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Homeownership should not be subsidized
Home ownership policy of the Bush and Clinton administrations was, in essence, an attempt to pay low-income people to make a risky investment that they would otherwise rationally avoid. I cannot understand why anyone would think that such a policy would be sensible. In some cases, these people will do well and enjoy the upside of their investment, but in other cases they will do poorly, with the result that they will be worse off than ever.
That's Eric Posner. You'll note that Henry Paulson has been calling for the mortgage agencies to be resurrected as "public utilities" of some sort. I don't understand this path. There is a very good (modern) liberal case against more home ownership: behavioral economics is true, people overestimate their prospects, poor people shouldn't take too much risk, and the natural market tendency is too much home ownership, not too little. That's without taking environmental issues into account.
Here is a recent Richmond Fed article, skeptical of the idea of homeownership subsidies.
Posted by Tyler Cowen on January 10, 2009 at 06:32 AM in Economics | Permalink
Comments
Thanks for the Richmond Fed link. I had not realisedtah tsomeone had managed to quantify the correlation between higher home ownership and higher unemployment.
Although I am over-invested in real property, I am all in favour of shifting more of the tax burden onto real propeerty ownership. To tax home ownership to a worthwhle extent you have to increase the tax burden gradually because real property investment is so illiquid; and you probably have to allow the elderly to acumulate unpaid tax as a charge against the property (just sell bonds secured on those charges to square the accounts of the taxing government). Nevertheless, making the shift looks more and more economically desirable.
Posted by: D iversity at Jan 10, 2009 7:45:23 AM
Federal efforts to coerce lower-income, higher-risk people into homeownership go back way further than Clinton -- all the way to the mortgage guarantees of Title II of the Housing Act of 1949 (which was the flip side of Title I's "urban renewal" catastrophe).
And that's not including ancillary programs such as the Interstate Highway system, etc. -- all of which, taken together, have been making "not owning a house in the suburbs" a patently irrational act for over two generations.
Posted by: KipEsquire at Jan 10, 2009 8:22:32 AM
I consider myself "liberal" and agree that homeownership isn't for everyone.
Posted by: meter at Jan 10, 2009 9:03:50 AM
On the other hand, buying a house is often the only 'forced savings' that many people have. I'd love to see the statistics, but I suspect that for a lot of people somewhat above the bottom, the home is the only asset of any worth they have, and if they didn't have the home, they would have *no* assets.
Admittedly, there is some risk, but it has two advantages. One, it's useful while the investment is being made and two, it's illiquid, making it hard to plunder the savings.
Of course, point number two is somewhat weakened by the ease (in fact the pressure) to pull the equity out of one's home nowadays. Oh for the days when the shame in encouraging people to do self-destructive acts often outweighed the lure of the profits to be made in doing so.
Posted by: Tom West at Jan 10, 2009 9:04:16 AM
I have a different point; I don't understand why we assume that cost of building a house is fixed and is the same for anyone who is on the market. Why is there no option for some to build something cheaper or more specifically why are the builders not catering the market for lower cost homes. Do not stigmatize low cost housing, it does not have to be a shack, you can build homes good enough with lower costs than the homes on the market right now. Having such houses on the market would probably give someone with lower income but with genuine desire to own a home to take advantage of the opportunities given by the government and at the same time not over reach by buying comparatively expensive home. But my guess is, anyone who reads this is going to interpret as someone building inferior housing for poor and therefore putting some kind of social stigma on them. I don’t think there is enough debate on this angle of housing either in public policy space or outside.
Posted by: JAK at Jan 10, 2009 9:09:24 AM
I looked at the title and thought you were going to attack the IRS rules on deducting home loan interest. But I guess subsidizing home ownership is fine for the wealthy and middle class, who always are economically rational and make wise decisions, but not for the poor, who aren't? (Seriously, I think Tom West has a good point.)
Posted by: Bill Harshaw at Jan 10, 2009 9:18:35 AM
I am for encouraging home ownership and I agree with @Tom West regarding the forced home ownership issue.
The big problem is the ease with which people can pull equity out of their homes.
I think a better policy would address this issue so that it is easier for poor people to buy a home, but it's harder for them to pull the equity out.
I'm not saying the above will solve the problem we have today, but buying a home is still a good way for the poor to save money, but making liquid assets available to them when they have temptation to use and abuse them ,given their risk profiles, is not.
Posted by: Robert at Jan 10, 2009 9:19:07 AM
From a financial perspective this argument makes sense -- and that's leaving out the important point that home ownership makes people less mobile and, so, less able to move to pursue a new job.
But part of the rationale for encouraging home ownership is that home owners behave differently than renters--greater commitment to a neighborhood and community, more likely to care for the property, and so on. Would you be eager to buy a home in the midst of a neighborhood of rental houses?
