Why Homeownership?

Well, obviously, there are a lot of reasons a person might want to own a home. The question is less why would one want to own a home than why the country has so much public policy aimed specifically at encouraging homeownership. Roger Lowenstein's New York Times Magazine article on the housing market doesn't directly address this point, and neither does the chart from that article that I've reproduced to the left. Still, look at the chart.

The highest homeownership rates are in West Virginia, Michigan, Delaware, and Mississippi. I couldn't say for certain, especially since I don't know much about Delaware, but the common factor here seems to be economic stagnation leading to relatively low housing costs plus relatively small numbers of new people moving to the state. Now, it'd be dumb to say that high levels of home ownership are making Mississippi so poor (try history) or causing Michigan's current economic woes (try to auto industry) but it does seem to indicate that boosting homeownership rates doesn't produce any miraculous consequences.

If we didn't subsidize howmownership, people would own less home and own more stocks and bonds instead. Some of that owning "less home" would come from people renting rather than buying, and some would come from buyers simply buying smaller houses. That's be good for the environment, and more capital would be available for business operating in non-housing sectors. Meanwhile, I feel like if we weren't specifically encouraging an ideology of home ownership ("American dream" and all that), you might get less of the risky behavior that seems to be causing trouble of late. I feel like there are a lot of people who would never dream of doing something so exotic as margin trading who've been basically willing to do the same thing with their investment in the housing market. If anything, it seems to me that we should be work at the margin to discourage people from treating their homes as speculative investment commodities.

Comments

we should at least limit the subsidization of home ownership. why should the interest on a loan for a vacation home be deductible? why should millionaires be able to deduct interest? this sort of subsidy - if we have it at all - should be reserved and limited to first time home buyers and those below the poverty level.

Posted by john | September 2, 2007 3:19 PM

If we didn't subsidize howmownership, people would own less home and own more stocks and bonds instead.

If we didn't subsidize home ownership, housing prices might fall and owning a home would be cheaper.

Posted by richard | September 2, 2007 3:21 PM

You obviously haven't had your landlord walk in on you and your spouse having wild sex on the living room floor so he could use your telephone.

Posted by ella | September 2, 2007 3:24 PM

Wow, Matt is in real "blind man feeling the elephant" territory here.

Just to review- homes are built by the construction industry, which uses lumber, plumbing and lighting fixtures, concrete, roofing, and appliances, which all move by truck. All of these industries shudder when new housing starts slow.

The homes are financed by the finance industry and sold by the real estate industry, often in new subdivisions created by developers- all of whom operate cohesively to keep the home-building rates high.

The subdivisions are served by freeways and roads, built and maintained by public employees who usually belong to unions. The unions, acting in concert with the developers, lobby the statehouses to keep the roadbuilding going.

Naturally, the automobile companies and the oil companies and the big box home repair retailers and shopping centers all favor the creation and maintenance of suburbs.

When parents move to a suburb they have a lot more control of their schools than they do in, say, Washington D.C..

Now, along comes Matt, who looks at the last five years, apparently ignoring the last 150 years, and concludes that the problem is ordinary people using their homes as 'speculative investments'.

Needs work, Matt- needs work.

Posted by serial catowner | September 2, 2007 3:25 PM

ella - TMI baby... random much?

Posted by john | September 2, 2007 3:28 PM

If we didn't subsidize howmownership, people would own less home and own more stocks and bonds instead.

That you, Tom Freidman?

Posted by alphie | September 2, 2007 3:44 PM

serial catowner, for one thing, greater suburbanization is simply environmentally unsustainable. For another, MY isn't arguing we should criminalize home ownership. He is pointing out that the link between high rates of home ownership and local economic growth is weak if non-existent and that we should probably correct market-altering policies that lead to less-than-desirable incomes. As a commenter above mentioned, why should we allow millionaires to write off the interest on a loan for vacation homes? For that matter, all eight of the states in the graph - the four highest and lowest for home ownership - aren't exactly known for their high-quality public schools, so either parents aren't exercising the higher degree of control that they have over suburban public schools effectively or your claim isn't true.

