Weighing Merits Of U.S. Intervention In Housing

The federal government has always promoted home ownership through tax breaks and other incentives. But the extent to which the government is supporting the beleaguered housing market today is unprecedented.

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MELISSA BLOCK, Host:

The $8,000 tax credit is only one of many new government programs designed to cushion the collapse of house prices. Since the Great Depression, the U.S. government has encouraged homeownership. But in the last year, the size and scope of government intervention in housing has grown enormously. Adam Davidson is part OF NPR's Planet Money team. He's been trying to add up the various government housing plans. He joins us now.

And Adam, what exactly is the government doing to encourage people to buy a home?

ADAM DAVIDSON, Host:

Well, it's important to realize they've been doing for a long, long time. Since the Great Depression, the government has done all sorts of things to encourage homeownership. So we all know, of course, that mortgage interest payments are tax deductible, which means it's cheaper to buy a house than to rent one at the same monthly payment. The very existence of Fannie Mae and Freddie Mac and a whole host of other federal, state and local institutions make homeownership cheaper than it would be otherwise.

And if you look at the last 70 to 80 years, what's clear is these government programs have really encouraged even more home buying and more expensive home buying, and that has effectively made the housing prices higher. But what the federal government, the Federal Reserve, and many state and local folks have been doing for the last year is a whole new world of government intervention in housing prices.

BLOCK: Right. And we'll remember that the whole financial crisis began as a housing crisis. House prices fell and that contributed to those huge numbers of foreclosures we've seen, and those prices haven't recovered. What has the government been doing to boost those prices up?

DAVIDSON: Well, the biggest thing that the government has done is rescue Fannie Mae and Freddie Mac. You know, those quasi-private, quasi-public companies that would have collapsed a year and a month ago if the government hadn't basically taken them over. If they had failed, then we wouldn't be talking about housing prices at all because there just would be no home sales probably at all in America.

But since that time, the Federal Reserve has unbelievably, dramatically increased its lending. Basically, what the Federal Reserve is doing is lending money very, very cheaply to banks to encourage those banks to lend money to regular folks to buy houses, and that has made mortgages much more affordable.

There's also a whole host of federal, state and local programs. For example, The Wall Street Journal reported that Fannie Mae and Freddie Mac, now government agencies, are going to give money to mortgage companies to encourage them to do even more lending. The Obama administration is planning a $35 billion incentive scheme that's going to mostly go to state and local housing authorities to encourage lower income folks to buy houses. So all of this together has meant a lot more buying and selling of houses than would have happened in the last year without it. But still, it hasn't been enough to overcome this bubble bursting. So housing prices have not yet reached where they were, you know, two, three years ago.

BLOCK: Uh-huh. And Adam, what do you hear when you talk to economists? Do they think all these government incentives that we've been talking about are a good thing, a bad thing, somewhere in between?

DAVIDSON: I think that overall, the way that these incentives have worked for the last 70, 80 years, probably you could get a majority of economists to say it's been on balance, a bad thing. It has basically subsidized wealthier people to buy homes and not done enough to help poorer people buy homes. And it has altogether made housing a much more central part of our banking system, which helped lead to this financial crisis. The question is what should the government do now? And there is a small number of generally pretty strongly libertarian economists who say they should just pull out completely and let the market sort things out. That's pretty hard to get a majority of economists to agree to because I think most people agree that would lead to severe, severe recession, probably even a depression. So it's hard to imagine any politician proposing such a plan.

BLOCK: NPR's Adam Davidson of our Planet Money team.

Adam, thanks so much.

DAVIDSON: Thank you, Melissa.

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