The affordability president

The affordability president

After calling affordability a “hoax” the president has obviously changed his tune and now probably wants to be called “the affordability president.” He has continued to insert the federal government into private markets (socialism alert!). He is trying to force price controls on the pharmaceuticals, he has asked the Justice Department to investigate meat packers for price fixing, he endorsed Bernie Sander’s bill to cap credit card interest rates at 10 percent, he has joined with Elizabeth Warren in banning investors from buying single family houses and has instructed Fannie Mae and Freddie Mac to buy $200 billion in mortgage backed securities. What’s next? Wage and price controls? And although it has little to do with affordability the president has joined with the democrats in dictating an end to stock buybacks, this time in the defense industry. Has Bernie Sanders become Trump’s economic advisor?

Note that the president ignores market solutions to all these issues and relies instead on big government interventions (more Americans socialism). As my sainted father used to say “That sounds good – if you are interested in sounds.” The question is whether any of these will really make a difference or are they just “sounds”? First, what about price controls on drugs. Won’t that make drugs cheaper?  Didn’t he say that the deals with 14 drugmakers is “the greatest victory for patient affordability in the history of American health care, by far”? Hardly, the deals do not apply to the two thirds of Americans with private health insurance. Also Medicaid already receives heavily discounted prices which would not be affected. Any price decreases rest on getting the drug companies to charge other countries more for their drugs and using the money to lower the prices to the American consumer. Do you really think that is going to happen? The industry has cautioned against price controls as having an adverse impact on research and development. One industry spokesman said “This is not speculative. This is exactly what we saw happen in Europe, where they adopted price controls and drove investment and jobs and innovation out of that region.” The verdict? To quote a well known saying “I’m from Missouri.”

Second, what about the cap on interest on credit cards? This is a form of a usury law which is one of the most common laws in recorded history. It has always failed. It helps only those people with excellent credit – usually higher income people. Those people with less than perfect credit will find themselves dropped from the credit card issuer. This has happened countless times in the past and is decidedly anti-poor. It will force those with impaired credit to lenders who have to charge much higher rates due to the higher risk clientele. Usury ceilings are just another way that democrats under the guise of helping the poor actually make them worse off. Trump’s critics could say that he is endorsing such a plan because he is a racist but the bill in the Senate is sponsored by Bernie Sanders – naturally. Is anyone calling Bernie a racist? I have written on rate caps and testified on them as well. Here is one testimony before the South Carolina Senate https://www.scstatehouse.gov/video/archives.php?key=13059&part=1

I begin at minute 52:07.

Third, what about banning investors from buying single family homes? Members of both parties have been clamoring for this for years assuming that buying homes for rental somehow pricing individual households out of the market for purchase or at least making single family housing more expensive. This has been a contention by Elizabeth Warren and now Donald Trump. Here is what the president posted: “For a very long time, buying and owning a home was considered the pinnacle of the American Dream. It was the reward for working hard, and doing the right thing, but now, because of the Record High Inflation caused by Joe Biden and the Democrats in Congress, that American Dream is increasingly out of reach for far too many people, especially younger Americans. It is for that reason, and much more, that I am immediately taking steps to ban large institutional investors from buying more single-family homes, and I will be calling on Congress to codify it. People live in homes, not corporations.” If there is bill to this effect, it will pass. Politicians as different as Texas governor Abbott and New York governor Hochul and even JD Vance and Tim Walz are on board. Of the total number of housing units, the Urban Institute finds that institutional investors defined as owning 100 or more homes own about 3 percent of single family rentals. But smaller investors who own one to five houses did account for purchasing 25 percent of single family homes in 2024.

Not surprisingly, most of the homes are in areas of high demand. The question is whether the demand by the smaller investor drives the price significantly above the price willing to be paid by the individual homeowner. There are several studies on the impact on prices in buy-to-rent markets. All do show that in areas with high investor ownership that home ownership rates are lower, increases in neighborhood diversity (doesn’t Warren want this?) but also higher prices. Recently, some large investors are selling more than they are buying. In some markets, like Atlanta, institutional ownership is falling and homeownership is increasing. The relevant question then, are home prices lower now than before?

A ban on investors would also mean a reduction in the number of renters who cannot qualify for or afford a mortgage. Moreover, home construction is higher in these rental markets and would likely fall in the absence of investor purchases. But it is easy to blame institutional investors for the rise in home prices rather than the real culprits, inflation, zoning restrictions, building codes, environmental regulations, tariffs on building supplies, property tax increases, insurance and construction costs. The National Association of Home Builders say that these can add up to an additional $94,000 in the cost of a home. Does all this mean that the president favors homeownership over renting? Does he not think that some households prefer to rent over owning? 

A decrease in the buy-to-rent market will reduce the number of rentals and drive up the cost of housing for renters who wish to rent a single family home rather than an apartment. Speaking of apartments, the Daily News says that there are 247,000 empty units in New York City! Do you think if those came on the market that the cost of housing in New York would decrease? Also, the president’s immigration policies have basically stopped the influx of illegals at the southern border and over 1.3 million illegals have left the country, voluntarily or otherwise. This has implications for the job market but don’t you think that there will also be an impact on the number of vacant rentals leading to a reduction in rents? We will see.

Lastly, what about that buying of mortgage bonds? Yes, an increase in demand for these bonds would raise the bond prices and lower their return but how would this lower the mortgage rates offered in the market? These bonds are composed of pools of existing mortgages whose rates are not going to be affected by the purchase. So the impact must be not on existing mortgage pools but on ones that are being packaged contemporaneously. The problem here is that the amount is only $200 billion in a market of $1.8 trillion. It is doubtful that would make a difference. However, rates did fall by 25 basis points after Trump made the announcement. Some think it is temporary while others think that the Fed should step in and start buying the bonds like it did during Covid. But if the president were really serious he would push Treasury Bessent to lower the 10 year Treasury off of which mortgage rates are linked.