If you’re a millennial, housing policy probably isn’t at the top of your priority list. I don’t blame you; with sky-high unemployment, mounting student debt, and stories like this getting printed every 15 seconds, you have plenty of other issues to worry about these days.
So you might not have noticed when President Obama unveiled his second term housing agenda two weeks ago. And you probably haven’t paid any mind to the two bills working their way through Congress, each promising to redesign America’s housing finance system.
Well, it’s time to start paying attention. The decisions being made in Washington will have a profound impact on your life.
If you own a home (look at you!), they’ll decide whether you can refinance or sell it down the line. If you hope to buy a home in the near future, they’ll decide whether you can get a mortgage and under what terms. If you’ll be renting for the foreseeable future, they’ll decide the availability and price of your next apartment. Heck, even if you’re planning to live in your parents’ basement for the next decade (yikes!), changes in the housing market will send ripples throughout the economy, deciding whether you can find work and save for the future.
Listening now? Good. Let’s start with a bit of background.
The current debate over housing finance focuses on the fate of two companies: Fannie Mae and Freddie Mac. As you may recall, the federal government took control of Fannie and Freddie in September 2008 during the early days of the financial crisis. They have since needed $187.5 billion in taxpayer support to stay afloat, of which they’ve paid back about $132 billion so far. (For an overview of what the companies do and why some needed a bailout, here’s a helpful primer.)
Between Fannie, Freddie, and federal agencies, the government backed about nine in 10 mortgages made in the U.S. last year. Just about everyone agrees that level of support is too high, but there’s much less agreement on how to shrink the government’s housing footprint.
Today, Congress is considering two profoundly different paths forward. In the Republican-led House, the plan is to dissolve Fannie and Freddie and fully privatize the U.S. mortgage market. In the Senate, a bipartisan plan would replace the companies with a new form of government insurance on certain types of mortgage debt, sort of like what the Federal Deposit Insurance Corporation (FDIC) offers on bank deposits. You can read more about the two bills here.
So, what will happen if we take the House’s approach and do away with government support to the housing market? Here are three implications for millennials.
1. It will be harder to get a mortgage.
The government guarantee was instrumental in creating and normalizing low-cost, long-term loan products like the 30-year fixed-rate mortgage. The loan allows borrowers to spread out principal payments over a long period of time and lock in their monthly housing costs for decades, putting home ownership within reach for families with modest incomes.
According to a recent analysis from Moody’s Analytics, eliminating the government guarantee would cause mortgage interest rates to skyrocket (up roughly 20% from their current level), limit the availability of the 30-year fixed-rate mortgage (from 75% of the market down to 10-20%) and limit the availability of mortgage credit for middle income households. In other words, it will be harder for first time home buyers to get a loan, harder for current homeowners to refinance an existing loan, and harder for families looking to sell their home to find a buyer.
2. Rental housing will be harder to find and more expensive.
Fannie and Freddie also guarantee so-called “multifamily” mortgages, which finance apartment buildings with five or more units. That guarantee helps ensure that quality, affordable rental options are available to the one third of the population that’s either unable to buy or would just rather rent.
According to a recent analysis from Freddie Mac, if the government guarantee on multifamily mortgages were to go away, new construction on rental housing would plummet by as much as 27%, while average rents would rise by as much as 2%. That’s at a time when more than one in four renters spends more than half their monthly income on rent.
3. The housing market will be much less stable, wreaking havoc on the economy.
Perhaps most importantly, a government guarantee helps prevent and mitigate the impact of boom-and-bust cycles in the housing market. When private capital retreats from mortgages during a downturn, government-backed entities stay open for business to keep money flowing.
According to Moody’s Analytics, a fully private market would have “difficulty providing stable mortgage funding during difficult financial times” resulting in bank runs and a credit crunch that “undermines housing demand, driving down prices and unleashing a vicious cycle.” And as we learned from the most recent financial crisis, a single bubble and bust in the U.S. housing market can bring down the entire global economy.
Millennials can no longer afford to ignore housing policy. If we don’t make ourselves heard now — calling for a stable housing market, affordable rental options, and the opportunity to own a home down the line — we’ll be left behind.