Bidenomics: Robbing Peter to help Paul buy a house
President Joe Biden is many things, but he’s clearly not an economics whiz. That’s an unfortunate reality for Americans, since our economy is facing many challenges. The country is struggling with rampant workforce shortages, high inflation, a flagging housing market and the economy may soon be thrown into a recession.
Biden isn’t to blame for every economic woe, but he sure hasn’t responded well either. In an attempt to get 40-year-high inflation under control, the Federal Reserve under Biden repeatedly raised rates, and the nasty side effects have been coming to a head.
Because of this policy, mortgage rates surged higher—decimating an already weak housing market—and some banks found themselves on unstable footing. This led to high-profile bank failures, and as you might imagine, the stock market hasn’t reacted well. Oh, and inflation still remains high. Great job, guys.
The Biden administration has decided that it will next focus on the housing market, which is an absolute mess, especially here in Georgia where homes have increasingly become unaffordable. Housing prices jumped from $235,000 in January 2020 to over $345,000 in March of this year, and like the rest of the country, mortgage rates have also ballooned here.
In January 2021, the national average mortgage rate was about 2.65 percent. Thanks in large part to the Biden administration’s meddling, if you put down 20 percent on a $400,000 home today and have an 800-plus credit score, then you’re likely to get a 6.8 percent mortgage rate on a 30-year loan. That gives you a $2,600 monthly mortgage payment, including taxes and insurance—an increase of nearly $800 from the previous rate.
In an effort to make homeownership more affordable—but only for some—the Biden administration took an audacious step. “Today, the Biden-Harris Administration announced an action that will save homebuyers and homeowners with new FHA-insured mortgages an average of $800 per year, lowering housing costs for an estimated 850,000 homebuyers and homeowners in 2023,” reads a White House Fact Sheet.
The plan is ridiculous, but that shouldn’t come as a shock. In the world of Bidenomics, what’s bad is good and what’s good is bad. The plan reveals a rob Peter to pay Paul scheme in which the government will levy surcharges on home buyers with good credit scores and those who make large down payments. Over the lifetime of a 30-year loan, this can cost each person tens of thousands of dollars, and the government plans to use that money to lower the mortgages for prospective homebuyers with subpar credit scores.
The Wall Street Journal didn’t mince words when describing the imprudence of this plan. “This is the socialization of risk, and it flies against every rational economic model, while encouraging housing market dysfunction and putting taxpayers at risk for higher default rates,” according to the paper.
The Biden administration is clearly ignoring lessons learned from the 2008 crash. Biden’s rule aims to penalize people who have spent a lifetime building good credit, and in doing so, it will disincentivize them from purchasing homes. Meanwhile, it incentivizes those with subpar credit scores to make large purchases.
“Progressives want to reduce the importance of credit scores for mortgages, but such scores are designed to measure comparative risk,” reports the Wall Street Journal. Given that they are a legitimate indicator of who will repay their debts, Biden should be encouraging those with high scores to buy homes, not the other way around.
The current scheme seems incredibly unfair, risky and may set the stage for future problems. While the plan’s ultimate result is to be determined, it will likely saddle people with more debt than they will be able to handle and won’t fix the housing market’s broader problems.
Two of the biggest issues are low inventory and high mortgage rates. If the Federal Reserve reduced its rates, then mortgage rates would fall as well—making homeownership more affordable for everyone.
This is only part of the solution because low inventory is driving prices ever higher. According to Redfin, Georgia only has two months’ supply of homes for sale, and the gulf between supply and demand is vast. A 2022 Georgia Trend article noted that the Peach State has the 10th-worst housing deficit.
Reducing mortgage rates would permit people, who purchased homes with low interest rates and are looking to up- or down-grade, to finally sell their homes. This would help improve the inventory problem as would reducing red tape, fees, ordinances and building moratoriums that inhibit new construction.
Biden doesn’t need to be an economics expert to figure out how to ease this problem. Much of the housing market’s woes come down to some pretty basic market principles, but for some reason, the president just doesn’t get it.