Jeffrey M. Lacker

English

Research Papers in Economics

Region Focus | Third Quarter | 2010  1
F
or decades, owning a home has been viewed as a key
component of the “American Dream.” It’s a goal to
which many people aspire and one that federal 
policymakers have promoted, largely through subsidizing
housing-related debt. Even if one supports subsidies for
homeownership, there are strong reasons to question the
way those subsidies are structured. In particular, it may be
more desirable to subsidize home equity rather than debt,
a point I will consider later in this article.
First, I think it’s worth stepping back and noting that
while purchasing a home is often a wise choice for many
people, it’s not a universally good idea. There are people for
whom homeownership doesn’t make sense.
Many people value mobility. For instance, they may want
to be able to move from one part of the country to another
to pursue their career goals, as different and perhaps better
job matches become available. For them, owning a home can
make such moves considerably more costly. 
Moreover, even if a household prefers to stay in the same
area, it may wish to either downsize to a smaller house or
upsize to a larger one, depending on its circumstances. That,
too, can be costly. Finding a buyer may take time — and 
once an agreement is made the transaction costs often are
considerable. 
So why do we so actively promote homeownership as a
policy goal? One argument is that homeownership produces
what economists call “positive externalities.” People who
own their own homes, the argument goes, have more of a
stake in their communities than do renters. They are more
likely to maintain their properties, which benefits their
neighbors. And they also may even become “better citizens,”
participating more actively in organizations that aim to
improve the safety of their neighborhoods and the quality of
the local schools. 
I think there is something to this argument. It makes
sense in theory and I think most of us have seen it in prac-
tice. But do these benefits outweigh the costs associated
with the policies that we have employed to increase home-
ownership? The answer to that question is less clear.
Government-sponsored enterprises (GSEs) such as
Fannie Mae and Freddie Mac facilitated the issuance of
mortgages that, upon closer scrutiny, should not have been
made. Why did they, and their creditors, take on such risks?
I think there can be little doubt that they were emboldened
to act incautiously by the belief that they would receive 
federal assistance in the event that those risks would put
them in financial peril. The implicit policy of protecting
“too-big-to-fail” firms ultimately failed the American public
and contributed to the financial crisis. 
However, even if the GSEs had acted more prudentially
PRESIDENT’SMESSAGE
when evaluating the subprime
loan market, there is still 
reason to question whether the
way we promote homeowner-
ship is wise, as I noted at the
beginning of this article. As 
it stands, we effectively subsi-
dize mortgages — that is to say,
debt. I think there is a 
better way. We could instead
encourage savings and the
accumulation of home equity.
One way to do this is to create
tax-favored savings accounts for potential homeowners. 
As Charles Calomiris of Columbia University recently
noted, these accounts “could be used by low- and moderate-
income families to accumulate adequate down payment.”
Such a policy would limit the risks associated with current
GSE practices and provide incentives for households to
more carefully consider how much house they can afford
and under what terms. 
As the economy continues to recover, it is important 
to reconsider and correct those policies that directly con-
tributed to the crisis, as well as fundamentally examine our
long-term societal goals. Homeownership is a good thing for
many people. But it is not for everyone. If we are going to
promote it, we should recognize that and tailor our policies
accordingly. This wouldn’t mean an end to the “American
Dream.” Far from it. Instead, it would mean an end to 
policies that, in combination with other public actions, 
have the potential to imperil our financial system again —
and our prosperity.  RF
A New Approach to Federal Housing Policy
JEFFREY M. LACKER
PRESIDENT
FEDERAL RESERVE BANK OF RICHMOND

President's message : A new approach to federal housing policy

http://www.richmondfed.org/publications/research/region_focus/2010/q3/pdf/presidents_message.pdf

President's message : A new approach to federal housing policy

Abstract

Similar works

Full text

Available Versions

Research Papers in Economics