- A steady accumulation of precious metals is recommended, but can not alone save or increase assets, one will have to find a way to generate cash flow and to transfer this cash flow into "stateless" currencies, such as gold and silver.
- Low-income rental units can be such as investment in cash flow generating assets, but beware of governmental regulation favoring the renter, i.e. weekly cash advance payments and strict security measures can increase operational costs. Surely, demand for low and middle income housing will increase in the future.

Buchholz, T. G. 2002. Safe at Home: The New Role of Housing in the U.S. Economy. Washington, DC: Home Ownership Alliance.

Carliner M. 1998. The Development of a Federal Homeownership "Policy". Housing Policy Debate. Vol. 9. Issue 2. 1998.

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Data on ownerships rates:

Data on crime rates:

Data on food stamp participation rates:

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« Last Edit: 2011 Jun 11, 04:00:36 pm by DiggingNorway » Logged

We do sell some MCC here:
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« Reply #1 on: 2011 Jun 11, 08:47:16 pm »

Wow! Nice work!
I suggest you title the last paragraph or two "Summary" or "Conclusion" to make it stand out and match your abstract.
Capitalist Pig
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« Reply #2 on: 2011 Jun 15, 01:15:33 pm »

Took me a while to get to reading this massive work of yours, but great job! Interventions, well, intervene and distort markets.

Neal McSpadden
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The Primal Prepper - my blog about preparing for the worst while living the best
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« Reply #3 on: 2011 Jun 17, 08:05:43 pm »

Very nice job.  Whenever politicians try to create a utopia, the common people end up taking one in the neck.
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