Despite the fierce rhetoric, the primary driver of the financialization of the US housing market has been A) US federal policy that grants preferential financia

Despite the fierce rhetoric, the primary driver of the financialization of the US housing market has been A) US federal policy that grants preferential financial treatment of home ownership in the way of mortgage deductions and the Home Sale Tax Exemption B) Local and state governments which place supply restrictions on the construction of new homes, especially multi-family dwellings. The latter is particularly serious. In normal markets, tight supply leads to higher prices. Producers respond to higher prices by increasing supply and prices moderate over time. In the housing market this is not happening: in high demand cities with well-paying jobs it is largely illegal to build new homes. Thus supply does not increase and prices continue to rise. In the oil industry in the 1970s, we saw how OPEC supply restrictions caused oil prices to rise. The same is happening in the housing market: local zoning laws are effectively operating as a cartel. This government supported financialization of the housing market has created a haven for real estate speculators in the private sector. Continued low housing supply helps insure prices will continue to rise and thus make housing a good investment. This speculation makes the housing market even more frothy. To break the cycle, we must end federal policies that encouraging housing to be seen as a primary asset investment for individuals; and we must reform local zoning laws that restrict new supply.