Expanding Homeownership Doesn’t Have to Cause a New Subprime Bubble

(Bloomberg Opinion) -- As the political winds appear to be shifting in Democrats’ favor after an eight-year electoral cycle dominated by Republicans, expect a renewed push to address housing issues related to inequality and affordability. My Bloomberg Opinion colleague Noah Smith and I argued this week that one key to success will be incentives for homeownership for households that would otherwise struggle to buy a home.

Elizabeth Warren agrees. The Democratic senator from Massachusetts and potential 2020 presidential candidate unveiled an ambitious bill this week that seeks to address a variety of housing issues. But before any housing bill can be judged on its merits, we’re going to be dragged back into debating housing’s role in the financial crisis and whether new types of housing subsidies will be setting the stage for another crisis.

While government involvement in the housing market did play a part in the crisis, it was really leverage in the housing market and financial system and the interconnectedness of financial markets that were primarily to blame for the crisis. It’s the leverage we should be worried about recreating, not housing subsidies.

Warren’s bill, which has no chance of becoming law while Congress and the White House are controlled by Republicans, should be seen as a potential framework for what Democrats might try to do when they inevitably get their turn to govern. It proposes subsidies for development in rural, low-income and middle-class communities. It would provide incentives for suburban communities to permit more housing construction by offering them grants to fund amenities like schools or parks. And it seeks to address racial inequality in the housing market by offering down-payment assistance to African-American families who previously had not been able to get mortgages through federal programs.

A knee-jerk critique of efforts like Warren’s is that if the government’s previous distortions of the housing market left too many people owing mortgages they couldn’t afford, then efforts to expand homeownership a decade later will have the same effects. But it was not primarily unqualified borrowers who caused the housing crisis, but rather the leverage of lenders that was the real culprit.

When subprime housing borrowers were getting mortgages with low or no down payment, and banks and insurance companies were using credit derivatives to make hugely levered bets on said mortgages, we had a recipe for disaster. (Exacerbated by credit-rating agencies blessing the financial products sold to investors, and by longstanding beliefs about home prices’ inexorable rise.) In a different world — where, for instance, subprime borrowers were given 20 percent down payments by the government, and those mortgages were held without leverage by investors — the systemic risks would have been far less.

It’s a little disingenuous to howl about extending housing subsidies to a new class of homebuyer when so much of the real estate market in America is already subsidized by the government one way or another. The federal mortgage interest deduction, along with state and local tax deductions, already heavily subsidize the housing market for current homeowners, and the subsidy is largest for those Americans who take on bigger mortgages to buy more expensive homes.

In a way, the opposition to new proposals by the government to address housing-market affordability and inequality is reminiscent of concerns in the earlier part of this decade, when companies like LinkedIn and Facebook were growing quickly and looking to go public. Many feared that this was a sign of another tech bubble, like in the late 1990s. We’re always worried about repeating our mistakes. But just as this generation of technology companies have shown to be more robust, with more durable business models, the scars that remain from the great recession are likely to ensure that new policy measures to address housing won’t repeat the mistakes of the past.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Conor Sen is a Bloomberg Opinion columnist. He is a portfolio manager for New River Investments in Atlanta and has been a contributor to the Atlantic and Business Insider.

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