A radical housing finance proposal
The world of finance is widely seen as little more than a casino seemingly custom designed to wreak havoc and destruction throughout the world. As portrayed endlessly in movies and books, though, it seems to have a high degree of panache; it’s exciting, gets a great deal of attention, and our focus is directed on ways to dampen the speculative excess. But there’s another face of finance that’s not speculative at all and has absolutely no sexiness attached to it. It’s the steady grueling daily parasitic extraction of rentier finance. While it gets little attention, though, it’s arguably more damaging over the long term than the casino. No industry illustrates this better than residential real estate.
A home, of course, isn’t just another consumer commodity; it’s a fundamental requirement to civilized life, ranking right up there with food, clothing, and healthcare. On the economic front, residential real estate is the critical backbone of the US economy and a collapse in values, as we’ve seen, can easily lead to depression. A sharp rise in prices, on the other hand, can be equally bad; not only because it could then collapse, but also because it’s a sharp tax on future generations who must buy at the inflated prices.
The United States has developed elaborate institutions to encourage home ownership and prop up housing values, but it turns out every one of them is centered on and directly benefits finance. Fannie Mae, Freddie Mac, and the FHA provide 100% guarantees against losses to mortgage financiers while the homeowner is essentially unprotected. What a deal! Mortgage financiers take absolutely zero risk yet are institutionally enabled to extract high rents from homeowners in the form of interest charges.
The average mortgage rate in the US today for a 30 year mortgage is 3.98%, plus an average additional upfront fee of 0.7% plus many other charges and aggravations. Financing a home turns out to be a very costly and grueling experience. For a $300,000 home financed at 90%, for example, the annual interest charge at today’s rate is a whopping $10,746, about 21% of median household income. This significant transfer of income, we must not forget, is for a loan that’s fully guaranteed by the government and has no risk.
We live in a hierarchical society structured like a great pyramid and the gigantic wealth and power at the top is largely sustained through these kinds of riskless rentier extractions. The only way to really improve conditions lower down is to put an end to the upward flows. The relationship between rentier finance and the population is a direct conflict of interest and there’s no way forward without facing up to it. In that light then, I humbly offer a straightforward proposal.
I propose that the government end its loan insurance program for finance and start financing the homeowner directly. There’s nothing inherent in the laws of the universe which decrees a home must be expensive, risky, and difficult to acquire. So, how about this? Anyone who wishes to buy a home simply makes a down payment, perhaps 5%, and the remainder is automatically financed by the government at 0% interest. No principal payment would be required either, so there would be no monthly payment, no underwriting requirements, and no additional hassles. The effect would be to render home ownership far cheaper, sharply increase disposable income, and virtually eliminate home ownership risk. Homelessness would be vastly reduced. Not only would we eliminate the unjust unearned income going to the top, we would also put an end to the vast waste of human effort devoted to producing, servicing, and analyzing mortgage securities, the collection and foreclosure industry, and much else. We of course need to assure these workers find new sources of income, but that’s a separate story for another day.
Here’s some obvious objections and comments:
1) Where does the government get the money? Anyone who reads this blog knows the dollar is a fiat currency and can be created at will. Interest rates are controlled by the Fed and it can and should keep them at zero. There’s never a just cause for a riskless rate of return for wealth. Risks of inflation are controllable through assuring that the economy never attempts to spend beyond its real resources, coupled with oversight over the oligopolies to assure they maintain “reasonably” low profit margins. Existing home sales are now on about a 5,000,000 unit per year pace with the median price being $192,800. At this level, the program would require annual financing of about $867 billion per year or $72 billion per month. While this may sound high, it’s lower than current QE purchases which could then be reduced or discontinued. Also, we must remember that the government need only finance a home once since all future sales would be a net wash given that the new government loan would simply pay off the old one.
2) Should it be available for investment properties and very high priced homes as well? I think not. I think it should be directed toward the vast majority of the population and centered on owner occupied homes. Of course the cost of home ownership would sharply decline and rents would certainly decline as well.
3) Wouldn’t it just lead to sharply higher housing prices? Without some reasonable controls, it probably would. But the controls wouldn’t be that difficult and would serve important societal purposes. Housing price increases could be limited by an index tied to inflation or median income. The controls could even be optional in the sense that a homeowner could decide whether or not to opt into the program. Once a home is entered into the program though, it’s future value would then be linked to the index. We may lose some possible benefits dealing with price signals from an unstructured housing market, but they would be greatly offset by the elimination of the risk of future housing collapses or bubbles and the vast advancement in disposable income.
4) This is way too radical and would never be implemented. Probably true, but no reason to attack it.
This post clearly hasn’t addressed the many issues involved, but they’d all surely be resolvable with a bit of effort. It isn’t exactly rocket science. The important thing, I think, is that our views on finance need to be sharply radicalized if we’re to make true progress. We can’t endlessly send rentier income upward if we seek to live prosperously, and that will clearly involve radical challenges to existing power. Every day we hear radical proposals emanating from the top demanding ever greater cuts in wages, security, benefits, and living conditions. We have, it seems, just three possible ways to respond: we can accept the elite theory of the universe as true and, serf-like, humbly accept their endless cuts; OR we can seek to avoid the cuts and maintain the status quo; OR we can throw right back at them our very own democratically based proposals that fully match theirs in the level of radicalism. Why not go for the third?
Update 6/14: I think the class status aspect of housing is very relevant here and I touch on it in today’s post.
Comments on Inequality 
“Wouldn’t it just lead to sharply higher housing prices? Without some reasonable controls, it probably would.”
Institute a land value tax.
That would keep prices down, but with the significant downside of instituting a cost on housing as public policy. My dislike of price increases is mostly driven by the fear that the rising cost would offset some of the benefits of zero interest rates. A tax would do the same thing.
Over a longer time frame, we should expect a vast improvement in available decent housing since it will become much more affordable. That would help keep price increases down. But, until then, I’d opt for some form of price control.
The fact that fiat currency “can be created at will” and spent on housing does not make that expenditure costless: reason is that the same amount of money could be created and spent on education, roads, etc, or just donated to taxpayers in the form of tax cuts. I.e. the consumers of education, roads and every taxpayer pays a price if government creates fiat money and spends it on housing.
The latter point is what economists mean by the phrase “opportunity cost”. Opportunity cost views the cost of a particular way of spending money in terms of the next best thing the money could have been spent on.
People who consume housing should have to pay a realistic cost for it, just as they pay a realistic cost for food, beer, you name it. That optimises at least in theory the allocation of scarce resources as between housing, beer, etc etc production.
Ralph,
That’s certainly an important thing to keep in mind. But the point I’m raising here seems to me to be somewhat different in that I’m seeking to eliminate an extraction of rent rather than fund a cost. The elimination of the housing interest rate extraction industry would seem to pose no cost to society as it would, in fact, free up a great deal of people who could be put to occupations widely seen as more beneficial – perhaps in education, roads, beer, or whatever. Surely we need to differentiate between costs and rents.
I recognize that many economists see their mission as how to best allocate resources in an economy where they’re scarce. I don’t see that as at all realistic though in our world of massive unemployment, poverty, gross inequality, and oligopoly.
Greatly appreciate you dropping by!
Why no monthly payment? People are still paying down the loan, right?
I suppose they could if they wanted to, but why do that on a zero rate?