The White House recently published a factsheet on the Biden administration’s plans to address housing affordability. The factsheet contains a variety of proposals intended to lower the costs of acquiring a home and increasing the supply of housing. It includes a two-year program that would provide a $5,000 tax creditvto first-time homebuyers and assistance programs for downpayments and closing costs. Moreover, the administration proposed that the Federal Home Loan Banks increase their funding of programs that finance the acquisition, construction, and rehabilitation of affordable rental and for-sale homes as well as help low- and moderate-income homeowners purchase or rehabilitate homes. This comes on the heels of the Federal Housing Finance Agency raising the conforming loan limits for Fannie Mae and Freddie Mac, and the Federal Housing Administration lowering the premium charged for insuring mortgages.

Housing and elections / It is no accident that all these actions are happening in an election year. For much of the past winter and spring, polls showed Joe Biden trailing Donald Trump in their race for the White House. It’s likely Biden’s administration sees housing policy as a way to improve his odds of reelection this November. However, while these policies may temporarily reduce the cost of buying a home for those who use the programs, in the long run they will tend to raise the market price of housing by increasing demand, thereby exacerbating the current affordability crisis.

This kind of electioneering is not unique to Biden. All elected officials face short time horizons. Their behavior while in office is constrained by the proximity of the next election cycle and the understanding that, if they want to be reelected, their policies must be seen as returning enough value to their constituents to outcompete any would-be competitors for their office. This tends to incentivize policies that generate gains in the near-term while shifting costs to the long-term (preferably after the official in question is out of office). These policies include transfer payments, targeting swing districts for government spending, and engaging in various forms of macroeconomic manipulation. Historically, such manipulation has caused “political business cycles” by stimulating the economy in the run-up to a presidential election. The gains of the expansion in economic activity are felt prior to an election, while the costs (typically higher inflation, larger deficits, and debt) are felt subsequently. Voters tend to look at their pocketbooks when deciding who to vote for, so the short run gains pay off in terms of improved vote margins for the incumbent. The costs, however, come to bear only after the election.

Increasing the supply of mortgage credit is another way the administration could attempt to gain an advantage in the upcoming election. The United States’s uniquely politicized housing finance system, dominated by government-sponsored enterprises (GSEs), is well suited to such economic manipulation for political profit. Created to act as secondary markets for mortgages, these institutions enjoy legal and fiscal advantages that permit them to borrow at interest rates close to those paid by the Treasury in credit markets. The GSEs have utilized this subsidy to both massively expand the size of their operations and to pursue the objectives of their political sponsors.

From the standpoint of presidents, it is rational to attempt to sway the outcomes of elections via housing credit policy. Homeownership remains one of the primary drivers of household wealth, meaning that households stand to capture a sizeable chunk of the gains from home price appreciation attendant to credit expansions. Likewise, borrowers who previously found the cost of taking out a mortgage prohibitive are now “priced in” via the loosening of credit terms. Lastly, movement in the housing sector influences the rest of the economy, meaning that stimulating housing construction can have temporary positive ripple effects in the rest of the economy.

Voters have been shown to react to shifts in housing credit supply. They increase their support for incumbents during boom periods and punish incumbents (or their party) for contractions in credit supply. Research suggests that if the contraction in mortgage credit supply had been less severe in 2008, John McCain, running to succeed fellow Republican George W. Bush as president, would likely have won several key swing states (particularly North Carolina) and improved his margins in others. Moreover, it has been shown that incumbent administrations have used their influence over the housing GSEs to counteract declines in popularity among voters. As a result, there has been a recurrent pattern of housing construction being artificially stimulated in the months leading up to a presidential election.

Ignoring the real problem / Of course, the cost of these election-year games is borne by future homebuyers. Present-day issues with housing affordability primarily stem from too little supply rather than insufficient access to financing. Several studies have shown that local land use regulations have raised the cost of constructing new homes to meet shifts in demand. In the face of restricted supply, successive cycles of subsidized housing demand have done nothing except inflate the average home price. As the prices of homes appreciate, prospective buyers are faced with the prospect of having to take on ever larger debt burdens to afford even a modest home. Indeed, the American Enterprise Institute’s Home Price Appreciation Index shows that the prices of low-value homes have appreciated the most since 2012. For low-income borrowers, these policies have a double effect: higher prices for homes that would otherwise be affordable to them and greater debt burdens. Considering low-income households tend to face higher income and job insecurity, a mortgage can pose a substantial financial risk.

If policymakers are serious about addressing housing affordability, their efforts should be focused on deregulating the supply side of the market as opposed to proffering further subsidies for demand. Indeed, the best policy would be to take government out of housing finance entirely. The congressional charters of Fannie, Freddie, and the Federal Home Loan Banks should all be repealed, removing the various distortions these institutions create and removing the temptation for incumbents to engage in off-budget vote
buying in election years.

Readings

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  • Choi, C.Y., David Quigley, and Xiaojun Wang, 2023, “The Impacts of Local Housing Markets in the U.S. Presidential Elections: Via the Collateral Channel,” working paper, Aug. 18.
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  • Ren, Zhou, and Lixing Wang, 2022, “The Political Origin of the Credit Cycle,” working paper, Oct. 3.
  • The White House, 2024, “FACT SHEET: President Biden Announces Plan to Lower Housing Costs for Working Families,” March 7.
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