One of the clearest messages from the American Founding was that the Constitution left regulation of private land within state boundaries to the exclusive prerogative of the states. This was an area completely outside the sphere of the federal government.
When, during the debates over the Constitution, advocates were pressed for examples of powers outside federal competence they again and again adverted to real estate.
Today, however, land is subject to heavy federal regulation. The regulation comes in the form of environment restrictions, the outright federal ownership of 28% of the territory of the United States, and—the subject of this post—federal manipulation of the home sale and mortgage market
Federal manipulation of the home sale and mortgage market is promoted as policy to make home ownership and mortgage investment easier. In fact, it has imposed incalculable costs on the economy generally and on millions of unfortunate individuals.
Illustrative of this is a recent DenverPost story. We’ll return to that in a minute. First some general comments from this former real estate lawyer.
Since the federal government has become involved in the housing and mortgage markets, some disaster has afflicted those markets every few years. Federal subsidies and guarantees encourage over-buying and bubbles. Then the bubble bursts, causing a depression in the housing business, and sometimes a wider recession as well. Think of the 2009 financial crash. Think of the recurrent problems with Fanny Mae and Freddie Mac. Think of the savings and loan crisis of the 1980s.
The problem is that real estate sales and financing are not areas where federal meddling makes sense, even if it were constitutional. Most real estate lending, and the property it secures, is inherently local in nature. Knowledge about particular properties is mostly local. Trends that affect a property’s value are largely local. Knowledge about prospective buyers and borrowers cannot be fully captured in a credit report; complete knowledge is the province of friends, neighbors, and business associates. Zoning regulations and development and other urban trends are unique to each area. Title questions often depend not only on a chain of documents at a local courthouse but on the physical condition and actual occupation of the property—something that requires visual inspection and often local inquiry.
For these reasons, federal policy is a very clumsy regulatory tool where real estate is concerned. Consider, for example, the feds’ efforts, largely though Fannie Mae and Freddie Mac, to create a national loan market. Those entities bundle loans for supposedly fear-free national investing. But bundling bad stuff just creates a bad bundle, as thousands of investors have learned to their sorrow.
So regulation of real estate and real estate lending is not just properly local as a matter of constitutional law, but it is properly local as a matter of good policy.
The Denver Post reports that the Federal Housing Administration (FHA) is now causing pain in the condo market by altering its certification policies for condominium developments. FHA whims can either inflate or devastate property values and salability, and devastation is the FHA’s whim du jour.
The people involved are desperately unhappy about it. Perhaps they don’t know it (the Denver Post article says nothing on the subject), but they are among the vast majority who would benefit by returning the federal government to constitutional limits.