Real Estate Market Skewed by Federal Government

NO, you say! In an article this week at Business Insider, there is some measurement of the government’s influence on where we live and how we buy our homes. The belief of many is that people live in the suburbs because that’s where they chose to live, and they don’t mind driving into work, because the suburban life is important to them. So, we have large tracts of single-family homes and many strip malls. People get where they want to go mostly by car.

There’s another point of view expressed and measured in the Business Insider article. It is stated that the environments created in our suburbs and small towns are due more to the federal government than our own personal preferences and the free market. Using tax credits, loan guarantees, grants and other programs, more than $450 billion of government money influences the housing markets every year.

Plain logic would have us assume some influence purchased with this massive amount of money infused into the real estate market by government. Smart Growth America released the $450 million figure in a report stating that urban sprawl is in part influenced by federal government intervention in the free market. They counted 50 federal programs that influence the real estate markets in some way. The home mortgage interest deduction, loan guarantees through the Small Business Administration or Federal Housing Administration or grants for low income housing are mentioned.

One program not mentioned that is very appropriate for this article is the USDA Rural Housing loan guarantee program. Yes, the U.S. Department of Agriculture is even involved in guaranteeing home loans, and the program is an excellent example of location influenced by financing. This program guarantees a mortgage for up to 103% of a home’s appraised value for borrowers buying in areas defined as “rural” and lacking in adequate mortgage opportunities.

One actual purchase example includes a divorced buyer who placed a $500 earnest money deposit on a home in an area covered by the program. At closing, she placed no money down, and due to negotiations with the seller to pay part of closing costs, she even got back her earnest money deposit. Were it not for that program, this buyer may have been buying somewhere else, perhaps a less rural area, or not buying at all.

The report from Smart Growth America concludes that the government has favored many types of development at the expense of others, often with weak and outdated logic. Investors should at least keep up with major government trends to fund or guarantee mortgages, as they can influence where people congregate to live.