Elizabeth Warren’s Housing Proposal Would Make Homeownership More Risky

July 10, 2019
By Christina Sandefur

Massachusetts Senator and Democratic presidential hopeful Elizabeth Warren recently visited Detroit to pitch her housing proposal in front of the city’s Eight Mile Wall. Built nearly 80 years ago when developers sought to construct whites-only housing communities, the wall stands today as a vestige of past injustices—and a call for a better future.

Unfortunately, Senator Warren’s plan would likely exacerbate the problems it purports to solve—and stick taxpayers with a hefty bill. The Warren proposal offers financial assistance to first-time homebuyers living in areas that were once excluded from government housing programs, and to those who lost their homes during the recent mortgage crisis. It would also commit $500 billion over 10 years to build “affordable housing.”

During the housing crisis, low-income and minority homeowners witnessed a dramatic decline in the value of their homes—a predicament Warren seeks to remedy. But as the Manhattan Institute’s Howard Husock notes, minimizing or eliminating down payments doesn’t ensure stable homeownership. To the contrary, it increases the likelihood that homes will fall into disrepair or be foreclosed. The point of a down payment is to act as a form of insurance for the property owner. Eliminating it makes it more likely that the owner will have to seize the property in the event of default. And that, of course, has lasting financial consequences for the owner and neighbors.

In fact, it was the federal government’s guaranteed mortgages that helped cause the Great Recession in the first place. People who would have moderated their purchases, or opted to rent, instead bought homes they could not afford, thanks to encouragement from Uncle Sam. Warren’s proposal would double down on that foolhardy approach and further incentivize people to take unwise risks that could devastate them, their families, and their communities.

In fact, government policies have historically exacerbated all sorts of housing inequalities. Zoning laws throughout the 20th century have been directly responsible for racial segregation, and many remain indirectly responsible today. For example, about half of Los Angeles is zoned exclusively for single-family homes, which deprives would-be homeowners of options and makes housing more expensive, which, of course, has disproportionate effects on less wealthy minority homeowners.

Worse still, cities nationwide are banning home-sharing, which deprives homeowners of a means to cover their mortgages in the face of increasing costs. Airbnb reports that in ten of America’s largest cities, more than half of its hosts would be unable to pay their bills without the extra income from home-sharing, and 13 percent would have faced foreclosure.

Government regulations and red tape also make it prohibitively difficult to construct new housing, which further contributes to the lack of affordable housing options. A 2015 study conducted by Point Loma Nazarene University shows that housing regulations add 40 percent to the cost of building new homes in the San Diego area. A study by the National Association of Home Builders showed nearly a 30 percent increase in the cost of complying with building regulations in just five years.

Rather than proposing a new costly, one-size-fits-all government plan that is likely to cause more problems than it solves, Senator Warren would do well to support policies that reduce regulation, empowering all individuals to fulfill their unique preferences and needs, such as:

• Eliminating zoning laws that do not directly protect the public health and safety.
• Adopting fair processes so building permit seekers do not face excessive delays and costs.
• Requiring government to pay homeowners when regulations reduce their property value.
• Getting rid of unnecessary licensing laws that keep people from getting a job and earning a living.

As the 2020 election approaches, we’ll almost certainly hear more about this and other similar proposals. But rather than adopting “feel good” plans that do more harm than good, we should learn a lesson from the history books and pursue policies that give everyone a shot at their American Dream.

Christina Sandefur is the Executive Vice President at the Goldwater Institute.