Housing Affordability Crisis Results From ‘Too Much Socialism,’ Not Too Little: Report

America’s housing affordability crisis isn’t a result of too little government intervention or socialism, but a tragic consequence of massive federal intervention gone awry, a new Heritage Foundation report argues.

“When it comes to housing, our problem isn’t a lack of socialism but too much socialism,” John Gibbs, Heritage’s economics director, told the Daily Signal. “Heavy government involvement in mortgages promised to make homes more accessible but instead made them more expensive.”

Gibbs released a report Wednesday noting that despite heavy federal intervention aimed at increasing homeownership, rates have remained essentially stable since the 1960s. According to the Federal Reserve Bank of St. Louis, the homeownership rate in the U.S. stood at approximately 62-63% in the early 1960s and remains at approximately 65%.

“We do not make homes affordable by making debt affordable,” Gibbs explained. “We make homes affordable by reducing the policies that inflate home prices in the first place.” 

“Federal mortgage policy has become a $10 trillion experiment in boosting housing demand,” he added. “The evidence suggests much of the result has been higher prices rather than higher ownership.” 

Many housing economists attribute the housing affordability crisis to local zoning restrictions, environmental reviews, permitting delays, and other barriers to construction. Gibbs argued that federal mortgage subsidies deserve greater scrutiny because they increase demand for housing and therefore push prices higher when supply cannot expand quickly enough.

As the report explains, the federal government aims to boost homeownership in two ways: by directly providing insurance for home loans, and by purchasing mortgages from lenders, pooling them into mortgage-backed securities, and guaranteeing those securities.

The Federal Housing Administration insures certain mortgages, while government-managed enterprises such as Fannie Mae and Freddie Mac purchase mortgages from lenders and package them into mortgage-backed securities.

Taxpayers ultimately stand behind many of these guarantees, making the loans less risky for lenders. Gibbs argues that this encourages more lending and allows buyers to borrow more money, putting upward pressure on housing prices.

When the government takes some of the burden, it frees lenders to offer more loans. That’s one of the major reasons why the federal government now provides some security to between 70% and 80% of new mortgages and outstanding mortgage credit, according to the Heritage report.

Most European countries do not subsidize home loans to nearly this degree. Even Canada only secures the debt of between 30% and 40% of housing, Gibbs told the Daily Signal—about half the rate the U.S. does.

The federal government backs about $11.7 trillion in home loans, but this massive intervention hasn’t meaningfully increased homeownership, the report notes. Instead, it has driven up prices.

“The federal government has spent decades making mortgages easier to get,” Gibbs told the Daily Signal. “The result has been higher home prices, while homeownership remains roughly where it was a generation ago.” 

Why does this drive up prices? Just as government-backed student loans have increased the cost of college, government-backed home loans increase the cost of homes, he argued.

“When the government intervenes to expand access to credit or subsidize loans, it artificially raises borrowers’ willingness to pay, increasing demand faster than supply can respond,” the report explains.

This government intervention makes housing less affordable and transfers wealth to those who already own homes, the report states.

“Rising prices reward existing owners on paper, but rapid appreciation reduces affordability for prospective buyers by raising the cost of entering the market—especially when wages fail to keep pace,” the report warns.

If Americans truly want housing to be cheaper, they should urge the government to stop buying so many mortgages, Gibbs argued.

His report recommends reducing the government footprint by setting a maximum value for loans the government will purchase, aiming to stop the government’s purchase of loans for expensive homes. It also recommends the government offer shorter-term mortgages that help homeowners accumulate wealth more quickly.

While the report acknowledges some progress in the 21st Century Road to Housing Act—a bill Congress passed this summer that streamlines the process of housing construction by waiving certain environmental regulations—it warns against too much federal intervention to expand housing supply.