The Case Against (Government Subsidization of) Homeownership

I briefly argued on Saturday that public policy bias in favor of homeownership was perhaps a not very good idea. Paul Krugman lays out the argument at greater length today. Clive Crook did an even longer column on this for The Atlantic several months ago. Crook and Krugman are not particularly close to each other ideologically, an indication that this aspect of our policy environment is not motivated by any particularly principled considerations.

Let me just add to this that if you look at homeownership rate by state it's clear that a super-high rate of homeownership is neither a sign of economic vitality nor something that creates economic vitality.

Comments

Crook and Krugman are not particularly close to each other ideologically, an indication that this aspect of our policy environment is not motivated by any particularly principled considerations.

What people want is not a "principled consideration?" There are advantages and disadvantages to both owning and renting, but most people seem to fundamentally prefer to own their home rather than rent it. It's hardly surprising that our public policies tend to reflect that preference.

Posted by Mixner | June 23, 2008 2:06 PM

Those 2007 numbers are probably pretty near the peak of the bubble. If you figure that ownership % will revert to something similar to what it was in 1990, then DC, NJ, and CO will be feeling a lot of pain.

Funny that ND, PA, and MN all decreased their ownership %.

Posted by daveNYC | June 23, 2008 2:09 PM

It may not create economic vitality in and of itself, but a high rate of homeownership is certainly not a bad thing in and of itself, either.

The real question is whether or not preferential tax treatment for homeownership, in the form of the mortgage interest deduction and the tax exemption on the proceeds from the sale of a primary home (up to $500,000), is a good thing. If I had my druthers, I would repeal the mortgage interest deduction, but keep the exemption on sale proceeds.

It won't happen, of course, because it's a maxim of Washington that any special provision in the tax code becomes viewed as a god-given right by those who benefit from that provision. The realtors, the homebuilders, and whatever Astroturf lobby groups they create will lobby like hell to defeat any attempt to repeal. When you realize that the quest for tax code reform has to go up against thousands of such entrenched interests, not the least of which will be the lawyers and accountants who reap billions every year interpreting the complexities of the code for their clients, you tend to despair that any change is possible.

Posted by Claudius | June 23, 2008 2:13 PM

"then DC, NJ, and CO will be feeling a lot of pain."

Don't know about DC and NJ, but Colorado's increase in home ownership can be attributed to the fact that the state population has increased by about 50% during that time, and a enormously disproportionate number of the immigrants have been affluent professionals looking for cheaper housing.

Posted by Joe | June 23, 2008 2:18 PM

There are advantages and disadvantages to both owning and renting, but most people seem to fundamentally prefer to own their home rather than rent it. It's hardly surprising that our public policies tend to reflect that preference.

Couldn't you say the voters with the most clout (older, richer, whiter) are the ones that own homes, so it's not surprising that policies tend to reflect that preference. You've gotta live in a cave to think that personal preference in aggregate leads to public policy. It's largely due to the political power of those that have those preferences vs. the power of those that don't.

Posted by Mo | June 23, 2008 2:19 PM

If the gov't rescinds tax breaks for homeowners, many many homeowners, myself included, will be forced to sell because we can't afford the house without the tax breaks.

If they pull the bait and switch on this one, it would be an utter disaster all across the country. On top of the disaster they already caused by artificially lowering rates to prop up George Bush's economy - which has now caused a bubble to burst and our home prices to DROP!

Homeowners are getting fucked enough as it is.

Posted by Homeowner | June 23, 2008 2:20 PM

I thought Krugman raised the issues in a helpful way. I still have a nagging thought, though, that these issues are not at all fairly captured by what Matt wrote the other day, that opposition is about certain entrenched commercial interests. The negative impacts can't fall just on real-estate magnates.

Without the tax break, demand for homes would fall, and thus so would prices. Thus, homeowners, too, would take a hit. I don't want to put this in terms of my own special needs, but my own first reaction was that, oh, heck, there goes my main asset down the tubes after years of paying for it and hoping to rely on something like that approaching retirement. If states average, as would seem, about 70% home ownership, a lot of others must feel the same way.

In addition, high as housing prices are, one reason I bought was that rentals in New York are so huge (well above twice my monthly maintenance). Thus, it's not obvious it'd make a metro region more affordable either. In sum, I'm not saying Krugman is wrong and want to know more, but Matt's case that it's undemocratic sure needs more careful argument.

Posted by John Haber | June 23, 2008 2:20 PM

It won't happen, of course, because it's a maxim of Washington that any special provision in the tax code becomes viewed as a god-given right by those who benefit from that provision.

