Federal Government's Role in U.S. Homeownership Rates

Introduction

Over the last several years, the role of the federal government in the housing market has been increasingly brought to the forefront, largely because of the implosion in home prices and the extensive support that Washington provided to address those issues. Since the 1930s, however, the U.S. government has been directly involved in the housing market through the Federal Housing Administration (FHA), a response to the devastating impact of private mortgage failures on the broader economy during the Great Depression.

Over time, this role expanded considerably. Washington began providing both direct and indirect assistance through Fannie Mae, Freddie Mac, and the Veterans Administration (VA). The combination of these programs allowed the federal government to help Americans with the financing and purchasing of homes. As a result, the number of Americans who own property has increased exponentially since the 1940s, as illustrated in Figure 1, which shows total homeownership rates in comparison with interest rates from 1940 onward.

Figure 1: Percentage of Americans Who Own a Home

These figures indicate how homeownership has increased exponentially, illustrating the impact of the federal government on ownership rates through both direct and indirect involvement. To fully understand what is taking place requires examining homeownership rates prior to federal intervention, the specific policy decisions that were made, and how those rates are affected whenever new federal homeownership policies are enacted. Together, these elements provide the greatest insight into the effect of the federal government on the housing market.

Research Question and Variable Definitions

To effectively focus the research, one central question guides the analysis: Is the involvement of the U.S. government in the housing market having a measurable impact on homeownership rates?

The basic standard used to determine the effects of U.S. government policies involves comparing their impact on the market against previous periods — specifically, times prior to such active federal involvement, such as the era of the Great Depression. Once that baseline is established, the impact of subsequent interventions becomes clear.

Homeownership Rates Prior to Federal Involvement

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 through private lenders, who typically required at least 10% to 20% as a down payment. This made it difficult for most people to purchase property immediately, as they first had to save enough money and secure private financing.

The problem with this approach was that it did not address the underlying challenges facing buyers, most of whom could only afford to purchase a home later in life. This situation effectively forced many people to rent for extended periods, which decreased their net worth and potential earnings over time. To address these barriers, the federal government began offering direct assistance through the FHA. As these programs evolved, Washington became directly involved in the majority of residential real estate transactions, transforming from a non-participant in the housing market into one of its most influential players.

The data from Figure 1 shows how federal government involvement has caused homeownership to increase dramatically since the 1940s. This reflects the fact that government backing provides lenders with greater confidence when underwriting mortgages. Because Washington has a stake in the process — offering protection in the event of borrower default — many of the mortgages offered through these programs significantly reduce the risk for financial institutions.

Federal Decisions and Mortgage Underwriting Trends

As a result, the total number of mortgages underwritten by U.S. government agencies has grown exponentially. The tables below illustrate the types of loans used to provide direct support to homeowners, according to FHA data.

Table 1: New Single-Family Mortgages for Fannie Mae, 2006–2010

Table 2: New Single-Family Mortgages for Freddie Mac, 2006–2010

These figures illustrate how the federal government's involvement in the housing market grew dramatically. There was a deliberate emphasis on having different agencies provide loans to individuals from low-income households. Over time, this meant underwriting mortgages that were considered more risky — such as Alt-A and interest-only loans. Near the peak of the housing bubble, these categories accounted for nearly 25% of both Fannie Mae's and Freddie Mac's portfolios.

When compared with the information in Figure 1, this data shows how this approach contributed to an increase in homeownership rates. The federal government made it easier for a broader range of buyers to purchase a home without having to meet traditional lending standards.

In addition, homeowners were permitted to deduct mortgage interest and property taxes under the Federal Income Tax Code of 1913. The Revenue Act of 1951 further allowed individuals to avoid paying capital gains taxes on the sale of residential properties. Together, these policies demonstrate how the federal government provided support to the housing market through both expanded loan availability and tax-friendly incentives. These measures encouraged more people to purchase homes beginning with the post-World War II era, contributing to a rapid increase in homeownership rates from that period onward. As reflected in Figure 1, each time a new program was introduced, the number of American homeowners steadily increased.