Kamala Harris’s Economic Ignorance and the Housing Affordability Crisis

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The Misdiagnosed Cause of Unaffordable Home Prices

In her recent interview with Bret Baier on Fox News, Democratic presidential candidate Kamala Harris said that she would solve the housing affordability crisis by lowering home prices, which she proposes to do by increasing the supply of houses.

That alone reveals her economic ignorance. The reason housing costs are so high is not a lack of supply. There are plenty of houses. They are just unaffordable.

In fact, there is a housing surplus remaining from the building boom that occurred during the housing bubble that burst in 2007, which precipitated the 2008 financial crisis. In the wake of the bubble, because there were already so many new vacant homes, there was necessarily a reduction in construction activity relative to growth in households. The vacancy rate naturally decreased as the supply and demand moved toward equilibrium—which was, of course, a good thing.

The argument that the problem is a “housing shortage”, however, treats that reduction as though it were a bad thing, as if construction activity should have just continued along the same trajectory it was on during the bubble.

The misconception that the problem is a housing shortage is propagated by the Federal Home Loan Mortgage Corporation, or “Freddie Mac”, which is a “government sponsored enterprise” (GSE) that was established in 1970 to create what the government considers to be “competition” with its sister organization, the Federal National Mortgage Association, or “Fannie Mae”.

Fannie Mae was established as part of “the New Deal” in 1938 to provide liquidity to the fractional reserve banking system, the goal of which was to ensure that the banks had enough capital on hand to be able to make more loans. Why? Because clueless politicians believed then, as they do today, that economic growth comes from mere borrowing and spending as opposed to being a product of savings and capital investment.

Government policymakers also perpetually fail to understand the critical role in the economy of market prices, which are the signals that investors and entrepreneurs use to make decisions about how to efficiently direct scarce resources toward the most productive ends as determined by the will of consumers, which is to say, by all of us. The bureaucrats think that they know better than we do how our hard-earned dollars out to be spent, and they utilize the monopoly on violence known as “government” to get their way.

The “government sponsored enterprises” are a manifestation of this belief in the use of force to achieve aims, which contrasts with the belief in the non-aggression principle and the free market principle of engaging in voluntary exchange for mutual benefit.

Fannie Mae and Freddie Mac buy mortgages from lenders and bundle them into mortgage-backed securities (MBS), which they then sell to investors. This is how the desired liquidity is provided to the banks to ensure that more people go into debt.

It should not be too surprising, therefore, that, instead of recognizing that the housing surplus resulting from the construction boom during the 2000s housing bubble was part of the problem, Freddie Mac misdiagnoses the problem as being the subsequent market correction. The government-backed mortgage industry points to the decrease in vacancy rates as evidence of a “housing shortage”.

Financial “experts”, including analysts within the Federal Reserve banking system, then cite Freddie Mac’s assessment as though it were flawless, and government officials and the mainstream media then propagate the claim while conveniently seeming to forget that there had even been a housing bubble.

This institutionalized myopia becomes even less surprising when one considers how that earlier housing bubble was in no small part a consequence of the government’s policy of encouraging homeownership, which tied directly into the role of the “government sponsored enterprises” in buying, bundling, and reselling subprime mortgages.

The other primary cause of the housing bubble was the Federal Reserve’s inflationary monetary policy aimed at keeping interest rates artificially low, by which I mean lower than they otherwise would have been if determined by the market—by the supply and demand for capital—rather than by central planners engaged in the price fixing of interest rates.

Naturally, when the government royally screws up the economy, policymakers have only the free market to blame.

So, instead of recognizing the problem as being the government’s massive interventions into the housing market, politicians instead blame the market for its ostensible failure to provide a sufficient supply of homes, which phantom menace they then say they will solve with—what else?—even more government intervention.