Heartland Ideas

Free Market Solutions in Real Estate

Proposals to increase regulation of the real estate industry are in the news these days thanks to record foreclosures, a collapsing credit market, spiraling losses for some of the nation’s largest and most respected financial institutions, and the spectacle of government agencies racing to find short-term solutions to stop the collapse.

Many of these problems are the result of regulatory policies that unnecessarily raise costs, limit competition, and expose taxpayers to risk. Restoring order to housing markets requires the following public policy reforms:

Accountability

Following the collapse of housing prices, thinkers on the right and left have proposed different ways of insulating people from the consequences of their decisions. We reject nearly all of them. Although underwriting by mortgage brokers and mortgage bankers became increasingly careless during the housing boom, letting the lenders get into trouble is the best way to solve the problem. Holding lenders and borrowers accountable according to the terms of their contracts is the only way to “solve” the home mortgage crisis.

Government-supported Enterprises

Recent events have shown that government-supported enterprises such as Fannie Mae, Freddie Mac, and the Federal Home Loan Bank pose significant systemic risk to the nation’s overall financial system. Although activities they perform may be valuable, they are properly performed by the private sector. Likewise, the Federal Housing Administration, insofar as it exists at all, should uphold standards that reduce its chance of becoming a burden on taxpayers.

Affordable housing

Zoning ordinances, building codes, and smart growth policies all tend to increase the cost of home ownership, and there is plenty of evidence that these policies contributed to the housing bubble and subsequent collapse. Home values skyrocketed in cities with smart growth policies and strict building codes, and these cities experienced the highest rates of subprime lending, the biggest crashes in home values, and consequently the highest rates of foreclosure. Repealing these policies and regulations would go a long way toward “solving” the affordable housing problem.

Low-income housing

Public housing for low-income individuals and families continues to be an unfilled promise. The Heartland Institute has been documenting the shortcomings of public housing “projects” since the 1980s and calling for their privatization and expanded use of housing vouchers. Federal and local governments finally began privatizing public housing in the 1990s by subsidizing new construction that is privately owned, privately financed, and leased to former public housing tenants in a mixed-income format.

Even this model has had only mixed success and could be replaced by full privatization of the existing developments and further expansions of the existing Section 8 voucher programs. Changes in state, federal, and local tax codes and housing regulations also would expand the supply of affordable rental housing.

Sound housing policy for the twenty-first century requires a limit to government intervention in the private housing market that is well below what was common in the twentieth century. The history and economics of housing give ample testimony to the fact that government involvement brings more government regulations, unsustainable investment levels, and higher housing costs.