Falling House Prices are Good for Everyone, even Homeowners

Better and more > less and worse

In a cabinet meeting on January 29, President Trump told assembled journalists that he wanted to keep housing prices high: “I don’t want to drive housing prices down. I want to drive housing prices up for people that own their homes, and they can be assured that’s what’s going to happen.”

Trump’s concern is for home buyers who might lose equity in their home through falling prices: “Existing housing, people that own their homes, we’re going to keep them wealthy, Trump said. “We’re going to keep those prices up. We’re not going to destroy the value of their homes so that somebody who didn’t work very hard can buy a home.”

Trump’s solution for affordability is to lower interest rates. This easy money policy will, he argues, make it easier for banks to lend out money and for borrowers to bid on homes.

The President is right to be concerned with affordability. Biden era inflation—the byproduct of the Federal Reserve’s political choice to inflate the money supply to make the lockdowns economically palatable—has been ruinous for Americans, especially young people. The prices of capital and consumer goods have risen faster than wages for many Americans over the last 6 years. Savers—Americans who held large dollar reserves—were especially hit hard by the substantial decrease in purchasing power.

The affordability crisis is bad, but the President need not, however, concern himself with keeping the price of housing high in order to protect the wealth of Americans. Falling home prices serve the common good of the American people. In the long-run (which is always nearer than people think) falling prices will benefit everyone who wants housing to be more affordable (people who live in houses).

Moreover, I advise that Trump should not attempt to press interest rates downward through manipulation of banking and monetary policy. Instead, he should make policies that push interest rates down by encouraging real work, saving, and investment.

Easy money policies from the Fed will spur more inflation and an eventual economic bust. Promoting a true fall in interest rates through policies designed to encourage genuine saving and investment, however, will result in sustainable, long-term growth that benefits everyone and with no downside of an inevitable crash.

So why are falling housing prices good for everyone, even home buyers? Let’s start by examining our terms. Our use of the word “homeowner” is fundamentally corrupt. A true homeowner is someone who literally possesses the title to their home. If you are making a monthly payment to a bank to live in your home then you are not a homeowner but a renter with a longer lease and an option to buy over time.

It would be more honest to call mortgage holders what they are: debtors.

The breakdown of renters, mortgage debtors, and true homeowners is as follows: 35% of Americans rent, 39% have a mortgage, and 26% own outright. A supermajority of Americans—about three quarters—are not homeowners. They are either renters or debtors making monthly payments to some entity (either a landlord or Fannie Mae) to live in their home.

If they don’t pay they will either get evicted or will lose their home in foreclosure. All of these people, with almost no exceptions, if given the choice would choose to have a lower monthly payment.

It is a powerful principle in human nature that we prefer to have more for less. Given a choice between the same good at a high price or a low one we prefer the latter. We are this way because we want to be happy. We are mortal beings driven by a powerful longing for happiness (satisfaction). We are, however, constrained by scarcity. We have more problems than solutions, and therefore we must allocate our available solutions to our most pressing problems first.

The longing for shelter is very powerful in human beings. We are willing to devote lots of resources to solving our longing for housing. The average American, for instance, devotes some 30-40% of their pre-tax income towards housing. It is, for most people, their single largest expense.

Were the monthly cost of housing to fall it would be the single biggest driver of an increase in purchasing power for most Americans. Even with no rise in wages a fall in housing costs would immediately mean economic relief for the vast majority.

The monthly price of housing is connected to the price of a house overall. The price of housing is directly related to the supply of homes relative to buyers.

Cheaper houses have cheaper monthly payments. If there are more houses relative to buyers then the price of houses will go down. A price represents a ratio between one good and another. In the case of housing, the ratio between houses and dollars. If the number of dollars increases due to money printing, then the dollar price of houses will rise. If the number of dollars stays stable but the number of houses increases, then the price will fall.

Falling prices are good for people with monthly payments. Downward pressure on housing means that current owners when they move can get a better deal. Let’s look at the example of someone who owns their home outright. Let’s say there is a large expansion in housing construction and the price of his home falls in half. This does not harm him. Why?

First, even if he sells his home for half what he paid for it, the price of housing more broadly has fallen in half. When he goes to buy a new home that home is also half as expensive as it would have been.

The owner has not lost money. He has not lost out on opportunities to buy new housing just because their price has fallen.