Posted by Reality Man | September 2, 2007 3:49 PM

Homeownership is encouraged to make sure economics and democracy are properly aligned.

Long story short, all of the benefits of being in a location eventually end up being capatilized into the value of the land. When a location becomes more productive (because of better infrastructure, better education, lowering crime, etc.) people want to move their so land values rise. Land prices will rise until the benefits of being there match the price of being there. This benefit from increases in productivity accrues to landowners. If everyone is a renter, they are less likely to vote for actions that will cause productivity improvements, because their rents will go up. If everyone is a homeowner though, they will get the benefits of rising land prices and vote for things that will make their cities more productive.

This explains a bunch of things like why neighborhoods with higher levels of home ownership tend to have lower crime, better schools, etc. and why we used to (along time ago anyway...) only let landowners vote (since they were the only ones with the long term interests of their areas in mind).

Posted by Jared | September 2, 2007 3:58 PM

Re: you might get less of the risky behavior that seems to be causing trouble of late.

Much of the risky behavior of the last few years involved not people who bought homes to live in them, but rather people who bought them as short-term, speulative investments.

Re; greater suburbanization is simply environmentally unsustainable.

There is no reason we have to keep building the types of suburban developments we have been. Many older suburbs (pre 1970s, definitely pre 1980s) were built with schools, shopping and other amenities close at hand, so that one could walk or bike many places (I grew up in one such place). And even if one had to drive during inclement weather, the drive would be a short one, not the ten-mile gas-guzzling drives we often have today.

Posted by JonF | September 2, 2007 4:08 PM

Hey, you don't need to tell me about environmental unsustainability. I grew up in suburbia,watched tens of thousands of acres bulldozed from farms and second growth timber into suburbs, and muttered a heartfelt 'amen' when I read Jane Jacobs in 1964.

I read the title, read the post, and did not find discussed "why homeownership?".

Re-reading, it gets even funnier- Matt starts by saying that neither the article linked to, nor the chart he presents, actually answers the question, but asks us to look at the chart, and concludes that homeownership doesn't produce any miraculous consequences. Well, who said it did?

He then goes on to conclude that if we didn't subsidize homeownership, people would own more stocks and bonds, and maybe they would, if you provided them the same subsidies to buy stocks and bonds. The only thing we can be really sure of here is that if you eliminate the mortgage subsidy and make it a stock and bond subsidy, the people who wrote mortgage paper will start writing stock and bond paper.

Like I said, needs work.

Posted by serial catowner | September 2, 2007 4:09 PM

I couldn't say for certain, especially since I don't know much about Delaware, but the common factor here seems to be economic stagnation leading to relatively low housing costs plus relatively small numbers of new people moving to the state.

I think this doesn't apply at all to Delaware. If you look at data, say from http://quickfacts.census.gov/qfd/index.html
you'll see that Delaware's population is growing much faster than those of MS, WV, and MI. Also, DE has lower poverty rates and higher income, and unemployment is around 3%.

Delaware's economy has a lot of jobs in banking and the chemical industry; government (including Dover Air Force Base) and agriculture are also major employers. I don't think the economy of DE can be described as stagnant.

Posted by delawhere | September 2, 2007 4:24 PM

I suspect it makes more sense to own when you're a serial catowner.

Posted by abb1 | September 2, 2007 4:25 PM

Jared is correct, the interest in promoting homeownership had as much to with citizenship and community as economic growth. As a unit of ecnomic analysis, states make no sense to test the effects of homeownership. I suspect if one looked at the various neighborhoods in DC you would find quite a different picture.

There is probably a case to be made to limiting the amount of interest that can be deducted. But from both a tax policy standpoint and a political standpoint eliminating the deduction is a bad idea. One of the principles of sound financial policy is predicatbility, and changing the rules in the middle of the game to the deteriment of 68.8% of American households is not smart.

