Freddie Mac has proposed a “stimulus” program to enter the secondary home equity loan market, claiming it will cost the government nothing and add no more than $1 to the national deficit. The government entity wants this program implemented by the summer of 2024 and by the fall of the same year and hopes to dump up to 2 trillion dollars into the economy.

But is this a good thing?

I say no because everything comes at a price. While these programs may seem helpful, especially for the bulk of our middle class, who are struggling to make ends meet with the higher costs of inflation, higher interest on mortgages, credit cards and auto loans, and property insurance, they have a devastating effect on our economy as a whole and hurt citizens financially.

In this article, I will explain exactly how that happens and why this is just another government gimmick to buy votes.

It drives home prices up

While on the surface, it may seem helpful to give homebuyers access to more of their home equity (thanks to the massive government Covid bailouts and fiscally reckless spending), adding more consumer debt in the face of an oncoming recession with imminent job layoffs is only adding fuel to the fire of an economic disaster. Opening up more credit and subsidizing home equity via the quasi-government agencies Fannie Mae and Freddie Mac is inflationary and will continue to push the price up on commodities already out of reach for many Americans. While it may seem like giving people more leverage to purchase a home would be a good thing, this actually drives prices up, making the market worse for everyone in the long run.

There are easily half a dozen other ways government handouts like what's being proposed cause a rapid increase in prices, but instead of looking at this purely from an academic perspective, let’s look at it from your own firsthand experience.

You’ve seen what’s happened to home prices over the last several years—driven by so-called “stimulus” programs and easy money, and you may even be old enough to remember the exact same thing leading up to the 2008 housing crash.

While these programs may help some buyers get into homes sooner than they might without them, they also quickly drive prices up, making homeownership even more unaffordable for everyone—especially those the programs are supposed to help.

It also leads to higher debt-to-income ratios, which makes homeowners more susceptible to falling behind on payments and eventually losing their homes to foreclosure.

It limits options for low-income buyers

Here’s a staggering statistic—the income needed to purchase an average home in America is $110,871. Meanwhile, the average family income is only  $59,384. That affordability gap creates a nation of renters in the land where property rights and ownership have always been the American dream.  This causes a generation of hopelessness and, in some cases, depression.

There’s no debate this is unsustainable, but the more significant issue is that when these stimulus programs drive prices up, as they always do, fewer choices are available for lower-income buyers because fewer homes will be available in their budget. .

The challenges aren't limited to the purchase price. They start long before a buyer can begin negotiating, often when they first contact a seller.

That’s because the seller’s agent will first verify that the buyer is qualified and, in doing so, will learn that the buyer is using one of these programs. While it may seem advantageous to have big daddy government funding part of the transaction, it’s the opposite.

Due to regulations around the program, sellers are often required to make certain concessions, and due to the bureaucracy and paperwork, the transaction will almost always take longer. It shouldn’t surprise you that sellers don’t like that, especially when they can close the transaction faster and more efficiently with a traditional buyer.

Remember that the housing market is already facing a significant inventory shortage, which will only compound that, further driving prices up.

It causes inflation to skyrocket

Despite the claims from politicians and pundits, our economy is struggling under crippling inflation levels we haven’t seen since the Great Depression.

Now, you might be thinking, “No, David, that can’t be true! The government said it’s only 3.4%. I saw it in the news!”

That’s true. The government claims that our inflation rate is 3.4%, but what they fail to mention is that they have changed how they calculate inflation to make our economy look better for them. But don’t take my word for it—look at your own grocery bills. Look at your energy costs. Look at the prices of just about anything today compared to just a year or two ago. Are your costs only 3.4% higher?

No? I didn’t think so.

So, how do these “stimulus” programs cause inflation?

I’ve covered the topic extensively in previous articles, but the short version is that the value of everything is based on its scarcity. The more scarce it is, the more valuable it is, and likewise, the inverse is also true.

America has a certain amount of currency in circulation at any given time, which plays a significant role in its value. When the Federal Reserve, not a government entity, dumps more money into circulation, it dilutes its value, making everyone’s money worth less.

This has been happening since the implementation of the Federal Reserve and will continue for as long as it exists.

To put this in context, The dollar has lost over 96% of its value throughout our history. Based on purchasing power, which is how inflation is measured, today's dollar would be worth less than 4 cents in 1913.

Fast food is an excellent analogy to these stimulus programs. Sure, it’s cheap and might taste good at the moment, but you’ll feel like garbage later, and more importantly, your health will decline dramatically over time.

The same thing happens with monetary policy. These stimulus programs may give people the perception that they are wealthy, but the negative effects begin relatively quickly, and get exponentially worse in the long term—particularly in terms of inflation and generations who don’t see a bright future ahead.

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Dr. David Phelps created Freedom Founders to help its members achieve the freedom they wanted in their lives by building the necessary financial foundation. He is a noted financial expert who is regularly cited by the media, and recently helped the FL Dept. of Education develop its new financial literacy curriculum.