In the most elementary of terms, the government at all levels has created the current housing crisis. On a national level, localities have all but criminalized new housing development through draconian zoning laws, though Democratic NIMBYs seem to be far worse offenders than Republican locales, while President Joe Biden lit the purchasing power of the U.S. dollar on fire with the $2 trillion American Rescue Project, which further induced demand on top of the COVID spending boondoggle.
And the president’s solution to this worst of both worlds phenomenon? To exacerbate the problem even more by offering $5,000 per year for two years to first-time, “middle class” homebuyers and a one-year credit for $10,000 for families who sell their so-called starter homes.
The White House boasts that the former proposal, which will be announced during Biden’s State of the Union address, would be tantamount to lowering a buyer’s effective mortgage rate by at least 1.5 percentage points. To understand why this is such an aggressively moronic proposal, you have to understand that this — reducing the effective mortgage rate — is literally the opposite of what the Federal Reserve has done and wants to continue to do to reduce the worst inflationary crisis in 40 years.
Unlike the massively successful monetary tightening conducted under Paul Volcker’s tenure at the Federal Reserve, the central bank’s efforts under Jerome Powell are diametrically opposed to, not working with, the White House. While Biden has pursued the single most expansive fiscal policy of any president not presiding over a war or pandemic, the Fed has undertaken the fastest monetary tightening in nearly half a century, increasing the federal funds rate from virtually negative to north of 5% and destroying an unprecedented 4% of the money supply. All of that has succeeded in bringing inflation from its near-double-digit apex in summer 2022, but even now, inflation persists at almost double the Fed’s maximum 2% target. This is why the Fed continues to defy investor expectations and has kept interest rates at the highest level since the start of the Great Financial Crisis. It is because of the fact that this translates to the highest average mortgage rates since — you guessed it — the start of the Great Financial Crisis.
The point is not to punish would-be homebuyers but to incentivize the demand artificially suppressed by the zoning laws that are thankfully beginning to be voted out of fashion. The solution illustrates the very nature of the problem: A study by Realtor.com found that the dearth of single-family homes compared to household formation over the last decade grew to an astounding 6.5 million homes, but this gap could shrink to just 2.3 million homes should the nation decide to embrace multifamily home construction.
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While Biden has made some halfhearted attempts to incentivize zoning reform at a federal level, they’ve proven lackluster. Rather than stoking further demand in the housing market, he can and should be throwing his weight behind federal legislation such as that which would give homeowners, not neighbors and the local government, sole discretion over how many parking spaces a dwelling must supply.
Of course, all of this would require the hard work of legislating, and that means actually crossing the aisle to make a deal with Republicans who control the House. Offering free cash sounds a good deal sexier in an election year, especially when the president in power assumes the average voter knows as little about economics as he does. $5,000 won’t make any difference except to increase prices further. But 5 million new housing units? That is indeed the solution.
