Tackling expensive rent would be a smart way to increase home ownership over time and arguably create more jobs. Instead, Washington has encouraged mortgages reminiscent of last decade's housing bubble.
The Federal Housing Administration (FHA) allows Ginnie Mae to guarantee mortgages to people with low credit who put down as little as 3.5 per cent of the purchase price. Fannie Mae and Freddie Mac now guarantee 34 per cent of new mortgages with down payments of 5 per cent or less, up from 24 per cent in 2012, data from the AEI International Center on Housing Risk show. House prices would not have to drop much to saddle taxpayers with losses.
Non-bank lenders have made a comeback, too. The likes of Quicken Loans and PennyMac now account for 51 per cent of all new mortgages sold to government-backed guarantors and more than 60 per cent of the riskier FHA loans, according to the AEI. The institute's calculations show they offer mortgages with a 25 per cent greater chance of default than the banks, which have pulled back to just a third of the market for new mortgages as new capital rules and litigation fears bite.
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Meanwhile, rental demand has increased, pushing costs up to a historical high of 30 per cent of income on average at the end of last year, according to Zillow - 4 percentage points above the 2006 figure. The same ratio for mortgages has, by contrast, dropped to 15 per cent from 25 per cent over the same period.
Ditching mortgage-interest tax deductions - or at least limiting them to less affluent borrowers - would help reverse this. The money could be used to reduce renters' costs, perhaps with some encouragement for them to set aside the savings for a down payment.
Cheaper rents could also persuade millions of Americans to jettison roommates or move out of their parents' house, which could spur construction - and jobs. That has the foundations of a more sturdy housing policy.
