It’s Time to Supercharge FHA Loans

Buying a home is more than buying four walls. When you purchase a home, you literally buy a part of your community. You own a stake in it — meaning that you care more than a transient or a renter would. You care about the schools — your kids go there after all, or at least your property taxes do — and you care if Main Street falls into disrepair, because you know you’re there for the long haul. This is not just secondary to community: it is central to it.

But modern American communities are missing this critical puzzle piece, because young Americans aren’t buying homes.

The data tells the sad story. In 1996, 42 percent of home buyers were first-time buyers. That wasn’t a random blip; the number stayed the same for roughly the entirety of the 1990s. Even in the mid-1980s, when it temporarily dropped, due partially to the savings and loan crisis, the percent of first-time home buyers only got down to 30 percent.

Today, the number is 21 percent.

This is partially due to COVID; before the pandemic, the number bounced around just north of 30 percent. But the pandemic effectively ended at least three years ago — it’s simply nonsensical to pin the blame entirely on that.

Experts are divided as to the cause. One, Kevin Erdmann — writer of “Shut Out” — has argued that it was a housing shortage which caused the collapse in 2008, and that a shortage continues to cause problems today. There is no question that America must build more homes; companies like the American Housing Corporation have understood this and are seeking to fill the gap.

But that will take time. And with at least 1 in 7 Americans hoping to buy a home, the number of new homes necessary to fill that gap is enormous. Any solution, therefore, must also make it easier to buy already-existing homes as well as expand supply.

Fortunately, there’s a tool for that: Federal Housing Authority loans. These loans are ideal for first-time buyers, as they allow you to buy homes on a low down payment (as low as 3.5 percent).

The problem is how these loans are doled out. For starters, anyone is counted as a “first-time” buyer if they have not owned a home in the past three years — which obviously includes significantly more individuals than actual young families just starting off.

Then there’s the strictness of the loans. The FHA can only loan houses which are “safe”, a reasonable goal which is often stretched to absurd ends. The most famous example of this is paint; any old houses (before 1978) which may have cracked paint cannot be covered under FHA loans (because the paint may have lead in it). This closes out an immense number of properties from ever being considered for loans; almost half of all occupied homes in America were built before 1980.

Finally, buying a home with an FHA loan does not mean the person has to live in it. They just need to live there for a year — afterward, they can rent it out, which does nothing whatsoever to help build communities.

The way forward here is obvious: we need to supercharge FHA loans and restructure how they’re paid out. While safety should be kept in mind, the shackles need to be taken off the FHA so that millions more homes can be purchased with their loans. At the same time, some rules need to be tightened; you should not ever be able to rent out a property purchased with an FHA loan, and first-time buyers should actually be first-time buyers.

The above would not solve the American housing crisis. But it would go a long way toward managing it.