Posted by AJ | September 2, 2007 4:34 PM

Sorry to be obvious, but let us remember the great dictum: "in all the history of the world, noone has washed a rented car".

Posted by PT&S | September 2, 2007 4:48 PM

There's another problem. Home ownership increases the transaction costs of moving to a new region. That means that when jobs move (e.g., from the rust-belt to the sun-belt), home owners are especially unlikely to follow the economic trend -- thus leaving them more likely to fall on hard times.

Posted by dcuser | September 2, 2007 4:52 PM

Argue about the data all you want (there's lots of contradictory stuff out there).

Subsidizing housing by the mortgage interest rate deduction really can't be justified economically unless you believe government should subsidize some business sectors and not others. Social justifications (ownership leads to responsibility) cuts two ways however, not just more interest in YOUR community but less interest in nearby communities - including the urban core that creates a metro area - and therefore lots of beggar-thy-neighbor behavior and litte whole-community concern. Metro-area planning and control (as done in the Portland OR area by state law involving 3 counties and numerous cities) is a far better solution for everyone.

No one should be encouraged to invest in a house for appreciation in prices as a way of gaining wealth as this inevitably leads to unsustainable bubbles that destroy many lives when they burst - as they always do. The current bubble in housing in many areas will take years to unwind, and much more 'wealth' to disappear. Housing appreciation has been postured as a free lunch, and we all know that there are no free lunches in the longer term.

Let land/housing price appreciation find its balance between single-family housing purchase and rental properties, commercial/industrial buildings, condos, multi-family dwellings, high/mid/low-rise rental apartments, etc, subject to reasonable zoning and planning restrictions. Area redevelopment and reuse will even out the bumps as economic and social changes occur in that area.

The housing mortgage deduction is an apple pie that has long becomes moldy. I wouldn't eliminate it overnight, but would ratchet it down over time - perhaps with some grandfathering for existing primary dwellings (but not vacation or income properties).

Posted by JimPortlandOR | September 2, 2007 5:09 PM

If we didn't subsidize howmownership, people would own less home and own more stocks and bonds instead.

Matt, don't take this the wrong way, but what planet do you live on?

You can construct reasonable arguments pro and con the state subsidizing home-ownership for those not normally able to afford them, but regardless if those people do not buy homes, what they will spend more money on is not "stocks and bonds" but rent.

Posted by Doctor Memory | September 2, 2007 5:10 PM

Two words--- zoning tax. Edward Glaeser's research is pretty damn interesting. The tougher the zoning regs, the higher the price regardless of the underlying land or construction costs. For comparable houses in St. Louis or San Francisco, zoning adds $18,000 the the St. Louis house and a mere $608,000 to the SF home. I'm guessing that the high homeownership states are on the St. Louis end of the scale.
http://www.heartland.org/Article.cfm?artId=10635

It is true we're overinvested in real estate (and thus underinvested in other areas), but then everyone who's read Kevin Phillips knows that:

"But what's happened in a nutshell is that since the 1970s, you have seen manufacturing in this country slide as a percentage of the GDP from a very large lead back then. And during the 1990s it was passed by financial services, the FIRE sector: finance, insurance and real estate. By 2003, you basically had 21 percent in the FIRE sector, GDP. And you had 13, 14 percent in manufacturing.

Now what's pushed up the roll of financial services in that sector is in most part, debt. In the sense of public, international, private, mortgage, credit cards... If you look at two previous leading world economic powers, Britain, 100 years ago, and the Dutch after New Amsterdam... In each case what happened was an erosion of actually making things, as the society shifted towards trading things and moving money around and all of that sort of stuff.

Once you start to make that transition, there doesn't seem to be any way to go back because you create an elite that is then a set of vested interest in the new way of doing things. And they don't much care whether or not they're still making steel in Sheffield, or in Pittsburgh."
http://transcripts.cnn.com/TRANSCRIPTS/0603/20/ldt.01.html

Posted by beowulf | September 2, 2007 5:24 PM

In a world without subsidies, the cost of renting should be cheaper than the cost of owning. The ability to earn investment income from owning housing compensates for the higher cost (ie. you could rent it out again).

