What's Wrong With American Housing?

In 2004 and 2005, American homebuilders created over two million new housing units per year, including mobile homes. Then housing construction plummeted to under 600,000 new units per year, a record fall of 70 percent, and home prices fell drastically too.

Housing will not help lead the U.S. economy out of this recession, as it has done many times in past recessions. A major reason is that America’s housing industry suffers from nine deficiencies that limit its ability to meet our housing needs. Some of these deficiencies are not widely recognized or are even considered advantages by the housing industry. Until its problems are better and more widely understood, that industry will continue underserving U.S. housing needs. This article summarizes those nine deficiencies and then analyzes them in more detail.

The Nine Deficiencies

  1. The biggest deficiency is the lack of households willing and able to buy homes
     
  2. A combination of falling home prices, losses of jobs by millions of Americans, and low-quality home mortgages sold to home buyers led many home owning households to default on their mortgage payments.
     
  3. The federal government has tried several times to enable foreclosed home owners to remain in their homes, but its efforts have been limited because both banks and other mortgage lenders have fought taking any “haircuts” in their loan amounts to make that possible.
     
  4. The deduction of mortgage interest payments from the taxable incomes of home owners is a large government subsidy that provides most of its benefits to the wealthy owners of costly homes.
     
  5. Control over what types of homes are permitted within each community is completely exercised by that community’s local government, but many suburban governments are pressured by homeowners to exclude housing affordable to lower-income households.
     
  6. In each year, homebuilders construct as many new units as they can sell during that year. But doing so in prosperous periods requires selling into housing demands oriented towards the future.
     
  7. Many thousands of individuals and low-income households are essentially homeless.
     
  8. The measures of home prices used by the housing industry and major media distort what really happens to home prices.
     
  9. Bankers and other parties who normally provide loans to potential homebuyers have adopted stringent requirements for persons trying to qualify for home loans.