How much home ownership is too much? For decades, it’s been U.S. government policy – one backed by hundreds of billions of dollars annually in direct and indirect subsidies [Download Here] – to encourage Americans to own rather than to rent. Yet even if the issue hadn’t become tangled with sub-prime loans, the housing bubble and the collapse of Fannie and Freddie, it would be hard to claim that the policy has been a success. The ownership rate peaked at 69 percent in 2004 (before slipping a percentage point or two), which is just 7 percentage points higher than it was a half-century ago. Equally striking, the ownership rate today is no higher than in Canada, where much smaller subsidies are used far more effectively because they are targeted to low- and middle-income families.
The major impact of the subsidies (which increase along with the size of the taxpayer’s investment in housing) has been a dramatic increase in home size. According to the Census, the median new house was 50 percent bigger in 2007 than in 1973 – a period in which average households were shrinking from 3.0 to 2.6 people. It’s always nice of course, to have extra bedrooms, maybe a den or an in-ground pool. But you’ve gotta wonder whether the feds should be spending a quarter-trillion dollars a year to make it happen, even as government deficits soar into the ionosphere.
So why is it so notable when Sheila Bair, chair of the FDIC, argues that homeownership “should not be pursued to excess when there are other, equally worthy solutions that help meet the needs of people for whom homeownership may NOT be the right answer.” Because American housing policy amounts to a massive patronage machine, sustaining livelihoods in bloated construction, marketing and finance sectors and defending itself from political criticism by sharing the goodies with affluent homebuyers.
Is change possible? The tea leaves aren’t encouraging. Congress, after all, had an easier time extending the generous first-time homebuyer subsidy (thereby undermining the incentive to buy immediately, when the housing market was most depressed) than in extending benefits to the long-term unemployed. But as Herb Stein (that rare economist with a deep sense of irony) put it, “if something cannot go on forever, it will stop.” And surely (maybe? possibly?) plowing federal cash into ever more Jacuzzis and Sub-Zero refrigerators fits the category.
Professor Stephanie Stern at Kent School of Law recently presented a paper at a national law conference on this issue in which she reviewed the available empirical literature. You are absolutely correct. The empirical evidence for the expected public benefits is not strong, though the picture is a bit complex. I’m not sure if she is planning to publish the paper, but it adds to the evidence-based skepticism about our huge subsidies for homeownership.
It’s important to add that the tax break for housing ownership isn’t the mortgage interest deduction, since apartment owners can deduct that as well. The difference in tax treatment is that homeowners don’t pay any taxable rent, while apartment dwellers do. Homeowners get this tax break even if they’ve paid off the mortgage or never had one, so the tax benefit could be much larger and potentially more regressive than the posting suggests. The theoretically optimal if politically and practically difficult remedy would be to calculate and pay tax on imputed rent less the expenses landlords can typically deduct.
Advocates of promoting home ownership claim external benefits from the presumably greater incentives owners have to keep up the property and support community public goods. Is there much empirically to that? My intuition is that those putative benefits are either not large or attainable other ways, but anecdotally, local neighborhood civic associations, largely if not exclusively comprising homeowners, seem to favor restrictions on renters.