Two fears motivate housing bubbles. The fear of missing out and the fear of inflation.

America’s dysfunctional politics created the nation’s horrendous housing bubble.

To explain, an unholy combination of gerrymandering, corruption, voter suppression, incompetence, ideological extremism, and political exclusion create unrepresentative government. Unrepresentative government implements bad polices that benefit special interest and minorities at the expense of the majority.

One of the worst policies America’s undemocratic government enforces is to keep housing prices as high as possible to benefit property owners and speculators. Thus, America’s housing bubble is the creation of America politics.

The dangers the Great American Housing Bubble creates are enormous. For example, millions of Americans are using risky methods such as verbal contracts to purchase homes, NPR reports. Many of those people those pay tens of thousands of dollars for homes they have no legal title on. In the worst scenarios, people end up homeless with no money.

How Fear drives the Housing Bubble

Ultimately, emotions drive asset bubbles, such as the US housing bubble. However, political policies can create or magnify those emotions.

The emotions that drive any bubble are fear and greed. Interestingly, fear is the primary emotion that drives America’s housing bubble.

Two fears motivate housing bubbles. The fear of missing out and the fear of inflation.

Many people fear they will miss out on the big money others are making from the housing bubble. For example, all the people who hear some character at the water cooler talking about the huge windfall his uncle got by selling a cruddy old house. People fear they will not make the big money, so they buy a home or second home they do need for speculative purposes.

Many more people fear inflation will destroy their cash, savings, and investments, such as stocks, bonds, or retirement accounts. Hence, they take the natural human action of investing their cash in something physical, such as real estate. In particular, many middle and working-class people believe real estate is the best possible investment.  

A similar belief is the fear people cannot purchase homes, or a decent home, in the future because of rising real-estate prices. Consequently, many people take out mortgages they cannot repay to buy homes out of fear. For example, Pew estimates 22% of American homeowners use dangerous alternative arrangements such as cash payments to a private individual in lieu of a montage.

Finally, there is a massive industry in the United States that profits from such fears. For example, realtors, mortgage brokers, bankers, and all the media outlets that profit from real-estate related advertising.

Government makes the housing bubble worse by implementing policies that encourage the fears and refusing to limit real-estate prices.

How the Government could end the Housing Bubble

There are many actions the federal government could take to end the housing bubble. Unfortunately, politicians have no incentive to implement such policies.

The fastest and easiest way to cool the real estate market is to raise interest rates. In the late 1970s and early 1980s, the great Federal Reserve chairman Paul A. Volcker tamed inflation by raising interest rates.

To explain, the Fed sets America’s interest rates by loaning money to banks. Volcker cooled the economy and ended inflation by raising the fed funds rate to 20% in March 1980 and keeping it over 16% until May 1981. Volcker’s drastic action ended double-digit inflation by making credit expensive. Economic growth slows and inflation when credit gets expensive.

Volcker’s action prevented a housing bubble by making mortgages expensive. The rich had to keep their money in the bank or the stock market, while housing costs remained low.

I think a Volcker-style interest hike is politically impossible today because the political class is heavily invested in real estate. Former President Donald J. Trump (R-Florida) is a second-generation real estate developer and a major property owner, for example.

President Joe Biden (D-Delaware) is not a real-estate professional. However, Town & Country estimates Biden and his wife Jill own real estate worth $4 million. Hence, property makes up $4 million of the Bidens’ $9 million personal fortune.

In today’s political environment, I think Fed Chair Jerome H. Powell would lose his job if he tried to raise interest rates. The New York Times claims Powell admires Volcker, yet he cannot use Volcker’s remedy. My guess is Congress could impeach Powell if he tries to imitate Volcker.

Another housing bubble solution could be a wealth tax. To explain, our current system taxes income but not wealth. Hence, it rewards people who convert income into physical wealth, such as real estate.

To make matters worse, many people can lower their taxes because mortgage interest is tax deductible. Currently, the first $1 million of mortgage interest is tax deductible, NerdWallet claims.  

Hence, our tax system rewards affluent people who waste their money on expensive homes. This gives sellers an incentive to jack up prices and encourages builders to construct expensive housing. Worse, it rewards people who tear down affordable housing or convert affordable housing into luxury homes.

Therefore, an obvious solution to high-housing prices is wealth and luxury home taxes. For example, a progressive wealth tax that applies to all individually owned assets.

To elaborate, the tax rate rises with incomes. The wealth tax could start at 1% for $1 million, rise to 2.5% for $5 million, 5% for $10 million, 10% for $25 million, 25% for $50 million, 50% for $100 million and 75% for $1 billion. Another solution could be a 10% or 25% tax on luxury homes.

Other housing-crisis solutions could be a new GI Bill to help people get mortgages, European-style social housing (low-cost public housing available to everybody), and abolition of zoning and other restrictions that make construction of cheap housing impossible in many communities. However, those actions could threaten the value of upper-class Americans’ homes so politicians do not discuss them.

How America’s Sick Political System creates Housing Bubbles

America has a housing bubble because politicians have no incentive to take any action that could control housing prices or increase the supply of affordable housing.

Politicians have no incentive to end the housing bubble or make housing affordable for two reasons. First, most of America’s political leaders belong to the property-owning upper class.

For example, the median net worth a typical member of the US Congress in 2018 was $1.1 million, Quartz estimates. In detail, the median net worth of a US Senator was $3.2 million in 2018, while the 2018 median net worth of a US Representative was $900,000. In contrast, the median annual household income in the United States in January 2022 was $74,099, Political Calculations estimates.

Congress has a powerful incentive to keep home values as high as possible because most of its members are affluent homeowners. Even self-styled social democratic US Senator Bernie Sanders (I-Vermont) owns a $575,000 lakefront home in North Hero, Vermont, People claims.

Second, America’s electoral system gives disproportionate representation to property-owning, middle-class whites. Americans elect US Representatives in primary and mid-term elections, for example. Fairvote estimates only 40% to 50% of Americans vote in midterm elections. That favors older property owners who are more likely to vote.

Similarly, gerrymandering (drawing US Representatives’ districts to favor political parties) and the US Senate (which gives equal representation to all states regardless of population), give more political power to rural white voters. Predictably, rural whites are more likely to own homes and profit from the housing bubble.

Therefore, our political system gives little or no representation to the working class and non-property owners. The voices of those victimized by America’s housing bubble are absent from the halls of government.

Hence, political reform could be the ultimate solution for America’s housing bubble. Some reforms that could make our political system more representative of ordinary people include: public financing of electoral campaigns to enable ordinary people to run for office, a ban on millionaires running for office, banning gerrymandering, party-list elections, abolishing midterm elections, abolishing primary elections, proportional representation, Ranked Choice Voting, and election of the US Senate by population rather than state.

Such solutions will be difficult. For example, we will need Constitutional Amendments to change the US Senate and eliminate midterm elections. However, such reforms could be the only solution for America’s Housing Bubble.

The bottom line is politics is the actual cause of America’s housing bubble. No solution is feasible until Americans acknowledge that reality.

 Originally published at https://marketmadhouse.com on April 15, 2022.

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Government makes the housing bubble worse by implementing policies that encourage the fears and refusing to limit real-estate prices.
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