NCPA - National Center for Policy Analysis

You Don't Need Uncle Sam to Purchase a House

August 20, 2013

Dodd-Frank's missing pillar, housing finance reform, has finally found its way into the halls of Congress and the speeches of the president. But this pillar will be rotten from the start if it is built around the fallacy that undergirds the current housing finance system -- the notion that Americans cannot purchase and finance their homes without the help of Uncle Sam, says Hester Peirce, a senior research fellow at the Mercatus Center.

The government gets involved even before a family decides to purchase a home. It starts with the government's perpetual advertising campaign for home ownership. A White House website typifies this nudge towards homeownership with its assertion that, "Owning a home has always been at the heart of the American Dream."

  • The American dream is not reflected in homeownership, but in the ability to decide for oneself whether the positive aspects of homeownership outweigh the costs and headaches of it.
  • Americans who bought houses at the height of the market, lost their jobs and then lacked the flexibility to move to a new state for a new job because they were tied to a home may prefer to rent in the future.
  • Individuals are uniquely qualified -- based on a keen understanding of their own temperaments, dreams, and realities -- to make their own rent/buy decision without advice or subsidies from the government.

The government's favorite mortgage is the 30-year, fixed-rate mortgage without prepayment penalties.

  • President Obama recently called for continued "access to safe and simple mortgage products like the 30-year, fixed-rate mortgage."
  • Senator Warner, cosponsor of a Senate bill to reform housing finance, touted the bill's "thoughtful reforms that will protect taxpayers from future downturns while responsibly preserving the availability of the 30-year fixed-rate mortgage for homebuyers."

Thirty-year, fixed rate mortgages cost more than other types of mortgages because lenders take on more interest rate risk than they would with a shorter-term, variable rate loan. Restrictions on prepayment penalties make mortgages even pricier, because lenders know that homeowners will refinance when rates go down.

Some homeowners might be willing to pay for the benefits that go with this type of mortgage, but others might prefer to bear some of the interest rate risk. A family that knows it is likely to move in five years, for example, might be happy with a mortgage that adjusts after five years.

Source: Hester Peirce, "You Don't Need Uncle Sam to Purchase a House," Real Clear Markets, August 14, 2013.


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