So, if someone wanted to invest as well as live someplace, it would make relatively more sense to rent and also buy stock and bonds than it did before. (stocks and bonds being a common vehicle for investment...come on people, that's all his was saying.)

Regarding the first part, its common in political discourse to say that homeownership is good for the economy. So it should be subsidized. Which is why he argued the opposite, though he didn't make explicit where it was coming from.

Posted by graeme | September 2, 2007 5:45 PM

"Homeownership is encouraged to make sure economics and democracy are properly aligned."

In northern Germany (I don't know if this applies to Germany as a whole, to the extent which post-1991 Germany can be generalized), but renting tends to be the norm instead of owning a home, even for professionals like doctors and lawyers. Delaware, as many locals admit, is in many ways a subsidiary of DuPont and International Paper, which hasn't exactly been the best economic situation to be in in terms of promoting high-end technology and economic growth. This isn't to knock home-owning, but the way our tax system is set up now with regards to home-owning just ends up transferring wealth from the lower classes to the middle and upper classes.

Posted by Reality Man | September 2, 2007 6:00 PM

abb1 hit the nail on the head. For most of my life I have put some major effort into owning my own home to increase the amount of control I have over my own life.

What Matt was trying- not very successfully, in my opinion- to talk about was a) how public policy has been shaped to support homeownership, and b) the extent to which a mortgage bubble should make us question that policy.

Whether that has anything to do with the reasons that most people who own homes choose to do so is not addressed.

In any case, to see how complex policy questions get when they involve the whole economy, see Mark Trahant today in the Seattle P-I where he suggests we should be careful just how much air we let out of the housing bubble.

Me, I'm no economist, just a homeowner.

Posted by serial catowner | September 2, 2007 6:06 PM

Anyone who thinks housing is more expensive in SF because of zoning...has obviously never been to SF.

Posted by serial catowner | September 2, 2007 6:20 PM

Anyone who thinks housing is more expensive in SF because of zoning...has obviously never been to SF.

I lived in San Francisco for a number of years in the 1990s and zoning is indeed the reason housing is so expensive.

There are hundreds of acres of mothballed light industrial areas and fallow open space near lightly used roads and transit lines because they're not zoned for housing. There are high parking requirements even in transit corridors that add hundreds of thousands of dollars to the cost of new construction.

Of course a highly desirable climate, earthquake risk, the prosperous economy, a badly corrupted permitting process, and high quality of life also increase housing prices. But zoning is the number one culprit.

Posted by Adult | September 2, 2007 6:51 PM

I took ella's comment to mean that one of the downsides of not owning a home is bad landlords. Having had my share, I can sympathize. The last bad one I had would let himself into the other half of the duplex and root through the guy's papers and trash.

Posted by mwg | September 2, 2007 7:47 PM

The best thing about homeownership is that it dramatically reduces the person's need for assistance from their family and/or the government when they're done working. Here's my thinking:

A) someone who gets a 30 year mortgage will have their housing costs go up at a rate below inflation, as opposed to someone whose rent will keep getting bumped on them.

B) a retiree, if they've paid off their home over 30 years, only owes property taxes. A very good thing on a fixed income as opposed to having living costs the same as when you were working.

C) economically speaking, a homeowner will enrich the bank on a percentage of their mortgage, based on interest. Most of their monthly payment goes to paying off their own asset. A renter will enrich only their landlord, and their net worth will be dependent on what kind of money they can save above and beyond their rent. The homeowner gets to save in addition to their mortgage.

Posted by erikemery | September 2, 2007 9:18 PM

I live in Michigan and can speak to that. Michigan housing has never bubbled. In fact nothing in Michigan ever bubbles which is why Michigan is at the bottom of the heap economically today. Today most all 'wealth' is generated from credit driven inflation of asset prices. Michiganders don't understand that. They think you have to work and make something. How old fashioned, How 20th century.