Homes are not income producing assets. They are not businesses. They are not a salary. Your home is, in truth, a consumer good. It steadily wears out over time. It needs to be repaired and maintained. Almost everyone will find themselves in a position of needing to move due to changes in career, family size, or just plain preference for a new location.

Moreover, even people who are in debt through a mortgage benefit from falling prices, though this benefit takes slightly longer for them to see. First, most borrowers have to put money down on the property. They also tend to want to stay in the property for a long time. So even if prices fall they don’t have to move as long as they keep the same salary. And even if they did move, they might lose a portion of their down payment. But that doesn’t really matter since, again, the overall price of housing has fallen. They don’t need as big of a down payment on their next home.

If housing prices fall dramatically due to an expansion of supply, it could lead to some borrowers being truly underwater: owing more on the home than they could get by selling it. However, if prices fall due to economic growth and an expansion of organic homebuilding this isn’t that important.

The homeowner loses nothing if he doesn’t sell. He can keep paying on his current mortgage as long as he has a job. The longer he keeps paying, the closer he gets to breaking even on the house.

This brings us to another crucial point: if home prices fall then the money that Americans would have spent on housing they now will spend on something else. If Americans invest that money it will go straight into income producing assets (businesses) that can use those resources to expand production and therefore expand the supply of goods available for sale. This will mean more jobs and lower prices which means even more purchasing power available in the future.

If Americans instead purchase immediate consumer goods with their newfound savings that will simply mean rewarding past investors for their foresight. That reward for the investors’ willingness to defer consumption in the past will encourage more investment in the present.

No matter how you slice it, falling prices mean more savings and investment.

What I am describing here is the recipe for long-term, secular economic growth. Virtually everyone (barring leftists and other fanatics) prefers to live in a rich society to a poor one. Falling prices—the ability to get more for less effort—is the definition of prosperity.

This is why the government shouldn’t use the power of taxation or regulation to artificially keep the supply of housing down and prices high. It is self-defeating. There is no magic in this life. Having greater “wealth” on paper means nothing if you can’t buy things with that wealth that you want.

If your home is “worth” a million dollars but the next home you want is also a million dollars, then having a million-dollar home doesn’t mean much. You can’t extract your wealth and live in a home at the same time.

President Trump’s idea of using easy money policies to lower prices cannot logically work. Keeping interest rates low and home prices high has been the official policy of the American government since at least the New Deal and before. It doesn’t make sense. I can show why.

Since 1934 and the National Housing Act the federal government has used taxpayer money to subsidize lending on real estate. This has been very foolish and spurred multiple financial crises. For a full account of why, I recommend Judge Glock’s excellent book The Dead Pledge: The Origins of the Mortgage Market and Federal Bailouts, 1913–1939. James Hagerty’s book The Fateful History of Fannie Mae: New Deal Birth to Mortgage Crisis Fall is also good.

Put simply, the federal government invented the 30-year mortgage and subsidizes banks to lend at low rates of interest on these financial products. This is a problem because it means these loans aren’t rooted in a sober market analysis of the creditworthiness of the borrower but rather a political analysis that sees boosting “homeownership” (mortgage debt) as a good thing.

Consider the income verification on the home mortgage. It is an absurdity. There is no way the lender can accurately predict the next three decades of your earning potential based on what you make right now. But the bank doesn’t need to do this because they aren’t going to hold the mortgage.

As soon as you buy your home and sign the dotted line on the loan, the bank turns around and dumps off the mortgage to a Government Sponsored Enterprise, usually Fannie Mae or Freddie Mac. These two “companies” own 70% of the mortgage debt in America and they are really just an arm of the government. For one, they are both still under conservatorship by the Treasury Department after they imploded during the financial crisis and needed $190+ billion in bailout money.

In reality, subsidized loans only drive up prices. Borrowers can bid more money for the same asset the more money they can borrow. If interest rates were higher and terms shorter, if in other words the lending process reflected real economic conditions and lending willingness, home prices would be lower.

Driving down interest rates with taxpayer subsidized counterfeiting (the Federal Reserve) or fiscal subsidies (Fannie Mae) doesn’t make housing any more affordable! All it does is shield the reality of home prices from buyers and sellers. These policies are a form of fraud masquerading as economic brilliance.

