Housing Subsidies, Debt Expansion, and the Death of American Liberty

This post originally appeared on the Irvine Housing Blog.

Today we examine housing subsidies and how they contribute to the growth of debt and the slow erosion of liberty in America.

And I don’t think it’ll be so bad
And I know it won’t be so bad
‘Cause the man said “that’s the way it is”
And the man said “it don’t get better than this” no no no

Properties are encumbered with too much debt, and buyers in markets where prices have not crashed are being asked to pay much higher prices as a percentage of their incomes than generations past. Today’s buyers are being asked to pay for the excesses of those that came before them and sell out to the money changers.

Mom, Apple Pie and Mortgages

FOR decades, the federal government has subsidized housing — particularly owner-occupied housing. This has been especially true during the continuing financial crisis, with Fannie Mae, Freddie Mac and the Federal Housing Administration propping up the housing market by issuing guarantees for investors on most new mortgages.

But what is the long-term justification for putting taxpayers on the line to subsidize homeownership? Is this nothing more than a sacred cow in American society — a political necessity because so many voters own homes and are mindful of their resale value?

How much of our government’s response is tyranny of the majority? Are the owning taxpayers paying this subsidy comfortable with the face of housing entitlement today?

This time, the best answer isn’t found in traditional economics but rather in American culture: a long-standing feeling that owning homes in healthy communities is connected to individual liberties that embody our national identity. Historically, homeownership has been associated with freedom, while renting — often in tenements or mill villages — has been linked to the oppression of a landlord.

In his classic 1985 book, “Crabgrass Frontier,” Kenneth T. Jackson of Columbia University delineated the complex train of thought that over the last two centuries has produced the American belief that homeownership encourages pride and good citizenship and, ultimately, preservation of liberty. These attitudes are enduring.

The middle road is often a path between two evils. In the left ditch is the weakness of landlord dependency, rent controls, and other government subsidies of transitory housing. In the right ditch is an array of market subsidies to encourage home ownership, even if that form of home ownership is really money rentership – and, pardon my cynicism, our lending overlords want it that way. Wouldn’t you want to have 40% of society’s earnings if you could get it?

People forget they are merely substituting one form or weakness for another; landlord oppression is one evil, and lender oppression is another. Somewhere along the way, we lost ourselves. We escaped one form of bondage and fell into another. Why did we do it?

Back in 1899, in “The Theory of the Leisure Class,” Thorstein Veblen described homeownership, particularly of large and expensive dwellings, as “conspicuous consumption.” By that, he meant that it was undertaken substantially for the purpose of impressing others by showing the amount of money one can afford to waste on space one doesn’t need.

What is specifically American here — though it’s increasingly seen in other countries, too — may be the modern sense of equal citizenship, engendered by the illusion that we can sustain conspicuous housing consumption even among a majority of the people.

In short, this all has a great deal to do with culture, and little to do with financial wisdom. After all, financial theory suggests that people should not own their own homes, at least not in the way that many do today.

We are witnessing the final stages of a societal change. We have embraced debt as if it is capital or wealth; the change has been gradual, and the individual steps toward this end seemed natural and necessary; however, a significant number of people no longer distinguish between debt and wealth and truly believe obtaining debt bestows wealth and power.

“Twelve voices were shouting in anger, and they were all alike. No question, now, what had happened to the faces of the pigs. The creatures outside looked from pig to man, and from man to pig, and from pig to man again; but already it was impossible to say which was which.” — George Orwell, Animal Farm.

We are generation pwned. Lenders seek the maximum debt-to-income ratio people are willing and able to support. The lure of appreciation and HELOC spending increases borrower willingness far beyond borrower ability and this willingness (or kool aid intoxication) helps keep prices inflated and debt loads large. Lenders and realtors exploit our modern American delusions, and everyone pays higher housing costs as a result. What good is a large income if so much is spent on housing? Aren’t the lenders the real beneficiaries?

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