Biden’s mortgage plan: 2008, but with an inflation crisis
Tiana Lowe
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Starting next month, President Joe Biden will borrow from the middle class to pay for homeownership for the financially unreliable. In the name of “equity,” the majority of the mortgage market regulated by the Federal Housing Finance Agency will make prospective buyers with good-to-great credit scores pay more to fund reduced interest rates for those with bad credit scores.
You might recall that federal regulators tried pursuing the white whale of universal homeownership in the years leading up to 2007. The result? A bunch of people with bad credit scores — that is, a history of being unable to pay back their debt in a timely manner — were unable to pay back their mortgages on their McMansions in a timely manner. Because those obviously subprime mortgages were bundled up and billed as triple-A investments, investors were dumbstruck when the value of these mortgage-backed securities plummeted.
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The silver lining of the Great Recession was that, due to the precipitous drop in housing prices, those not swept up in the crummy credit mania swept in to purchase homes once their values had fallen. But unlike 2008, the disaster Biden is courting would be accompanied by the worst inflation in 40 years and interest rates that will put buyers off.
As in 2008, banks have much to lose if clients default on their mortgages, but this time, home prices are dangerously sticky due to depressed supply. The rental vacancy rate is the lowest since 1984, and the homeowner vacancy rate is the lowest ever recorded by the Census Bureau. The Biden administration has, directly and indirectly, made home prices more expensive. Indirectly, the $1.9 trillion American Rescue Plan was effectively financed by the Federal Reserve keeping the money printer in overdrive, resulting in home prices, which had plateaued during 2020, to skyrocket by 25% throughout Biden’s first year in office.
On the supply side, Biden’s regulatory agenda has compounded the problem thanks to his frankly Trumpian regulatory regime. In 2021, Biden doubled duties on softwood lumber imported from Canada to nearly 20% and maintained his predecessor’s Section 301 tariffs on Chinese construction imports. All in all, the National Association of Home Builders estimates that government regulations account for 25% of the cost of new homebuilding, which, in turn, has increased by about a third since Biden took office.
While Biden’s push for long overdue zoning regulations is laudable, the potential for zoning reform is much more limited at a federal level than at a local one. All in all, stubborn home prices have accounted for the majority of consumer price inflation in recent months.
Biden’s mortgage move is made even worse when you consider that interest rates are only this high because of his record-setting deficit spending. Without that ARP (and the Fed’s willingness to finance Biden’s first year in office), near-double-digit inflation would never have materialized or forced the Fed to hike interest rates to 15-year highs.
All of this risks the same financial collapse and instability of the Great Recession but without any deflationary silver linings. In other words, Biden is doing his level best to embrace the excesses of stagflation, all in the name of helping those unwilling to help themselves through a tool as easy to game as a credit score.