Thursday, January 5, 2012

Hotel Minnesota

Living in a hotel has its perks. Everything you needs is provided: kitchenette, desk, bureau, bed, TV and recliner. Housekeeping comes by weekly and there’s laundry on site. Utilities are included. They even plow the road. Pricing is good as tourism in January in Minnesota is low. It’s a perfect solution for me moving to a new city on short notice. It gives me the opportunity to discover the Twin Cities on my timetable before making the big determination as to where I’ll settle.

Imagine my surprise, then, to learn that where I ultimately settle has as much to do with government regulation as with my own personal preferences. I thought Los Angeles’ regulation of hedge height and West Hollywood’s house color palette recommendations was intrusive. As of January 1 West St. Paul, MN has a new ordinance that limits the number of rental units in certain geographic areas of the city. It’s a variable on neighboring towns which cap rentals at 30% of housing inventory.

Rental units are considered negatives for neighborhoods because they are not owner-occupied and perceived to be maintained poorly and impact housing prices. There may be elements of truth in the diagnosis, but the remedy punishes responsible landlords, is anti-capitalist, and likely illegal.

What is the Government’s role in Housing? St. Paul has decided that 10% of a block can be rental. If the unit is on a nicer street in a good location rents will soar, artificially increasing the cost of living for renters since the supply of available units will dwindle. The remaining 90% of units must be owner occupied, even if that owner would benefit from renting out a room or two to prevent foreclosure.

President Franklin Delano Roosevelt, as part of his New Deal, got the Government involved in housing. The Federal National Mortgage Association bought mortgages from banks, allowing the banks to have ready cash to lend to other people who would in turn buy their own house. Previously the bank would lend to somebody to buy a house, collect the money from them and eventually lend to somebody else. With the government buying the mortgages the banks had immediate liquidity to lend more money faster since they didn’t need to wait for repayment. More people bought houses, driving up the demand.

Construction workers, building suppliers and a slew of related industries blossomed. The Real Estate industry was born and millions of people over nearly a century have benefited from available housing, jobs and trillions of dollars have been generated, expanding the economy. Over the years the government programs changed – many names and variations, but their essential role remained the same. Today Fannie Mae and Freddie Mac own or guarantee the vast majority of U.S. Mortgages. To see if yours is by Fannie, click here  for Freddie, click here. (Happily for this Libertarian, my mortgage is privately owned!)

Conventional wisdom blames the 2008 financial crisis on the housing collapse. (It certainly played a part, but the roots of that crisis and the anemic recovery are much more complicated than just one sector of the economy and the subject of other blogs.) When people were buying homes who didn’t have the financial wherewithal to do so, the banks kept going because the Government was largely on the hook, not the bank. The relatively small amounts that the banks were on the hook were remedied through various bailouts.

Fannie & Freddie were nationalized by the U.S. Government on July 8, 2008  and are the beneficiary of the largest bailout in history. According to CNN, the net cost to taxpayers was reduced in October to $124 billion, down significantly from prior estimates of $193.

It’s never been a good idea for government to take on the role of banker. During Ronald Reagan’s Presidency the U.S. went from being the greatest creditor nation to the greatest debtor nation – and then as banker for mortgages the government began using borrowed money. (It’s sort of like when you use your Visa Card to pay your car loan.)

Nor is it a good idea for government to tell people how to live. Since the introduction of the Income Tax in 1913 every President and Congress has used the tax code to encourage home ownership through deductions and incentives that drive behavior encouraging home ownership.

It’s time for the Government to get out of the housing business – remove the mortgage deductions and hundreds of other incentives that favor home ownership. It’s time for the U.S. to stop being the primary funder of mortgages and spin off Freddie and Fannie to commercial banks and hold them responsible for all lending. Until that happens good thing I’m enjoying hotel living, eh?

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