The 80's bank and S&L failures put huge amounts of money into real estate and energy speculators pockets. The losses were socialized via the FDIC and the RTC. During the entire decade Michigan had one bank failure. A little bank in a little town to the tune of maybe a million bucks when a silly banker couldn't say no to car loans for poor people.. Meanwhile bad energy and real estate loans to the tune of at least a trillion bucks liquefied the Sun Belt. Michigan was a huge loser in this. And so it has gone, on and on and on.

Michigan has essentially zero population growth and at the end of the day it is population growth which drives the main street real world economy. Michigan has essentially zero skin in the game of modern finance and thus almost no top five percenters.

Posted by rapier | September 2, 2007 9:58 PM

The negative correlation between home ownership and the social safety net has been the subject of several studies. That's a self-perpetuating trend, and it encourages people to think of home equity as the source of the kids' college fund, or even the emergency medical fund, not just potential retirement income.

The obvious problem is this: work patterns and 30-year mortgages aren't an ideal mix. People move home more often, and move further between homes. I'd like to know how much people pay, on average, in closing costs and realtor fees over a lifetime.

In northern Germany (I don't know if this applies to Germany as a whole, to the extent which post-1991 Germany can be generalized), but renting tends to be the norm instead of owning a home, even for professionals like doctors and lawyers.

Northern Germany, across Scandinavia, and in quite a few other countries.

let us remember the great dictum: "in all the history of the world, noone has washed a rented car".

A dictum perfectly applicable... to cars. I'm guessing you've never seen the kind of work that people do on public housing in the UK, where people really do have a degree of security, because their rent will generally be paid in retirement.

Posted by pseudonymous in nc | September 2, 2007 10:17 PM

One argument for encouraging homeownership has gone unmentioned here: a means of accumulating wealth. Historically, until recently few people owned financial instruments; the bulk of most households' accumulated wealth was in their home. It was the one investment people could normally make, and because you lived in it, you could basically capitalize your rent by purchasing. If you had to pay for housing anyway, the reasoning went, you might as well gain something from it. Nowadays this reasoning is getting a bit threadbare, to be sure; many people have 401(k)s and the like, and have far more access to highly liquid investments than ever before. Moreover, despite the hype, housing isn't that great an investment when you factor in the costs. David Leonhardt of the NYT recently reported having a woman boast to him of how her daughter had sold a house for 30 per cent more than she'd paid for it ten years earlier; "Where can you get a better return than that?" Leonhardt thought (but didn't say) "any bank savings account"--and that's before taxes, mortgage, insurance, maintenance, etc.
Nonetheless, I suspect it works for a lot of people, essentially because it's a form of forced savings. If they weren't putting it into the house, they wouldn't be putting it anywhere at all; they'd be spending it.

Posted by David | September 2, 2007 10:38 PM

Let us remember the great dictum: "in all the history of the world, noone has washed a rented car".

I have washed rented cars several times.

Posted by adlsad | September 3, 2007 12:04 AM

David Leonhardt of the NYT recently reported having a woman boast to him of how her daughter had sold a house for 30 per cent more than she'd paid for it ten years earlier; "Where can you get a better return than that?" Leonhardt thought (but didn't say) "any bank savings account"--and that's before taxes, mortgage, insurance, maintenance, etc.

This strikes me as a completely bogus example. Unless the daughter lives in a very depressed real estate market, she should have seen an increase far higher than 30% over the past 10 years (my own fairly sleepy market has seen increases about three times that, and the hot coastal areas have seen higher than 30% increases in single years).

At the same time, bank interest has been stagnant for quite some time. My "interest bearing" checking account pays some laughable percentage that I think is well below 1%. You can get better rates, but only by locking into timed instruments like CD's. If you think you could have beat the past ten years' real estate return rates with a bank account, good luck. And I'm not even taking into consideration the mortgage interest deduction, which gives most homeowners another bonus.

Plus you get to live in your house. Can you live in a CD account?