It won't happen because politicians would (rightly) fear the wrath of middle-class homeowners when the sale price of their homes takes a sudden and dramatic fall, because the financing is no longer subsidized.

Posted by Brad L | June 23, 2008 2:21 PM

If I had my druthers, I would repeal the mortgage interest deduction, but keep the exemption on sale proceeds.

Claudius, being a flat taxer myself, I agree, but the problem is that removing the interest deduction will reset home values across the board, and so people will never go for it. The fact that the gov't is "helping out" with mortgage payments by providing a deduction boosts the price of a home. People would be looking at it as a reduction in the value of their single biggest "investment", and they'd be screaming bloody murder.

Perhaps a long-term phase out of mortgage interest deduction, like maybe 30 years, could be remotely possible, but I wouldn't bet money on it.

Posted by LFC | June 23, 2008 2:23 PM

I don't know if this point was made in the prior thread, but the most compelling argument I have seen for subsidizing home ownership is that people tend to increase consumption more quickly in response to increases in wealth in the form of home equity as opposed to increases in wealth in the form of other assets such as stocks. So, encouraging a shift of some wealth from things like stocks to home equity can help moderate the risk of deflationary recessions.

Of course right now this would probably be a really unpopular argument, since arguably policymakers overused this effect recently, leading to the current crisis conditions. But I think it is a sound idea in moderation.

Posted by DTM | June 23, 2008 2:23 PM

"Because the I.R.S. lets you deduct mortgage interest from your taxable income but doesn’t let you deduct rent, the federal tax system provides an enormous subsidy to owner-occupied housing."

This makes no sense. The renter already gets the advantage of the MID because it's passed along by the landlord. You can't subsidize the supply without subsidizing the consumption.

Posted by bjk | June 23, 2008 2:28 PM

Couldn't you say the voters with the most clout (older, richer, whiter) are the ones that own homes, so it's not surprising that policies tend to reflect that preference. You've gotta live in a cave to think that personal preference in aggregate leads to public policy. It's largely due to the political power of those that have those preferences vs. the power of those that don't.

You could say that about anything. Older, richer, whiter people tend to vote more, and be more politically active in general, than younger, poorer, darker people, and so our public policies in general tend to reflect the priorities of the former groups more than those of the latter ones.

Posted by Mixner | June 23, 2008 2:29 PM

If we are going to subsidize home ownership, why is the subsidy exclusively for the money we BORROW? Why not come up with a tax-advantaged saving scheme to encourage people to save up 20% (or more) for their down payments? We do it for retirement and education, and increasingly for medical expenses. Home ownership is the other big thing people should be saving for long before the need arises, so why not a scheme for that?

Posted by M.C. | June 23, 2008 2:36 PM

It seems to me that any discussion of public policy towards homeownership should at least mention possible social benefits of homeownership. There was an empirical paper by Ed Glaeser and Denise DiPasquale from 1999 that provided some evidence that homeowners are more inclined to make various types of investments in social capital in their community. They provided some evidence that this correlation may be in part causal.

If in fact homeownership encourages persons to invest in social capital, which we can see as a public good, perhaps some public subsidy is justified. This does not mean our current public subsidy is the right one, but at least this issue should be raised as part of the debate.

Posted by Tim Bartik | June 23, 2008 2:43 PM

Perhaps a long-term phase out of mortgage interest deduction, like maybe 30 years, could be remotely possible, but I wouldn't bet money on it.

My proposal has been that all existing mortgages as of a particular date remain at 100% deductibility and that the amount on new mortgages drop by 5% each year, but remain fixed for the life of the mortgage. So all mortgages issued in 2008 or earlier stay at 100%, all mortgages issued in 2009 are then 95% deductible, all mortgage issued in 2010 mortgages are 90% deductible, etc. That should avoid triggering too disasterous a collapse in prices.

Posted by Just Dropping By | June 23, 2008 2:45 PM

The easiest way to do this would be to slowly phase it out over the course of a 20 years. Since the value of the tax break after 20 years is small (due to time value of money and the reduced amount of interest), it will have minimal impact. Also, due to the phaseout, people that can barely afford their will still be able to afford their mortgage, since they'll still have the write-down. Since, the value of the break will slowly go down, people's home values won't jump down.

I believe this is how the UK got rid of theirs. Not over such a long period of time, but through a phase-out. The best time to do a phase-out would be now, when interest rates are low and therefor the benefit has the least value.

Posted by Mo | June 23, 2008 2:46 PM

This makes no sense. The renter already gets the advantage of the MID because it's passed along by the landlord. You can't subsidize the supply without subsidizing the consumption.

