In both expensive and moderate-cost cities, federal policy creates a feedback loop that keeps prices spiraling higher. Government guarantees allow people to borrow more, which pushes prices up and works against the agencies’ original goal of promoting affordability.
“The people who are hurt are the first-time buyers trying to get on that first rung of the ladder,” said Edward Pinto, director of the housing center at the conservative American Enterprise Institute. “It is a wealth transfer to people who already own homes.”
In his office, Pinto has an FHA poster from 1935, a year after the agency was established as part of Franklin Roosevelt’s New Deal. The poster shows a one-story dwelling of about 1,100 square feet, a typical example of housing the FHA was set up to finance.
Today’s first-time buyer might want something a bit larger, but Pinto says that over the past decade, the low-priced end of the housing market has seen the greatest price escalation. “The affordability problem gets worse and worse,” he said, “and the only answer seems to be to encourage more leverage.”
Private “jumbo” loans are available for houses above the government limits, but they come with stricter terms — a higher down payment or lower debt-to-income ratio, for example. Private loans are the norm in other developed nations with comparable rates of homeownership, but in the U.S. the government backs three-fourths of all mortgages.