This week as we’ve examined the mechanisms of American housing finance, the impacts it has on our communities and all the opportunities presented to do things better, I’ve thought about the changes I envision for a stronger America.

1.    Better pricing through market feedback.

Earlier this week, one of our readers took mild exception to what they thought was my free market idealism. Guilty. I think markets, as free from manipulation and coercion as possible, provide the best signals – positive as well as painful – as to what works and what doesn’t. Where we must tolerate some level of manipulation and coercion, I prefer a system that is simple at the federal level and is allowed to become more complex and nuanced at the local. This is the exact opposite of what we have now. 

When it comes to housing, my positive desire for better pricing mechanisms is overwhelmed by my distaste for the current market manipulation. In 2008, we had a housing bubble. Less than a decade later, housing is at near the same levels in most markets nationwide. We now call this a recovery. It’s just insane.

This year I’ve been to inflated housing markets in California, Washington, Vermont and now Georgia. Prices are crazy – out of touch with local realities – and everywhere I hear the same two things: (1) Housing is brutally expensive, really unaffordable for all but a few and (2) Housing prices are going to keep going up because we’re going to continue to grow. This makes sense only in a market without functioning feedback loops. That is our housing market. A lot of people are going to get hurt badly.

Image from Wikimedia

Image from Wikimedia

2.    Economic systems that are more localized and, thus, more antifragile. 

Yesterday in Savannah I was speaking to someone who told me about their recent home buying experience. The part of the story I would like to pass on involves the appraiser who asked, “So what price do you need for the loan you are after?” That’s not the first time I’ve had that reported to me this year. Yes, what once was business-as-usual became fraud for the briefest of time periods and now is, once again, business-as-usual.

Housing is the perfect case study in the dangers of a centralized economy. When either the Federal Reserve or one of our government-sponsored entities (read: privatized gains and socialized losses) like Fannie or Freddie buys home loans, the risks of default are socialized across our entire economy. We’re all on the hook, which means none of us individually is on the hook. This creates all kinds of incentives for mischief.

The appraiser does not need to be accurate, just defensible. The bank originating the loan doesn’t need to worry about whether or not the borrower will default since they don’t hold the loan. They only need to concern themselves with whether or not the loan is conforming to federal guidelines so it can be sold. Our current incentives are completely misaligned with the level of risk the system is assuming.

A localized housing market, one where local banks held loans (or at least kept a portion of each loan) on their books, would be slower moving, but it would also be more stable. Federal policy obsesses about today’s macroeconomic statistics like GDP growth and unemployment while local economic ecosystems have greater incentives to consider the long term implications of financial decisions. Localizing housing finance would make it harder to juice the national economy just to bump up next quarter’s GDP number.

3.    Cities with better tools to halt decline.

Federal housing policy creates distorted markets for single family homes while also accommodating the large building, something six stories or greater. What’s missing from this approach is the two, three and four story mixed use buildings that used to be the cornerstone of prosperous cities. 

I see cities try to overcome this gap in two ways. First, they feel obliged to accept neighborhood-busting leaps in development. No city exemplifies this more than Austin, TX, where you’ll have a neighborhood of single family homes with the occasional 12 to 20-story tower. When the next increment of intensity can’t be competitively financed, the outlet for demand is a hyper expansion on the edge along with random towers in the core, an approach that makes a city simultaneously unaffordable and stagnating. 

The other way cities try and overcome bad federal housing policies is with local tax incentives, often some form of tax increment financing. We force communities to forgo gains in order to have progress, which makes local governments a lot more fragile. It’s also created a local culture – especially among development professionals – that tends to look up the government food chain for the next subsidy program rather than at the many productive ways in which we can serve one another.

4.    People with more opportunities to pursue their dreams.

I want thousands of small developers working to make their communities better.

I want thousands of small developers working to make their communities better. I want tens of thousands of individuals with a hope and a dream to have the opportunity to open their own storefront in a building they could own. I want everyone to have options so that they can buy a fairly-priced home with the confidence that they are not going to be taken on a roller coaster of volatility. 

Federal financing rules started out as a way to help people. They’ve now become a mechanism that exploits. There is more to be gained by ending these programs than continuing them. At the very least, they should be reformed to provide more opportunity for people who want to choose traditional, mixed-use development.

(Top image by Greg Hume)


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