Opinion
A Homestead Act for the 21st Century
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Instead of lowering minimum down payments, the U.S. government should be raising them to reduce the probability of default and protect the financial system.
By Kim Schoenholtz
When the U.S. government wanted people to settle the western frontier, it gave them land, not a loan. Today, when the government seeks to promote home ownership, it offers cheap debt. That creates bad incentives and risks financial instability. American history teaches us that the government should subsidize home equity, not mortgage debt.
The Homestead Act of 1862 specified that anyone over 21 could obtain a grant of 160 acres of public land. After living on and farming the land for five years, including building a home and paying a filing fee of $18 (about $425 in current dollars), the land would be theirs.
Mortgage subsidies through federal agencies are the modern-day version of the Homestead Act. But unlike the land grants of the 19th century, government loan subsidies have proven to be a rather bad idea. They drive up prices and increase the size of the average house, at the same time that they encourage people with little savings and highly variable incomes to purchase homes and shoulder the risks of house price fluctuations. The result -- as we saw in the "subprime crisis" -- was ruinous for the borrowers, the lenders and the economy as a whole.
Read full article as published in The Huffington Post
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Kim Schoenholtz is a Professor of Management Practice and Director of the Center for Global Economy and Business.
The Homestead Act of 1862 specified that anyone over 21 could obtain a grant of 160 acres of public land. After living on and farming the land for five years, including building a home and paying a filing fee of $18 (about $425 in current dollars), the land would be theirs.
Mortgage subsidies through federal agencies are the modern-day version of the Homestead Act. But unlike the land grants of the 19th century, government loan subsidies have proven to be a rather bad idea. They drive up prices and increase the size of the average house, at the same time that they encourage people with little savings and highly variable incomes to purchase homes and shoulder the risks of house price fluctuations. The result -- as we saw in the "subprime crisis" -- was ruinous for the borrowers, the lenders and the economy as a whole.
Read full article as published in The Huffington Post
___
Kim Schoenholtz is a Professor of Management Practice and Director of the Center for Global Economy and Business.