Posted by jimBOB | September 3, 2007 12:39 AM

What I see immediately in the chart, with the exception of Hawaii, is the non-cosmopolitan areas vs. the cosmpolitan ones, and that the former probably have much more emotion invested in owning an actual piece of land, real estate that's really "real" estate, rather than "rootless" cosmpolitans.

The core market has been warped in the last half-century with "virtual" real estate like being able to own rather than rent high-rise apartments, and condos, coops, air rights, etc. The latter are like the pieces of paper (stocks & bonds) you think people will buy if the incentives are reversed. This will work for your rootless cosmopolitans, true, because that condo is virtual real estate, no different than renting, really.

But it will not work on the descendants of pioneer homesteaders & Okies, nor on a lot of immigrants, nor on the many many people who think the next dream step after owning a piece of land to reside upon is to buy another piece of land somewhere in the boonies that even if they never get that cabin built on it, their kids might sell to someone for a lot of money because other people will want a piece of land to reside upon because "they aren't making any more of it" and they can always make more paper documents to sell that supposedly give you a piece of an entity called a corporation.

This is also why we won't get rid of sprawl unless we disallow it. Strong disincentives won't help.

You will never really deter the lure of commodities for many people, especially one they aren't making any more of. Take all the incentives away, there are lots of people that will still want the "real" stuff, especially if they can get a deed for anything near the cost of rent.

Posted by artappraiser | September 3, 2007 12:50 AM

"in the history of the world, none has washed a rented car"

I also washed a rented car once when it was rented for two-week vacation in Utah and Wyoming. After driving on some gravel road and one "rough road", it was covered with a thick layer of dust that was quickly removed at a self-service car wash.

Similarly, people who rent for many years and are protected against arbitrary eviction make improvements in their appartments.

Posted by piotr | September 3, 2007 1:40 AM

Interestingly enough, I find that most homeowners I know only speak about their home as an investment when housing prices are skyrocketing.

Otherwise, they're looking at their home as something that is "mine," whether or not they own it outright. As long as you are making mortgage payments, the bank doesn't care what you do with the property. When you rent, on the other hand, you're likely to see a whole list of things you cannot do when you move in. Sure, none of those things will be invasive or unreasonable, but you still CANNOT do them. For instance, I can't pain the walls of my apartment (which I REALLY want to do to get rid of this awful creamy yellow color the landlord saw fit to apply to the plaster walls). I admit this is a psychological sticking point.

And even when a homeowner is restricted (ie, through planned developments and homeowners associations), we're talking about people who have purchased a home for neighborhood homogeneity or, more likely, for status reasons: "don't you SEE how successful I am? do you SEE that beamer in the driveway?!? Do you SEE the 3000 sq ft home i OWN?" The property might be an investment, but it's more of an investment in self-image than long-range financial planning.

I think alot, if not a majority of, Americans like this because they have a certain autonomy not just within the boudaries of their property, but in community planning. When you have whole-community and high-density planning, there is more of a chance of having to deal with people who are "not like me" and or have "different values than me"--and this matters more to people than whether or not their home, as an investment, is getting them the most bang for the buck.

Posted by johnny | September 3, 2007 1:47 AM

"with the exception of Hawaii"

Actually, Hawaii is highly urbanized. 70% live in Honolulu. And its population is growing.

The problem with this homeowner data is that the state is not a useful unit of analysis. What we appear to be seeing is mostly that states with large cities have lower rates of homeownership. There is probably a much greater range within states than among states.

Posted by bloix | September 3, 2007 3:29 AM

Re: Michigan was a huge loser in this.

Why would a state be a loser because its banks are not failing? Michigan's economic problems (I am a former resident of the state) are mainly traceable to the stupidity of the auto industry which should have learned its lessons when energy prices went high in the 70s, but now ha made the same mistakes again, producing too many gaz guzzling benmoths which people do not want when gas in $3 a gallon.

Posted by Jonf | September 3, 2007 7:19 AM

Matt, don't take this the wrong way, but what planet do you live on?

