“Oops! … I did it again” is a Britney Spears song, but it could also double as the federal government’s motto for housing policy.
Starting in late March, the Federal Housing Administration will reduce mortgage insurance payments on loans that it backs. The agency insures mortgages for borrowers with suboptimal — not good — credit. Some mortgages require as little as 3.5% down. Borrowers have to pay an extra 1.75% fee, which can be rolled into the mortgage. Borrowers also have to pay for mortgage insurance, which is an annual premium of 0.85% in many cases. The Biden administration will now drop that to 0.55%. On a $400,000 home, the average annual savings is $1,200.
The appeal of this move is obvious. A rapid increase in mortgage rates has dramatically reduced the pool of available buyers — at least at these prices. The White House is looking to juice the market.
On the surface, this looks as if the government is lowering costs in response to a market that has gone haywire. But if you take a step back, it’s easy to see how previous government interventions drove those prices higher. In the years leading up to the pandemic, the Federal Reserve slashed interest rates to near zero. Mortgage rates fell below 3%. The federal government showered the populace with stimulus checks. Remote work was another factor. It gave millions the freedom to leave high-priced cities and buy in places such as Las Vegas.
Nationally, home prices shot up 40% during the coronavirus crisis. They went even higher in Las Vegas. In January 2020, the median price of a single-family home was $305,000. It hit $482,000 in 2022, an almost 60% jump. In January, the price was down to $425,000. That’s a 12% drop from the peak but still a nearly 40% jump from just three years ago.
Welcome to today’s housing bubble. Home prices gradually decreasing is a best-case scenario. Perhaps a strong labor market and mortgages at low interest rates can allow the market to gradually unwind without too much collateral damage.
The worst thing you can do in a bubble is continue inflating it. But that’s exactly what lowering costs for the riskiest buyers does. It increases demand among those least financially able to handle having to sell if prices keep trending downward. Boosting demand may stabilize prices temporarily. It can also lead to foreclosures once prices go back down. If too many of those happen at once, the housing market will crash.
Las Vegas went through this 15 years ago, and it took years to recover. Federal housing policy should prioritize policies that are designed to avoid that, not repeat it.
