NCPA - National Center for Policy Analysis

Regulatory Reform and Housing Finance: Putting the "Cost" Back in Benefit-Cost

November 13, 2012

The bursting of the housing bubble served as an impetus for the federal government to regulate the housing market. The impulse for regulatory reform in the aftermath of the U.S. housing bubble is both understandable and appropriate  considering the bubble was a result of some under-regulation (mortgage origination) and over-regulation (the housing government -­‐ sponsored enterprises' excessive affordable housing goals), say Douglas Holtz-Eakin, Cameron Smith and Andrew Winkler of the American Action Forum.

However, it is necessary for policymakers to find the right balance between costs and benefits to ensure that new regulations are not weak but at the same time not overbearing. The housing regulations through the Dodd-Frank legislation and Basel III accords, for example, may hurt the long-term growth of the housing market.

  • The regulations may reduce the number of loans by 20 percent.
  • This could result in 600,000 fewer home sales.
  • In turn, the reduced lending and sales could cost up to 1,010,000 housing starts.
  • Additionally, there could be 3.9 million fewer jobs as a result of the regulations.
  • Finally, there is projected to be a loss of 1.1 percentage points from the gross domestic product over the next three years.

Moreover, banks will be limited by the amount and variety of mortgages that they hold in their respective portfolios, meaning that banks may become cautious in writing loans. Because of this, millions of people will face higher borrowing costs.

Slower price growth of the housing market has many implications:

  • Mortgaged homeowners would be more vulnerable to foreclosure.
  • Trade-up buying would be reduced.
  • Refinancing would become more difficult.

There are large macroeconomic implications as well. As home sales decline, so do expenditures on other goods and services that are related to purchasing a home. In addition, the number of unsold houses depreciates other houses as well, decreasing overall wealth in the housing market.

Source: Douglas Holtz-Eakin, Cameron Smith and Andrew Winkler, "Regulatory Reform and Housing Finance: Putting the 'Cost' Back in Benefit-Cost," American Action Forum, October 25, 2012.


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