Stop Encouraging Homeownership

fiscal policy, homeownership, mortgage finance, U.S. Treasury
"Rent or Buy," by Home Water Softener Reviews, CC BY 2.0

Rent or Buy

Last month, the Treasury Department announced new steps to boost the market for private mortgage bonds, not backed by the government or any federal entity, in order to increase homeownership and improve access to credit for working-class Americans who might be having trouble borrowing money to buy a house.  The Administration's latest effort to boost the market for private mortgage lending begs an essential question:  What are the societal benefits to homeownership, and would more investment in homeownership help the economy?

It's a long-discussed question, of course.  The pro-home-building folks aver that homeownership fosters civic involvement and helps people become more tied to their community, which encourages other behavior beneficial for the economy.  And for a good proportion of homeowners the majority of their net wealth is in their home, so it can be an important source of savings.

But another way to look at it is that correlation is not causation:  The reason that homeowners are more civic-minded and involved in the community is because such people are much more likely to have the wherewithal to save enough to make a downpayment on a house.  Ed Glaeser, the renowned housing economist from Harvard, puts little stock in the notion that homeownership has significant positive societal externalities.

What's more, there's some evidence that high homeownership rates have downsides as well.  In the last four decades the predilection for moving has slowed significantly:  only half as many people moved across state or county lines in any year this decade as was the case in the 1950s, for instance.  This is problematic because it means that our economy is worse at matching up workers with where the available jobs are.  The lingering unemployment in many rust-belt states would be less if some of their unemployed could be persuaded to move to another community where there are jobs.  There has been a decades-long move of people from the midwest to the Sunbelt, of course, but the data suggest there's ample room for more.  This hasn't happened in part because people are tied down by the homes that they own and are reluctant to sell while they are underwater.  That people are unable to ignore sunk costs isn't economically rational, of course, but it nevertheless governs how many people consider whether to move.

In other words, an argument could be made that instead of taking measures to boost homeownership, a better approach to jumpstarting the economy might be to reduce incentives to homeownership and let the proportion of people who own homes fall.  There's no reason to think that lower homeownership rates would reduce spending on housing:  people have to live somewhere, and fewer home owners would simply mean more renters.  If the average size of a family's home shrinks slightly because of it, it's hard to see what the harm would be in that — home sizes increased by one-third from the 1980s to the early 2000's, so it's not like we're returning to the world of tenements.  The net result of pulling back on homeownership incentives would be that new families would wait another year or two before buying the home that becomes their family home, and fewer singles would buy — salutary developments, I would argue.

And I’m morally obligated here to point out that the costliest incentive for homeownership — the mortgage interest deduction — does absolutely nothing to increase homeownership rates, since only the wealthiest third of all households can avail themselves of its benefits.  The amount of the tax subsidy from the deduction that goes to homeowners in Greenwich Connecticut is an order of magnitude greater than the benefits for people in Mossville, Illinois.

Above all else we need to help policymakers get away from this mindset that our ample housing subsidies benefit the economy by creating jobs building homes.  Demand-side fiscal incentives — and that’s 90% of the current political arguments for housing subsidies — are a chimera.  If we spent less on housing we'd spend more somewhere else in the economy.  This notion that the economy consists of various silos — like housing and autos — and that a reduction in any of these is an unmitigated bad thing is a lousy way to approach how an economy works.  The more we spend on building new houses the less money is available for investments in things that might actually boost the productive capacity of an economy.  In other words, the demand-side incentives of housing may reduce the productive capacity of the economy (the supply side of the economy) and with it long-term economic growth.

There's no disputing that our capital markets aren't working efficiently at the moment.  Some of this has to do with the collective shell shock many financial institutions still have over the financial market implosion in 2008.  However, government activities like the passage of Dodd-Frank, the management of Fannie Mae and Freddie Mac, the attempt by the CFPB to wipe out title and payday loan companies (with not a few installment loan companies caught in the crossfire), and the punitive fines assessed on various banks for their alleged misdoings (or in the case of the Bank of America, for simply doing what it was asked to do by the government) have left banks extremely hesitant to make anything but the safest loans.  It's hard to see what the government can do to convince lenders they won't be accused of exploiting borrowers with poor credit risks again if there's another recession in the near future.

Capital markets need better and smarter regulation, but the fact that homeownership rates are falling is not a reason to act.

  • I will suggest a bit of a paradox. Either in time series data for the US, or comparing various metropolitan areas, it looks to me like housing demand is inelastic enough that the way to spend less on housing is, ironically, to spend more on residential investment. The way to reduce the proportion of personal consumption expenditures going to housing is to build more houses. Look at San Francisco. The proportion of the median household's income going to housing there keeps rising – because they refuse to build houses. Because houses are capital, this all plays out as transfers of economic rents to existing owners of real estate. That is the drag on our economy for the last 20 years. Our most productive sectors are located in our housing-constrained cities, so every time you click on a Google ad, a micro-penny is transferred to San Francisco real estate owners who rent studio apartments to programmers and designers for $3,000/month.
    Whether it is through owner-occupiers or renters, to reduce our spending on housing, we need desperately to build.

    • I would agree, but Kevin, look at the 405 in LA. Building a ton of houses between it and the sea is certain to make it more difficult to get anywhere in a reasonable time. The 405 is a bad joke. Same for the 5. Without serious infrastructure efforts, it will just make a great big mess. Same with SF. Do you drive in SF?

    • One more thing, Kevin, most of the houses built would be bought by investors and speculators. Perhaps prices would not decrease. Some have said that price reduction is a libertarian fairy tale.

  • mulp

    Based on home ownership incentives from the 60s, I bought and paid off the debt on my home within 15 years and now pay no rent nor interest to banks and face no threat of foreclosure. I do owe property taxes which pay for the public services that make my property valuable, starting with the roads to get to it, and the schools and fire and emergency services and police. And all housing are in a constant state of decay, so I do need to periodically invest to maintain the built capital asset.

    What tanked the economy was the idea that housing increases in value instead of constantly decaying in value. The apparent increase in value has resulted from attempting to make life cheaper by cutting taxes. This means government spends less on roads, schools, emergency services, police, by setting zoning requirements forcing the home builder to bundle all those public service costs into the price of a new home. Thus rental housing is blocked in most parts of the US unless the rents are in the thousands of dollars per month.

    If you buy no house, you are forced to rent in old housing that is mostly in cities were the poor live and the tax revenues do not pay for good public services.

    In North Dakota where the jobs were, rents were extremely high for small spartan living accommodations unsuitable for families. The government's knew to block new housing based on previous mining booms that led to lots of public service investments that became unaffordable burdens in less than a decade.


    To argue that renting is a better solution is to argue that the cost of renting is free compared to building and ownjng.

    And if you work in the 50% of the economy that gets a share of income from real estate development and related construction, not building and buying means you have less income that you must pay instead for rising rents, so gdp goes down, not stay the same or goes up.

    Zero sum – the money you spend building a home is labor income for the workers, so renting existing housing puts workers into unemployment.

  • W. Ferrell

    Excellent article.

    Isn't there an irony that Canada has not engaged much in the various subsidies to home-ownership and presently has a higher proportion [than the US] that own homes?

  • So, here is the problem, in Germany, home ownership is low, low 40 percent. But deflation is gripping Europe. Perhaps Germans should buy houses. The Italians and Spanish and Greeks think the Germans are poor because they don't own houses. Lol. I get it when people say that renters should not become overextended through buying houses. But when people buy houses they put a lot more into them than renters do.