I might be wrong, but I think the deduction only applies to primary residences, not investment properties. So it could help out a bit for people who rent part of a multi-family home, but not someone who rented a flat in a regular apartment building.

Why not come up with a tax-advantaged saving scheme to encourage people to save up 20% (or more) for their down payments?

You can already withdraw some chunk of change from a Roth IRA in order to use it for a down payment. I forget what the limit was though. Not enough to make a big dent considering the runup over the last few years.

Posted by daveNYC | June 23, 2008 2:56 PM

So all mortgages issued in 2008 or earlier stay at 100%, all mortgages issued in 2009 are then 95% deductible, all mortgage issued in 2010 mortgages are 90% deductible, etc.

This type of phase out would destroy much of the refinancing market (after an initial pop). Not that that's necessarily a bad thing, I'm just pointing it out.

It would certainly influence the decision making of people with ARMs on when to refinance.

Posted by LFC | June 23, 2008 3:12 PM

The familiar mortgage interest deduction is available for a first and second house (but not a third or fourth). If the house is a rental, the landlord can deduct mortgage interest as a business expense.

Posted by Psittakos | June 23, 2008 3:22 PM

I think a time preference for when you signed your mortgage is a bad idea. Doesn't make sense at all to me. It creates large market inefficiencies where a property is more valuable to the owner than to a potential buyer, just because the owner has an older mortgage. It should be a simple phase out. One problem is that you aren't just taking a loss from the time value of the tax break, though. There is a 'natural' market price for homes with and without mortgage deductions and if you own a home you have to absorb this capital loss over the phase out time period one way or another. I don't see any particular reason to worry about taking more of this loss in the first few years, but maybe we shouldn't make this change during a recession, huh?

Posted by mpowell | June 23, 2008 3:38 PM

I think the value of the mortgage interest deduction to the average homeowner is vastly overstated. A married couple has to have a pretty hefty mortgage with a very high interest rate and be in the first 5 years of their mortgage for the deduction to actually amount to more than the standard deduction.

To take just one example, in the second year of a $200,000 mortgage at 6% interest, the total interest paid is $10,740.94. The standard deduction in 2007 for a married couple filing jointly was $10,700. Thus, a homeowner in this situation is receiving essentially a subsidy of $40.94 toward homeownership.

Even the owner of a $400,000 home ceases to receive any subsidy in the ninth year of the mortgage.

This is a subsidy that is mostly targeted at the upper-middle and upper class whose houses tend to be a lot more expensive.

Posted by Rob Mac | June 23, 2008 4:05 PM

Often the mortgage interest deduction is smaller than the standard deduction but big enough to allow the taxpayer to itemize (producing an itemized total greater than the standard deduction).

Posted by Psittakos | June 23, 2008 4:28 PM

And a $7,000 personal exemption comes into play for the married couple that's itemizing.

Posted by LFC | June 23, 2008 4:44 PM

You get the personal exemption amount either way, itemizing or taking the standard deduction.

Posted by Psittakos | June 23, 2008 5:02 PM

The framing of the issue is historically incorrect. It used to be that all interest paid was deductible. Until 1986, you could deduct interest on your car, on retail items (as for appliances or clothing) and on your credit card(s).

Reagan did away with that deduction as a back-door way of raising taxes while denying he was raising taxes, and giving a sop to the moralists who felt that debt among the working class was a sign of cultural weakness.

Debt among the investor class remained deductible, however, from interest on money borrowed to buy stock to mortgage interest on the vacation home.

A discussion of doing away with the deduction for home mortgage interest should at least put the topic in full context rather than talking as if a deduction was created just for home owners and there were no other deductions for interest in the tax code.

Posted by west coast | June 23, 2008 6:28 PM

I'm a long-time homeowner, and I've long criticized the mortgage deduction. I know removing it ain't politically feasible, but that describes a lot of what I advocate. It won't ever become politically feasible if people don't bother supporting it on feasibility grounds.

Yes, getting rid of it would reduce property values. I wouldn't mind that too much at all, given that all I would do upon sale would be to buy another property. But for others, this could be addressed by a long phase-out (as LFC suggested) as well as giving back some of the higher tax revenues to the "harmed" homeowners.

Of course, we aren't really harmed when we're just losing an artificial and unfair advantage.

Posted by perfectlyGoodInk | June 23, 2008 11:31 PM

In any case, the proper measure of home ownership is not the number of people who are barely scraping up enough money to make interest payments to the bank. It's actual equity owned in the home.

Every time some fucking neocon gushes about the rate of "home ownership" as proof of our wonderful level of prosperity, Henry George turns over in his grave.

Posted by Kevin Carson | June 24, 2008 4:06 AM