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The bottom line
...off the top of my head, I cannot come up with any reason to subsidize mortgage indebtedness. How does your having a mortgage loan benefit me? Does anyone have an answer for that? Bueller?
I think that mortgage subsidies emerged pretty much by accident. The income tax deductibility began when hardly anyone paid income tax, and it has been grandfathered in ever since. In the 1930's, government decided to reshape the mortgage market, and that effort evolved into government agencies, such as Fannie Mae, FHA, and Freddie Mac. Fannie and Freddie were subsequently spun out to private shareholders as government-sponsored enterprises, but Congress never let the GSE's forget that they had a "mission" to provide subsidies to low-income borrowers.
That's Arnold Kling. I'll add two complementary points. First, higher investment in homes may bring negative externalities through climate change. Second, home ownership apparently makes a laborer less geographically mobile and increases the severity of business cycles and real shocks.
Posted by Tyler Cowen on September 13, 2008 at 07:12 AM in Science | Permalink
Comments
I cannot come up with any reason to subsidize mortgage indebtedness. How does your having a mortgage loan benefit me?
I'm going to assume that owning a home, even with a mortgage, is considered to make people happier. Governments that don't make people happier generally don't get re-elected, therefore...
Posted by: Tom West at Sep 13, 2008 8:00:56 AM
Home ownership theoretically makes people more committed to their neighborhoods, more civic-minded and willing to work harder for local improvements, because their financial stake in it is greater. If a neighborhood declines and property values along with it, renters can pick up and move without financial loss but homeowners can't, so they would be more willing to take steps (neighborhood watch, involvement in local politics) to prevent the decline from happening in the first place. So greater rates of home ownership should produce an "ownership society" associated with greater levels of Putnam's social capital.
That's the theory anyway.
Posted by: at Sep 13, 2008 8:25:29 AM
The other thing is that mortgage repayment obligations serve as a forced savings program for people who would otherwise lack the self-discipline to save and invest their earnings rather than spending it all. It helps turn people into diligent worker bees instead of dissolute layabouts.
Again, that's the theory.
Posted by: at Sep 13, 2008 8:28:45 AM
I'd love to see all home-buyer subsidies phased out over 10 years, but I fear this is an incredibly fringe position.
Posted by: odograph at Sep 13, 2008 8:52:30 AM
If one applies the property rights theory of Grossman, Hart and Moore, one can conclude the home owners are more likely to make non-contractible investments in the community because they are the residual claimants. For instance, they have more incentive to paint house numbers on the curb and take other actions that increase the value of the community as compared to renters (or landlords). This is a positive externality, though probably a relatively small one.
Posted by: A student of economics at Sep 13, 2008 8:56:07 AM
Student: There is one major problem with that line of argument. In a renters society someone still owns the property and still has a vested interest in improving the community.
From personal experience and accounts of other renters the community is a big factor in determining which property to rent. They/I were even willing to pay a premium on rent to live in a safe neighborhood, with nice aesthetics, etc.
Posted by: Jay at Sep 13, 2008 9:18:45 AM
Home subsidies have an additional negative externality: They push home prices up.
Posted by: Mercutio.Mont at Sep 13, 2008 9:35:48 AM
Tom West: beer, pornography and video games make people happy as well. Should the government subsidize those also?
Posted by: Ninja Zombie at Sep 13, 2008 9:37:41 AM
Mercutio:
Along the same lines, another externality is that many household's investment portofolio is undiversified, overly exposed to real estate and further overly exposed to one location on the face of the Earth.
Posted by: Jay at Sep 13, 2008 9:52:36 AM
Jay;
Get out in the real world.
I. Examine neighborhoods of mostly renters and neighborhoods of mostly owners.
II. Examine the quality of repairs and renovations and landscaping in rental properties vs owner occupied.
III. Rethink your comment.
Posted by: RobbL at Sep 13, 2008 10:02:12 AM
It's accidental. Originally, all interest payments were deductible, on the grounds that all interest received was taxable (it's the "what is income?" question). Then the real estate lobby managed to keep mortgage interest deductible even when other interest payments stopped being deductible. And yes, it's indefensible.
Posted by: jim at Sep 13, 2008 10:09:03 AM
I fail to understand your claim of a climate change negative externality. Even if Person A doesn't own a home, he has to live somewhere. Is this an implied distinction between owned homes vs rented apartments - smaller living quarters and thus less energy consumption?
You cite mobility as a positive but I see transience as a potential negative. Depends on the character of the renter.
Posted by: meter at Sep 13, 2008 10:12:10 AM
First, higher investment in homes may bring negative externalities through climate change. Second, home ownership apparently makes a laborer less geographically mobile and increases the severity of business cycles and real shocks.
Are these mobile renters using electric U-Hauls? If not, doesn't their mobility partially or completely offset their reduced GHG emissions from apartment living?
Posted by: Bob Murphy at Sep 13, 2008 10:15:16 AM
... but I fear this is an incredibly fringe position.
Welcome to my world. But then, it was once fringe to favor income taxes, so chin up!
Regarding Arnold's question, assuming he is already a homeowner and likes to see the value of his home increase: "pecuniary externality". But lots of caveats and cost/benefit = ?
