SeekerBlog

An excellent critique of the housing subsidies and their adverse consequences by the Richmond Fed. Excerpts

…Yet, despite the warning of some experts, the federal government continues to play a role as matchmaker in this affair. Policymakers have been promoting homeownership as a goal for most Americans since the Great Depression. Even in the late 20th century, when the number of American homeowners was at historic highs already, the policy initiatives continued to expand. In 1995, when the homeownership rate as measured by the U.S. Census Bureau was about 65 percent, President Bill Clinton made it an explicit goal of his administration to boost it to 67.5 percent by the year 2000. So he enlisted his secretary of housing and urban development, Henry Cisneros, to spearhead a “National Homeownership Strategy.” The policies that resulted encouraged a loosening of lending standards.

…The homeownership rate is about 68 percent now. Perhaps the best policy question is no longer why the homeownership rate in the United States is so low. Aquestion that economists might ponder instead is: Why should we want the homeownership rate to be so high?

…The Downsides of Widespread Homeownership Whether subsidies to homeowners encourage more home purchases or instead simply lead people to buy bigger houses may not matter much. What really matters is that both result in similar economic effects. As Poterba explains: “The general pattern has been that we have invested more in housing relative to other kinds of capital goods than we would in an economy in which the tax system and credit institutions did not tilt the playing field at all.” Simply put, Americans may have overinvested in housing.

…Instead, the current policies produce an economy in which housing investment is generally higher than it would be if government didn’t favor it. And every dollar that is invested in housing stock is a dollar not invested in a more productive use elsewhere. That results in a net reduction in overall economic efficiency.

Nor is it clear that using a home purchase as a primary vehicle for a family’s investment is sound financial advice. Robert Shiller, an economist at Yale University and an expert on national housing markets, has estimated that “from 1890 through 1990, the return on residential real estate was just about zero after inflation.” Throw in the costs of maintenance of the property and it’s easy to see how renting could certainly be cheaper than owning, even if you include the tax advantages. Yet the opportunity cost of those home investments — the foregone investment opportunities elsewhere — go largely unseen.

The costs of owning a home go beyond the financial commitments too. Being tied down to a house tends to make people less likely to leave an area in which employment prospects are deteriorating. After all, terminating a lease is much less costly and time-consuming than foreclosing on a house or selling a home, even if the owner breaks even on the transaction. Economists predict this would lead to a decline in “labor mobility,” the ability for people to move to where the jobs are.

A seminal study by British economist Andrew Oswald of the University of Warwick traced the link between unemployment and homeownership. Oswald looked at the United States, the United Kingdom, France, Italy, and Sweden between 1960 and 1996 and discovered that, on average, a 10 percentage point increase in homeownership tended to correlate with a 2 percentage point increase in the unemployment rate.

Recent studies of European data discover that you don’t see these sorts of correlations in areas with higher concentrations of renters. Renters are simply more able and willing to move away when their community hits the economic skids. In addition, workers who aren’t likely to move from a specific location might create frictions in the markets for labor skills. It’s a cost to the economy when people live in an area in which their skills are no longer valued. But there is a potential personal cost too: The overall welfare of that worker may suffer.

Homeownership also tends to contribute to adverse political incentives. Incumbent homeowners have an interest in keeping their property values high and have been shown statistically to have a bias in favor of land-use regulations. These restrictions limit the number of houses that can be built in any geographic area and, consequently, keep housing inventory low and property values artificially inflated.