Do alternative forms of homeownership, such as shared equity models and rent-to-own programs, present viable alternatives for future homeownership? Can they be taken to scale in a way that can encourage stabilization of neighborhoods and housing markets?
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One of the things regularly in short supply in Washington is modesty, and an acknowledgement of the limits of policymakers to forecast the future. A defining characteristic of U.S. housing policy has been the drive toward a single style of homeownership. A model that is increasingly driven by ever higher levels of leverage. One that has heavily rigged the scales in favor of a GSE-driven model.
We should first recognize that the optimal form and variety of modes of homeownership is simply unknowable ex ante. Accordingly the right approach is a level playing field, devoid of subsidies, that allows individuals and institutions to experiment. Ideas that are scaleable will grow without subsidy, if the regulatory barriers that might stand in their way are removed. For instance the ability of banks to invest in the equity of a homeowner would require a considerable change in both the regulatory environment, as well as the regulatory culture. For that reason, innovation may come instead from less regulated financial firms, such as private equity or hedge funds.
We should, however, not let an obsession with scale deter experiments that provide viable alternative forms of homeownership. Considerable damage has been done to both our economy and financial system due to the need to protect the scale of the GSEs. Continuing to risk our economy for the benefit of a few basis points in funding should be rejected. Many, although not all, of the benefits of mortgage standardization and securitization have proved to be illusionary.
With those limitations in mind, I have been skeptical of a variety of proposals, such as shared equity and “flexible underwriting”, because they are usually attempts to stretch borrowers’ ability to pay more for the same home, accepting prices as exogenous. Rather than finding creative ways for families to bid-up home prices, our attention should be devoted to making homes more affordable. And contrary to Washington’s various attempts to prove otherwise, housing is subject to the same laws of supply and demand as other goods. In areas of the country where housing is plentiful and supply restrictions few, families can achieve homeownership relatively easily. In places with extensive supply restrictions, subsidies simply push up prices.
Before engaging in new forms of homeownership, we should take considerable caution to insure we do not simply repeat the various errors of our previous homeownership policies. Massive demand subsidies, via the tax-code and mortgage market, have largely served to drive up home prices with little impact on long-term homeownership rates. Such an approach should be rejected in any form. Proposals that do not address supply constraints are missing the most critical barriers. With that in mind, let the experiments begin.
Mark A. Calabria is Director of Financial Regulation Studies at the Cato Institute.
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