Posted by: Eric H at Sep 13, 2008 10:17:35 AM
"How does your having a mortgage loan benefit me?"
If you are really looking for the positive externalities, the productive from in which to put this question is "How does my equity in the house I live in benefit you?"
I have had that equity for most of my adult life. It has benefited me considerably (I bought houses other people did not want,and sold them on at profits). The only external benefit that I can clearly identify was that one purchase prevented a whole early 19th Century street (now an expensive place to live)from being demolished by the local authority as derelict.
Can anyone relly find a more plausible generalised externality?
Posted by: Diversity at Sep 13, 2008 10:20:57 AM
Second comment hits the nail on the head. Home ownership is thought to promote a large number of socially desirable actions, and some politically desirable ones (like not being a revolutionary). Hence, there is some justification to the binge in home construction.
Also, regarding labor market flexibility: True, but we have annual household creation of a bit over a million per year, plus the normal number of people that move (no idea how many?). Shouldn't this be enough to balance out wages in most areas on average?
Posted by: Robert Olson at Sep 13, 2008 10:33:27 AM
Subsidized mortgages provide systemic support for individual and family-centric home ownership and personal land property ownership. Depending on how broadly the incentives go it could also support limited-ownership rental property investment. This would also create mostly small-holding property companies, local or regional in scope, instead of vast rental corporations.
Subsidized mortgages combined with tax laws provide a disincentive for Wal-Property style mega rental builder/owner corporations.
Is this true in the data? What's the ownership/renter split?
Posted by: The other Eric at Sep 13, 2008 10:45:03 AM
We are wondering why some people like to use other people's money to enrich themselves? This is a mystery?
Posted by: Yancey Ward at Sep 13, 2008 12:05:37 PM
Home owners are much more likely than renters to use their own labor in upgrading their property so it increases the amount of labor and production in the country even if it does not show up as GDP, but as capital gains when the house is sold. That is it acts as an incentive to work, just as a tax cut does.
Posted by: Joan at Sep 13, 2008 12:34:16 PM
RobbL,
Since most people can afford to buy a home, (given the huge subsidies for them and tax breaks), neighborhoods of renters are one of two things: young or poor. Not young like newlyweds, because newlyweds buy their first home. Young like college kids.
So, you have to control for the fact that college kids don't care about that stuff and don't want to own a home and you can't change either of those preferences by dropping prices by half.
And you have to control for the fact that poor people can't afford to fix up the neighborhood whether they own or rent and tend to have other problems that will affect the neighborhood that aren't going to go away just by subsidizing their mortgage.
Anecdotal neighborhood evidence is nice, but there is a reason that people use control variables when they turn anecdotes into data.
Posted by: anecdotes have no controls at Sep 13, 2008 12:45:00 PM
Joan: do landlords ever put work into their buildings?
Posted by: liberty at Sep 13, 2008 12:46:30 PM
The question is really far more general than that. How does someone else's debt benefit me? There are many ways. It unlocks wealth that is otherwise trapped in assets. It enables expansion of capital intensive business. It enables the debt market which provides another investment vehicle. Many small businesses are actually funded by loans on the proprietor's residence. Much lending would be driven to internal sources and much less money would be made available on the market without it. Borrowing to invest would make much less sense. It would also present another tax avoidance incentive since borrowing on deductible assets would then be diverted towards nondeductible assets. Real property is a productive asset despite assertions to the contrary.
Posted by: Lord at Sep 13, 2008 1:03:20 PM
None of my economic actions are taken to benefit you, or anyone else but me. And you are free to determine what is a benefit to you. It is a slippery slope otherwise.
It is fashionable to pile on to home ownership, now that there is a credit crisis. But those zealots should try living in a renter's society, such as Sweden. There is no culture of ownership there, a very high concentration of wealth, and a decaying society which is being overtaken by the unassimilated. It is a society that most Americans cannot imagine, and most have an uninformed and benign view towards. There are good examples you can find, of the tragedy of the commons writ large in the world, as long as you can put aside your PC attitude.
Posted by: Richard Whitney at Sep 13, 2008 1:12:56 PM
Mr. Whitney,
have you looked at the Gini coefficients for the US vs Sweden lately? The USA is one of the worst countries in the industrialised world when it comes to wealth inequality. But you're right about it being a society that most Americans cannot imagine. I mean, universal healthcare? C'mon...
Posted by: C Solberg at Sep 13, 2008 1:41:06 PM
Robbl:
Like anecdote said there is a huge selection bias with what you are looking at. If Bill Gates rented rather than owning his home would be just as nice.
American's have this disease that makes them think they are best off with 70% of their savings in a single home and 30% in the 401k. Further legislation like "no recourse" and "capital gains exemptions" people are willing to be undiversified to seek out tax free returns with the losses socialized.
If you look at equity withdrawal in Southwest Florida, right after prices began to fall homeowners took out as much cash as they could, and are now just defaulting on their mortgage payments. Normally this behavior would be considered criminal. Instead we are hearing calls for moratoriams on foreclosures so these opportunist can live rent free for a few more months.
Posted by: Jay at Sep 13, 2008 2:09:49 PM
