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Make no mistake, the housing shortage is directly the responsibility of the US Federal government and Federal Reserve policies going back to the 1990s. Based on Governor Walz surprise revelation promise of three million new homes, and downpayment assistance, the problem is about to get worse should they be elected. As our great departed President Reagan once said, "The nine most terrifying words in the English language are: I'm from the Government, and I'm here to help. ". The questions are how did we get here, what is the solution, and how do we implement the solution?

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Prior to 1934, homeowners purchased homes with cash or small bank loans that were underwritten by banks. Obviously, this limited homeownership to those with means and hence ownership was historically 46.5%. In 1934 President Roosevelt created the Federal Housing Administration. The objective was to help builders and developers, not necessarily homeowners. Homeownership rates grew to around 65%. In the 1990s, the government encouraged and created a lending environment, along with quasi-governmental agencies backing loans that were increasingly more likely to fail, but with a government backstop, there seemed to be no limit. Homeownership grew to 69% by 2004. The limit, however, was reached, as loans reached maturity, along with a recession in 2008, that led to one of the worse economic crises in US history.

The fallout of the 2008 housing crisis had far reaching consequences that most Americans who are not in building or developing understand. From the 1980s until the year 2000, annual single-family housing starts fluctuated from 750,000 to 1.2 million homes. The supply chain around those number of starts, the number of builders, even considering consolidation, was steady, lot acquisition and development, real estate companies, mortgage lenders, and construction workers all found equilibrium. But when products like 3-1 ARMs with low introductory rates, low rate construction loans, interest from Wall Street in monetizing construction, and fly by night mortgage brokers flipping loans to Freddie and Fannie began, the whole industry was thrown into chaos.

From 2000 to 2005, housing starts ramped from 1.2 million to 1.7 million. In order to supply products like lumber, engineered lumber, brick, mortar, windows, doors, roofing, plumbing materials and fixtures, electrical materials and fixtures, heating and air conditioning units, et cetera, industry invested in new facilities to match the “new normal” rate of construction. Land developers had to acquire and develop hundreds of thousands of new lots, and given rezoning and permitting, the lead time is around 18 months to 2 years. Large builders made up a lot of the slack, but new “builders” were leaving jobs in insurance, banking, landscaping, trades or whomever wanted to fulfill their American dream of owning a business. Small banks were being created out of thin air and lending to all these new, inexperienced builders with 100% financing. All was going well until the bottom fell out.

Beginning in 2007 and continuing through 2009, housing starts fell from 1.7 million to less than 500,000, where it remained until 2013. In 2014, the rate of new starts got back to the historic level of 700,000 homes annually, and remained in the historic band between 750,000 to 1.2 million. The trouble is the intervening years, the population continued to grow and the shortfall grew to 4.5 million homes where we stand today. In fact housing starts really grew rapidly until 2021, when the combined Covid scare and Federal Reserve rate increases caused another correction in the market.

For the long period of sub-3% mortgage interest rates, buyers again flooded the market to buy up all the existing inventory and any new homes being built. This had the combined effect of low supply and massive demand, leading to increased prices of homes. Everyone felt comfortable that we had weathered the worst of the post-2008 market, but unfortunately the Fed created yet another bubble. Once they raised rates well above the historic level, and mortgage rates skyrocketed to 7-8%, the market once again was stuck in a dilemma created by the government.

Anyone with a low interest rate was never going to trade their loan for a new higher interest rate. Even if an empty nester wanted to downsize, the cost of the new home was higher due to inflation and higher interest rates. New prospective buyers were pitted against cash buyers willing to pay over asking price as they relocated from expensive urban housing to the suburbs and the heavy and of state, local and federal imposition on personal freedoms and crime. Even if the builders or developers wanted to ramp up production, the high construction lending rates, reduced supply chain availability, and high mortgage rates scared them off.

That brings us back to the Harris-Walz new plan to subsidize downpayments and build 3 million new homes. We have an unknown timeline on that ethereal plan, but let’s assume they want to enact on day one of their prospective administration. What are the limitations and risks? Going back to the assumption that we need about 1 million new homes annual to meet current new demand. Let’s assume that there is a 4.5 million home deficit. So to make up the shortfall, we need to built 2 million new homes annually for their 4 year term to get a balanced housing market. But remember, we peaked at 1.7 million in 2005, so there is a capacity issue.

If so incentivized, would manufacturers of construction materials open up closed facilities shuttered in 2008? Do we even have the workforce to accomplish this goal? Many skilled laborers who provided framing, plumbing, electrical, heating and air conditioning, trim carpentry, cabinetry and other trades have either left the industry or retired. Who then will fill these jobs? Could it be the 20 million illegals who flooded our country? And are they not adding to the new housing demand creating a new shortage?

In order to implement their plan, it would literally require another massive intervention from the Federal government that would amount to nationalization of our housing industry. If history tell us nothing, central planning does not work. Unless we get off the whipsaw government intervention, we will continue to the boom-and-bust cycles that harm American citizens, enrich banks and those who seek government favor, and destroy the US economy in way that we may never recover.

Unless and until the Federal government stops deficit spending that creates inflation, raising materials and labor prices, there is no solution to the housing problem. Add government red tape that makes the cycle of acquisition to development to housing sale on average 3 years and you can see the solution is not something that can be implemented overnight. What can happen is we can return to the 1400 square foot houses on a quarter acre lot of our grandparents. We can allow auxiliary housing units to be built for added income and low-cost housing for two families on a single lot. We can create economic zones in devastated downtown neighborhoods with incentives for single family for sale homes. What is certain is other than incentives for redevelopment, the solutions are local and private, not federal.

We have a choice in November that will send American in one direction or another. The America that built the greatest economy in history was built by men of vision and character, not politicians or grifters. Choose wisely America.