Government Housing Marches On

Housing’s dead cat bounce has the financial press all a twitter. There is a lack of existing homes on the market as the foreclosure pipeline remains clogged. Homeowners underwater (11 to 20 million nationwide) can’t sell. So builders are back in business, because as one buyer told the Wall Street Journal, “It’s much easier to buy a new home than an old one.” Builders do all they can to approve their buyers for financing, going as far as paying some of the closing costs. Many buyers use the builders’ mortgage arms that pave the way for buyers to obtain FHA and VA loans that require little downpayment. Didn’t people complain that it was the lack of down payments that caused the housing crisis?

During the boom, homebuilders chased buyers with granite counter tops, surround sound systems, and all sorts of fancy stuff.

In a down market, one would think builders would really be dolling up their offerings.

Just the opposite. Fannie, Freddie, and FHA now dictate what builders offer. The Wall Street Journal reports,

“Back at the height of the market, our homes were fully tricked out. They had granite, brass, everything,” said Lennar President Rick Beckwitt. “As the market declined, we needed to pull those specifications out of the homes,” he said, in order to keep prices within the price limits for buyers with government-backed loans.

Zelman & Associates says that half the new homes sold in the 4th quarter were to buyers using some kind of government loan. FHA backed nearly a third of these loans, a huge increase from 5 years ago when that percentage was 10%.

None of this is new. Government has driven the direction of the housing market since the 1920’s with Herbert Hoover’s “Own Your Own Home Campaign,” the Home Modernization Bureau, the Better Homes in America Movement, and the Small House Service Bureau.

While it seems Americans were born to own homes, historian Janet Hutchinson explains that home ownership was sold to Americans with “carefully calculated governmental policies that proselytized Americans about the virtues of suburban home ownership while opposing outright market intervention.”

FHA was created as part of the National Housing Act of 1934 with the intent, “to bring the home financing system of the country out of a chaotic situation,” as the FHA said in its first annual report.

As they say about the golden rule, “he who has the gold, rules.” FHA essentially has dictated land planning for much of suburban America. Marc Weis writes in his book The Rise of the Community Builders: The American Real Estate Industry and Urban Land Planning, “Through the powerful inducement of mortgage insurance, FHA’s Land Planning Division was able to transform residential development practices as well as play a key role in shaping and popularizing local land-use regulations.”

If builders want their buyers to get FHA loans they must build and develop according to the FHA’s Underwriting Manual. Weiss writes,

Consequently in order to obtain FHA insurance, lenders, borrowers, sub-dividers, and builders
were required to submit to the collective judgment of the Underwriting Division, who together with the technical Division determined minimum required property and neighborhood standards.

It’s hard to make the argument that the U.S. needs more houses. Redundant homes are being torn down in Detroit and other cities. Entire subdivisions are abandoned in the sand states.

Yet the government’s cookie-cutter housing policy marches on.