“Homeownership is good!” Not if it means Americans borrowing massive sums of money they can’t really afford. We learned this lesson the hard way in 2008. Well, not really. No policymakers learned anything from the financial crisis. The bailouts were the price of continuing to live in delusion. Not smart.

This argument here is also why lowering the rate of interest doesn’t work. Lowering interest rates artificially doesn’t mean falling prices—the same number of capital goods exists the moment before you lower rates as after. All that changes is who has the purchasing power. Before ordinary people are wise to the spike in prices caused by the Federal Reserve increasing the money supply by easing lending standards, early borrowers will get to capitalize on the cheaper loan rates before everyone else figures out what is happening.

Current sellers think they are living in a boom period. Bids are coming in higher than they expected! What they don’t see is the decline in the value of the money they are getting. That will take time. When that realization finally hits—when investors and consumers realize that lower interest rates don’t reflect real market conditions—the result is a collapse in the new unprofitable lines of production. That means job losses, lost fortunes, bankruptcy, and, worst of all, lost time. The false prosperity encourages people to live beyond their means because they don’t know they’re living beyond their means.

This is all very bad. It is also entirely avoidable. All that policymakers need to do is… nothing. Don’t monkey with the interest rate. Don’t subsidize debt. Don’t worry about asset prices. The people will figure it out.

People who can’t afford to buy will save. High interest rates will encourage investment by the frugal and deter the foolish from throwing money away lightly. Over time (and it doesn’t take long) the result will be stable growth. The supply of goods won’t reflect political connections and exuberance but rather the actual desires of buyers.

This growth in the supply of goods will ultimately mean an organic fall in interest rates! Once they meet their daily needs, prudent Americans will have more money to save for the future. This increase in savings will mean that savers will have to bid against each other to loan money to entrepreneurs. That competition will lower the price of money, i.e., the interest rate.

This, at last, is where we find President Trump’s true low interest rates. And I hope he gets them! So what can he do to bring them into being?

First, Trump can cut government spending. Less government spending means that people who currently rely on taxpayer money and government debt (future taxation) to live will have to get real jobs. Since most government employees are leftists, President Trump can both boost the economy and harm his political opponents in the same stroke by cutting spending.

Personally, I recommend slashing funding to the Department of Housing and Urban Development and the Department of Education. Those two are hives of misbehavior and uselessness. There are many others—the military industrial complex being one of the biggest—but those two cancers are a nice starting point.

Trump can also deport immigrants on welfare. These people are a net drain on the economy and have no right to be in America. If they go away, that means less government borrowing. If investors aren’t buying treasury bonds then they have to invest in something productive instead. That’s good.

Second, Trump can increase economic growth by cutting taxes. Self-explanatory: if you don’t take Americans’ money then they will have more of it. They will use that money to save and to buy stuff.

Third, Trump can cut regulations. There are tons of administrative rules issued from DC that could be immediately revoked in order to save Americans’ money. The incentives of regulatory capture mean virtually every Washington DC bureaucratic agency is actually in the possession of a corporate interest that can use that agency to harm its competitors and enrich itself. These interests are very vulnerable to public pressure because they are obviously grifting.

Here is a great example: 14 CFR §121.391. This is the federal regulation mandating a certain number of flight attendants on an aircraft based on passenger size. It is entirely arbitrary.

Airlines don’t need stewardesses for safety—air travel is already extremely safe—nor to deliver drinks. In fact, many budget airlines would gladly fly, for cheaper, without these government-mandated, glorified vending machines harassing passengers over tray tables and the like.

Getting rid of 14 CFR §121.391 won’t eliminate all flight attendants but it will mean that airlines can optimize the number of attendants to what is actually needed for passenger comfort. Fewer attendants will mean lower expenses for the airlines and that means lower prices for passengers due to the intense competitive pressure of the airline industry.

This is a small example. There are tens of thousands of others. Save a billion here and a billion there and pretty soon it amounts to real money.

This, then, is my recommendation for President Trump and American homebuyers: don’t fear falling prices, praise them! Don’t lower interest rates, let them fall naturally. They will!

If the President takes this course he will see economic growth. That will keep his popularity high and allow him to succeed in pursuing his sovereignty agenda on immigration. These two forces together: a strong economy and a solid national identity will mean long-term Republican dominance. That means a better country for the rest of us.

This is how falling home prices can help Make America Great Again.