But is there any empirical evidence to show whether home ownership actually engenders these pro-social attitudes and behaviors? Or are people who already have these characteristics more likely to buy homes in the first place?
Posted by: Slocum at Jan 10, 2009 9:37:30 AM
There is a very good (modern) liberal case against more home ownership: behavioral economics is true, people overestimate their prospects, poor people shouldn't take too much risk, and the natural market tendency is too much home ownership, not too little.
That's Barney Frank's point of view, as quoted in the most recent edition of the New Yorker:
“There are people in this society who don’t have enough money to be homeowners, and there are people whose lives are not sufficiently integrated for them to take on the responsibility to be a homeowner. And we did too much pushing of people into inappropriate mortgages and into homeownership.” [Frank] said that many people would always be renters, and that there was nothing wrong with this. “We need to get back in the business of building rental housing and preserving the housing we have,” he said.
The article also quotes Ed Glaeser, whose views are closest to my own: namely that more housing is needed in expensive coastal cities if housing is to be made more affordable. That's a tangential issue from the one being discussed but still of interest to me.
Posted by: Jake at Jan 10, 2009 11:04:56 AM
Everybody seems to have hopped on the Steve Sailer bandwagon as to the causes of the subprime meltdown.
Posted by: J at Jan 10, 2009 11:05:17 AM
So Steve Sailer turned out to be right all along.
Who knew?
(Anyone with eyes and an unpolluted brain)
Posted by: maciano at Jan 10, 2009 12:44:48 PM
Over the last 25 years I've "owned" 4 houses. Two of them made more money combined when sold than the two losers combined lost. Now I am a very happy renter. My (good) landlords take care of any problems (very few) promptly and I save money by not owning. Money I invest in other ways.
I have more flexibility as a renter and acquire less stuff (i.e., save money) as a result. However, it is very difficult for people to resist the lure of "owning your own home."
But if you want to buy, it is good to keep a few things in mind:
1) We never "own" anything; we are all renters. And this is especially true for those who live in residences that are really owned by a mortgagee, i.e., a bank or investor. Most home buyers are buying on margin. And when you buy a depreciating asset, unless the economy is deflating you are better off paying cash. The rise of mortgages (easy money) in the 20th century helped inflate real estate values.
2) In real estate you make your money when you buy, not when you sell.
3) Are you sure buying is less expensive than renting when you factor in repairs, taxes, insurance, lost opportunity cost, and maintenance? The hidden costs of buying are easy to overlook during the excitement of buying.
4) What happens if your neighborhood and neighbors turn out to be annoying, inconvenient, etc.? It's usually easier and less expensive to find a new place to rent than to sell and buy a new place.
We should stop subsidizing overinvestment in real estate.
Posted by: at Jan 10, 2009 12:50:05 PM
I'd be interesting on seeing another post on the externalities associated with homeownership, particularly the positive ones. I'd be most interested in hearing about education: seems that homeowners would be more involved in PTAs and the like
Also, if you're (you in a general sense) a proponent of index funds, I don't see how you can reconcile that with using the home as an investment. It's pretty much analogous to putting all of your money into Microsoft and hoping like hell Google's cloud computing
Posted by: Robert Olson at Jan 10, 2009 1:59:05 PM
Last part cut out: Hope that Google's cloud computing fails.
Houses aren't guaranteed investments. Too risky.
Posted by: Robert Olson at Jan 10, 2009 2:00:19 PM
"buying [a house] is often the only 'forced savings' that many people have"
This argument also gets made each day by thousands of whole life insurance salesmen.
My own suspicion is that zoning will be eased so McMansions can be turned into duplexes, allowing mortgages to be met. More on this idea, which has a wartime precedent:
http://mikekr.blogspot.com/2008/12/silver-lining-for-skaters.html
Posted by: ZBicyclist at Jan 10, 2009 2:06:23 PM
Sigh. Has anyone considered the signaling value of encouraging homeownership?
But seriously, policies to encourage home ownership in the USA go back to, well, the Homestead Act. We're settlers here. We want to settle, we want others to settle. We find all kinds of excuses to settle.
Even tho', ironically, Americans used to like to move, until about 2006 we moved all the time:
"As a nation, the United States is often portrayed as restless and rootless. Census data, though, indicate that Americans are settling down. Only 11.9% of Americans changed residences between 2007 and 2008, the smallest share since the government began tracking this trend in the late 1940s."
Or maybe we encourage homeownership precisely because we are uneasy about all this American mobility?
Posted by: StreetWalker at Jan 10, 2009 2:37:18 PM
Americans have been biting off more than they can chew for a long time.
But the fact is somethings are worth biting more of even if you end up spitting it out.
Think entrepreneurship, think education, think children, think R&D.
If we let the natural levels of those items be as they should, we'd have:
Fewer bankruptcies, fewer dropouts, fewer rotten children, and so on.
