The red lights are beginning to flash on the dashboard of the housing economy in the United States and around the world. As 2022 comes to a close, it has become clear that easy money in 2021 led to a buying frenzy and higher housing prices. As the values of those purchases fall and interest rates climb, financing for housing production will freeze up. And as 2023 unfolds, consumers are likely to see prices decline but the costs of borrowing money rise to put housing out of reach. Builders are bracing for a slowdown like the one that hit the industry back in 2009, which inaugurated a decade-long slowdown in housing production. What should policy makers at the state and local level do to avoid a repeat of the last housing collapse?
Since the end of World War II, government-backed loans have enabled a boom in single-family housing construction and acquisition. Congress created Fannie Mae and Freddie Mac, in the words of the Federal Housing Finance Agency , to “perform an important role in the nation’s housing finance system – to provide liquidity, stability and affordability to the mortgage market. They provide liquidity (ready access to funds on reasonable terms) to the thousands of banks, savings and loans, and mortgage companies that make loans to finance housing.” By 2009, confidence in this backing had tempted investors to bet on risky mortgages that allowed many people with thin credit to borrow money to buy houses; when those debtors couldn’t pay, all that bad debt was worth more than the asset value of many of the companies that owned it.
Suddenly, a white-hot housing market with lots of buyers, sellers, and builders completely shut down. Housing is expensive and complicated to finance, even when people with solid employment, great credit, and cash have […]
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