The planet of unmarried/childless 20-somethings living 3 or 4 to a dwelling in a sketchy neighborhood in a big city where the proximity of clubs and other nightspots figure into the calculation of what constitutes a desirable place to live. IOW, much the same planet I lived on two decades ago.

Of course, the vast majority of that planet's residents move on (to be replaced by new residents) and come to appreciate any contribution to making home-ownership more affordable. For them, their homes aren't "investments," at least not in the same sense their 401(k) or other portfolio items are. (My home has greatly increased in value and my thoughts were "that's nice. I'm not going anywhere.")

They're, as someone said above, a place where they can exercise a measure of control over their lives so they do right by all of their obligations.

None of this means that we shouldn't limit the tax subsidies to some homes: I agree that it makes little sense to subsidize vacation homes or the worst McMansions. But if you want to give the GOP a gigantic cudgel club with which to club the Democrats, keep talking about home ownership, per se, being an issue that should be re-thought.

Posted by Roberto | September 3, 2007 8:05 AM

People act as if the Mortgage Interest Deduction isn't already limited. This helpful summary is from the Tax Info Blog:

In general, mortgage interest is deductible. In practice, however, it is only open to those 30% of taxpayers who itemize their deductions. Additionally, the deduction tops out after a second home, a large set of mortgages, or a high income.

For more information on the home mortgage interest deduction, please consult IRS Publication 936, "Home Mortgage Interest Deduction."

If you or your spouse is legally liable for a mortgage that is a secured debt on a qualified home, the interest on that mortgage is deductible.

There are several limitations on this:

You must itemize your deductions. For the most part, if you had a mortgage for most of the year, this isn't a difficult threshold to meet.
The mortgages can only cover your main home and a second home.

Only $1,000,000 total of "home acquisition" mortgage debt is allowed (debt used to pay for your home).

Only $100,000 total of "home equity" mortgage debt is allowed (cashing out equity). This is completely-disallowed for AMT taxpayers.

When the $1,000,0000/$100,000 limits were put in place in 1987, that was a stratospheric amount of debt to carry. Now, though, it isn't hard to see a married couple having two $600,000 mortgages on two homes. They are still more affluent than the average American, but Joe Sixpack is catching up.

If there is any business or rental use of your home, the interest must be properly-allocated between personal and business/rental use.

Points paid at closing are fully-deductible if they are to acquire the home. For refinancings and cash-outs of equity, though, the points deduction must be amortized over the life of the loan.

Like most itemized deductions, the home mortgage interest deduction is subject to the itemized deduction phaseout. If your AGI exceeds $150,500 in 2006, your home mortgage interest deduction will begin to be slowly disallowed.

Posted by CharleyCarp | September 3, 2007 8:34 AM

CharleyCarp is wrong. The mortgage-interest deduction is one of the only deductions that is not subject to the AMT phaseout -- which makes the subsidy offered by the government even bigger than it otherwise would be. Even if your AGI is $800K a year, you get to deduct the full amount of your mortgage interest (up to the $1,000,000 limit).

And the idea that Joe Sixpack is anywhere near the world in which a married couple carries two $600K mortgages is, of coruse, the fantasy world in which today's Republican Party thinks we live.

Posted by F. Blair | September 3, 2007 10:19 AM

Why is ownership eqated with control? I have control over my rented apartment. Never tried renting a house. Is there something you can't do?

Posted by AlanC9 | September 3, 2007 11:12 AM

Re: I have control over my rented apartment. Never tried renting a house. Is there something you can't do?

Mortgage companies do not hold veto power of what pets you have, over whether you can have an additional roommate or nort, over what interior design you chose, over what landscaping (or lack thereof) you may opt for. Nor so they show up at inconvenient times poking their nose into your domestic arangements.
By the way, why would any progresesive in his right mind want to see the numbers of renters increase and the number of home owners decerease? That sounds like a recipe for ratcheting up social inequality yet further.

