Over the last several years, the role of the federal government in the housing market has been increasingly brought to the forefront. This is because of the implosion in prices and support that was provided by Washington to address these issues. However, since the 1930s the U.S. government has been directly providing support to the housing market (through the FHA). This was in response to the impact of private mortgages on the economy during the Great Depression.
As time went by, this role was expanded with Washington providing direct and indirect assistance through: Fannie Mae, Freddie Mac along with the Veterans Administration (VA). The combination of these factors allowed the federal government to help with the financing and purchasing of homes. As a result, the numbers of Americans who own properties have increased exponentially since the 1940's. Evidence of this can be seen in the below chart (which is showing the total amounts of homeownership in comparison with interest rates from 1940).
Figure 1: Percentage of Americans who own a Home
These figures are indicating how homeownership has increased exponentially. This is illustrating the impact of the federal government on these rates (through their direct and indirect involvement during this process). To fully understand what is taking place requires looking at: homeownership rates prior to their intervention, the decisions that were made and how these rates are affected by new federal homeownership policies that are enacted. The combination of these elements will provide the greatest insights as to the effect of the federal government on the housing market.
To effectively focus the all research, there will be an emphasis on one particular question. Most notably: is the involvement of the U.S. government in housing market having an impact on homeownership rates?
The basic standards that will be used to determine the effects of U.S. government policies involve: comparing their impact on the markets in contrast with previous periods. This means looking at times prior to such active involvement (i.e. The Great Depression). Once this takes place, is when the impact will be obvious.
Homeownership Rates Prior to the Involvement of the Federal Government
According to the U.S. Census Bureau, homeownership rates remained between 43% and 48% during the Great Depression. This is because most housing transactions were conducted by private lenders (who normally required at least 10% to 20% down to purchase a home). This made it difficult for most people to purchase a property right away. As, they had to: save and obtain financing for buying the home.
The problem with this approach is that it did not address the underlying challenges impacting buyers (with most being able to afford the property once they are older). This is troubling, because it meant that many people were often forced to rent (which decreased their net worth and potential earnings). To help potential homeowners, the federal government began offering direct assistance through the FHA. As time went by, these programs continually evolved to the point that the Washington was becoming directly involved in the majority of residential real estate transactions. This is illustrating how the federal government went from having no role in the housing market to becoming a major player in most transactions.
The Decisions that were made
The data from figure 1 is showing how the federal government's involvement has caused homeownership to increase dramatically since the 1940. This is an indication that this kind of support is providing lenders with more confidence when underwriting mortgages. The reason why is because Washington can provide a form of protection in the event that the borrower defaults. As they have a stake in the process, which means that many of the mortgages offered will reduce the risks for financial institutions.
As a result, the total amounts of mortgages that are underwritten by U.S. government agencies have increased exponentially. Evidence of this can be seen in the below tables which is showing the types of loans that they are using to offer direct support to homeowners (according to the FHA).
Table 1: New Single Family Mortgage for Fannie Mae 2006 to 2010