On the flip side, we'd also have fewer innovations, fewer educated citizens, fewer future geniuses, and fewer inventions.
So does helping the poor buy homes, even if they are at higher default risk, help society or not?
Standard, and flawed, economic analysis may say it doesn't, but it fails to take into account all the benefits that come with home ownership like improved responsibility, forced savings, improve community relations, and so on. These things are not easy to measure, but intuitively, anyone who has rented versus owned a home knows that these things exist. Just because economists cannot measure them does not mean that they do not.
So do the benefits outweigh the costs? I would say they do. Bubbles always lead people to second guess policy decisions even when it is far from clear that those policies were primarily responsibly for the bubble in question.
Lastly, I imagine that many small business will start going out of business soon. Perhaps Tyler will pen a piece about how we should stop supporting small businesses!!
Posted by: Robert at Jan 10, 2009 3:10:14 PM
Subsidizing home ownership isn't the problem. The tax breaks that have been available to home owners for decades are a direct subsidy to encourage people to invest in real property in which you build equity instead of flushing it down the toilet in rent. That policy has been highly successful.
The problem came from the lowering of qualification standards for the loans. It is one thing to encourage purchase, it is another thing to disregard the credit history and earnings of the borrower. This is where the mistakes were made. This was not helping the poor, it was helping the lender make a quick profit. That was the logical outcome of the "deregulation culture" that dominated the scene beginning with Reagan and reached it zenith during the G.W. Bush administration.
Deregulation isn't the answer to the problem, it is the problem!!!!
Posted by: Perry Young at Jan 10, 2009 3:28:02 PM
Subsidies inevitably raise housing prices since they increase demand. Look at Vancouver, where it costs an average of 70% of a family's income to own a home. That's not sustainable, nor is it positive in any respect whatsoever.
Posted by: Renee at Jan 10, 2009 3:38:45 PM
The tax breaks that have been available to home owners for decades are a direct subsidy to encourage people to invest in real property in which you build equity instead of flushing it down the toilet in rent.
The "tax breaks" are only available in substantial form on the interest charged on mortgages. I can see where that might encourage borrowing. Also inflated house prices. Whocodanode.
Of course, property tax is given a similar "tax break" for federal income tax purposes. And that was great for local governments when values were going up. I understand many home "owners" are not so happy now that their "forced savings programs" have left them with decreased values and little or no "savings."
One of the results of all this "encouragement" and subsidization is the financial mess we now have. Subsidizing certain activities results in economic distortions. I'd rather see a flat tax or a tax on consumption.
And I don't consider my rent as "flushed down the toilet" (that is real estate agent BS). Renting a house or apartment is a fair exchange of green paper for a place to live. Viewing rent as merely "flushed down the toilet" will also be news to all the businesses that rent office and warehouse space instead of buying or owning it.
But then I'm not a realtor....
Posted by: at Jan 10, 2009 5:06:53 PM
Sigh. This is why a lot of people that I know think of this as a distinctly second-rate blog. The idea that the CRA was to blame has of course been thoroughly debunked, to name one example where this meme manifests. I think, in fact, that Perry Young's comment is the predominant view among economists. And no, Glaeser is not 'respectable', he's a thoroughgoing crank that happens to spout the party line(he's the zoning guy, right?)
Or was by intent a red-meat post?
Posted by: ScentOfViolets at Jan 10, 2009 5:13:51 PM
What about the gigantic REMAINING subsidies for home ownership?
* Mortgage interest tax deductible
* Favorable treatment for family home in bankruptcy
* Exclusions for capital gains on sale of family home
There are probably others.
Posted by: zbicyclist at Jan 10, 2009 5:15:01 PM
Lastly, I imagine that many small business will start going out of business soon. Perhaps Tyler will pen a piece about how we should stop supporting small businesses!!
Dumb, dumb, dumb. Tyler didn't say stop buying real estate. He suggests we stop subsidizing it.
Ai yi yi!
Posted by: at Jan 10, 2009 5:17:09 PM
Sigh. This is why a lot of people that I know think of this as a distinctly second-rate blog.
Thank goodness you came along and cleared everything up for those of use who read second rate blogs. Until your comment, we were all just misinformed boobs.
Your thorough debunking and predominant views are very much appreciated.
And you have certainly raised the level of commentary here.
Gosh, I wish I knew a lot of the people you know. (Philosopher kings all by any chance?) Gosh!
Thank you!
Posted by: at Jan 10, 2009 5:45:09 PM
Sigh. This is why a lot of people that I know think of this as a distinctly second-rate blog.
It would not surprise me if you are a big fan of the world's most obnoxious blogger. Or maybe you are the world's most obnoxious blogger.
Then again, you may be a distinctly second rate obnoxious blogger.
Sigh.
Posted by: at Jan 10, 2009 5:55:10 PM