Posted by Jonf | September 3, 2007 1:25 PM

My parents owned rental property when I was growing up, and my summer job was to clean the houses after one renter moved out and before the next one moved in. (We lived in a college town. Before you start, the renters were adjunct professors with families teaching for one or two year stints while completing their PhDs. People who should have known better.) Those houses should have been condemned, not cleaned.

Perhaps in Europe, where the class system dictated that no one who wasn't nobility would own any property, means that middle-class people took better care of rentals by habit, but in the US, only owners take care of their property. Visit any lower middle class or working class apartment complex and prepare to be appalled. Encouraging home ownership is encouraging upward mobility in both the hard sense of increase assets, and the soft sense of improved behavior. No one with any pretensions to the title progressive should ever advocating reducing the percentage of homeowners.

Posted by Karen | September 3, 2007 5:25 PM

A mortgage deduction is a boon to couples at the expense of single people. Whether that is good depends on whether you think married people are better off financially than single people.

My objection is philosophical: subsidies end up helping the wrong people and may in fact have an opposite effect (in raising prices, for example).

Without the subsidy, more middle class people would be renting. Is that bad? That may merely mean that multiunits will become more family-friendly. It also may cause the market to offer lower priced options for consumers. A friend of mine is a housing expert in DC who swears that manufactured homes (i.e., mobile homes) could be a good (and even safe) low cost solution for many. Right now, the theshhold to own is still high (and possibly made even higher by subsidies).

One other thing. Given the fact that people are waiting longer to be married, why should they feel pressure to own rather than rent? Renting is seen as a stigma; that never made sense to me.

I am an underemployed writer who won't be owning my home for quite some time (if I ever manage to). Discussing mortgage deductions is about as relevant to me as discussing the yacht tax.

Posted by Robert Nagle | September 3, 2007 9:37 PM

One of my b-school profs actually encourages young investors to buy on the margin which allows you to increase your diversification because you have an equal amount of money invested over the years. they call them "retirement mortages".
http://www.law.yale.edu/news/1826.htm

Posted by djslippyb | September 3, 2007 10:11 PM

Homeownership is encouraged to make sure economics and democracy are properly aligned.

That's all well and good, but this still doesn't say why government needs to "encourage" the consumption of owner-occupied housing -- especially via massive tax code subsidies as is currently the case. I mean, if it were a matter of, say, having a 30% home ownership rate vs the actual 69%, the mortgage interest deduction might make more sense. But there are plenty of good reasons to own a home entirely independent of the government cash involved, and countries whose governments subsidize home ownership to a lesser degree than ours (Britain, for instance) enjoy home ownership rates comparable to ours.

Thing is, it's not even clear the tax code actually boosts the ownership rate, because that's not the same thing as boosting the consumption of owner-occupied housing (which current policy most assuredly does accomplish). I think it's entirely possible that the increase in the consumption of owner-occupied housing observable in increases in average home size and amenities (and, of course, price) largely cancels out hoped-for gains in the ownership rate (especially in areas where the subsidized increase in demand can't easily be accommodated by new inventory).

What we should be asking ourselves is: is the cost of the tax subsidies and attendant misallocation of capital justified by the extra (say) three points of home ownership we may (or may not) gain as a result.

My guess would be "no."

Posted by Jasper | September 3, 2007 11:49 PM

We have the mortgage deduction because so many voters own homes. people own homes for all the reasons cited above: You get something you can sell for all those mothly payments, you can control your life, etc. I don't think many people buy homes becaue of this nifty deduction you get, especially since it's cancelled out by the property taxes you pay.

Posted by cw | September 4, 2007 1:07 AM

As a well-salaried renter I've always despised the mortgage deduction, and I'll be REALLY pissed if my $30k of standard-deduction federal taxes goes to bail-out the "a (insanely over-priced) house is a great investment" crowd. But that's the way pandering democracy works.

Posted by miguel | September 4, 2007 3:27 AM

Does anyone know what the distribution of home-ownership is relative to income level? I'd be curious to know if the subsidies which are provided to home owners are progressive, regressive or about a wash.

Posted by TW Andrews | September 4, 2007 10:25 AM