A policy priority in the United States is to increase the rate of homeownership. To achieve that objective, policymakers rely on a host of policies and programs that reallocate billions of dollars of resources. Several of these policies and programs try to increase homeownership by reducing mortgage rates. More specifically, federal sponsorship for Fannie Mae and Freddie Mac is one of the major tools that policymakers rely on to reduce mortgage rates.

Given the public resources involved, many aspects of Fannie Mae's and Freddie Mac's activities have been subject to vigorous public discussion. As part of that discussion, we think it important to examine if the mortgage rate reduction produced by Fannie Mae and Freddie Mac is likely to increase homeownership. In the following essay, we contribute to the discussion by reviewing evidence on the effect of mortgage rate changes on people's ability and desire to buy a house. Most of the evidence we review finds that mortgage rate changes need to be around 2 percentage points before they have what many would consider a modest, but not trivial, effect on homeownership.

Because Fannie and Freddie likely have an effect on mortgage rates considerably lower than 2 percentage points, the effect of their mortgage rate reductions on homeownership is likely to be quite modest although, again, not trivial. Moreover, the evidence in the essay also suggests that a more direct method of subsidizing potential homeowners would have a larger effect on homeownership, while using the same amount of resources, than the reductions in mortgage rates attributed to Fannie and Freddie.

Of course, an analysis of homeownership and mortgage rates is complicated by a number of factors, including the complexity of the decision to own and weaknesses in data. As a result, the studies we summarize in the essay all have important weaknesses, many of which we highlight. Fannie Mae and Freddie Mac also do more than alter rates and have broader goals than an increase in homeownership. In short, this essay is surely not the last word on the topic, which we view as a welcome outcome. A lively discussion of one of the nation's top policy priorities serves the public interest.

Annual Report Essay:
Mortgage Rates, Homeownership Rates, and Government-Sponsored Enterprises [PDF format]

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