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How Easy Federal Money Could Be Laying The Groundwork For Another Housing Crash


If you think federal policies have caused sticker shock when you go to the department store or buy groceries, just wait for even more effects on the housing market. Unlike most prices for consumer goods and staples, for housing, what goes up can indeed go down—and may do so in the relatively near future.

It’s another example of government causing one problem, then coming back with a “solution” that causes even more difficulties. The federal government has spent the past two years pumping up all manner of asset prices—stocks, bonds, cryptocurrencies, you name it—via easy money policies. Because these asset bubbles have also hit home prices, Washington now will make housing more “affordable” by having the federal government take on more risk.

We’ve seen this movie before—it caused the financial market crash of 2008-09. It may not end well this time, either.

Bailouts for Rich Communities

On November 30, the Federal Housing Finance Agency announced that Fannie Mae and Freddie Mac, the government-backed mortgage lenders, would acquire mortgages worth nearly $1 million ($970,800, to be exact) in some high-cost locales (e.g., San Francisco, New York City, etc.) next year. In other areas, Fannie and Freddie will buy mortgages of up to $647,200 in 2022. In both cases, the numbers represent an 18.05 percent increase in loan limits for 2022 compared to 2021.

Fannie and Freddie do not lend directly to borrowers themselves; instead, they buy mortgages from banks, bundle them, and sell them as securities to investors. But because the companies, which were placed into conservatorship during the last housing crash, have access to more than $250 billion from the Treasury—and an implicit guarantee for additional bailouts besides—lenders generally offer lower rates, and smaller down-payment requirements, for mortgages that meet Fannie and Freddie’s guidelines (i.e., “conforming” mortgages).

Fed Promoting Asset Bubbles

The increase in loan limits for Fannie and Freddie next year comes due to the epic run-up in housing prices this year. The National Association of Realtors reported that median prices for existing homes rose 16 percent in the third quarter compared with 2020 levels—the highest annual increase in home prices since the organization began keeping records more than half a century ago. And the skyrocketing home prices appear near-universal: In the second quarter, median home prices increased at a double-digit rate in a whopping 94 percent of metropolitan areas.

Some of the increase in home prices stems from lifestyle adjustments since the coronavirus pandemic, with families seeking more space, and often moving from urban to suburban environments. But much of the inflation in home prices has the same source as the inflation in other prices: The Federal Reserve’s policy of printing money.

Since the pandemic first hit, the Fed has purchased $40 billion of mortgage-backed securities—the securities that Fannie and Freddie sell—each month. Those monthly purchases have driven mortgage rates to rock-bottom levels, encouraging individuals to refinance their house, or take on additional mortgage debt. The lower mortgage rates created by the Fed’s intervention have also driven the home-bidding wars that have led to skyrocketing home prices.

While it recently announced it will start reducing the amount of its monthly asset purchases, the Fed still plans to continue those purchases until next June. In other words, it will continue to inflate the real estate bubble it has created for six months more.

In the meantime, Fannie and Freddie—whose market share has already surged to 60 percent of all new mortgages, up from 42 percent before the pandemic—will take on more risk for the federal government by guaranteeing even larger loans. If the Fed has to raise interest rates dramatically to respond to ever-increasing inflation, that move could precipitate a housing crisis, and a financial crisis, just like the ones that hit when mortgage rates began to rise in 2006-08. Once again, taxpayers—meaning you and me—could be left holding the bag.

Solutions, Not Bailouts

Fixing the problems in the housing market requires a threefold approach that addresses both demand for homes and the supply of housing stock:

  1. Ending the Fed’s quantitative easing, which has artificially lowered mortgage rates, stoking bidding wars by encouraging borrowers to take on bigger and bigger loans;
  2. Reforms to zoning and other laws that make it easier to build new homes or repurpose existing buildings (e.g., office and retail space) into homes and apartments; and
  3. An end to supply chain problems and other distortions that raise the price of supplies for homebuyers, such as the tariffs on Canadian lumber that the Biden administration recently doubled.

None of those actual solutions involve increasing loan limits for Fannie Mae and Freddie Mac. If borrowers feel they have to take on more financial risk to get a toe on the housing market, then by all means, have at it.

But taxpayers shouldn’t have to assume that risk as well, which they do currently with every mortgage Fannie and Freddie assume. A more sound housing policy would see Fannie and Freddie get wound down—a move that, when coupled with the steps above, would go a long way towards ending the “boom and bust” problems in the housing market that could leave taxpayers holding the bag for a second time in as many decades.