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.

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.

I consider myself "liberal" and agree that homeownership isn't for everyone.

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.

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.

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.

So Steve Sailer turned out to be right all along.

Who knew?

(Anyone with eyes and an unpolluted brain)

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

"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

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!!

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.

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?

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!

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.

Previous comments submitted on behalf of "S-heater"

@Anon Jan 10, 2009 5:17:09 PM

1) This country does heavily subsidize small business by providing grants, preferential loans, tax incentives, and preferential treatment in contracting to name just a few ways. Many of the same tools used to "subsidize" home ownership in all its forms.

2)No need for "dumb, dumb, dumb" statement either. We're all grown ups here.

3)The comparison between small business and home ownership subsidies for the poor is an apt one. In both cases, the government is encouraging people "to make a risky investment that they would otherwise rationally avoid." To assume the alternative of taking fewer risks is better for society overall, or even in the long-term, is not necessarily true.

4)Let's assume there are no subsidies for home ownership. What would risky people spend their energy,time, and money on instead? Would they be better off? My gut tells me no -- perhaps even worse off because it would be wasted on non-productive assets.

1) This country does heavily subsidize small business by providing grants, preferential loans, tax incentives, and preferential treatment in contracting to name just a few ways. Many of the same tools used to "subsidize" home ownership in all its forms.

That's ALL news to this small business owner. But then I've only been in business a decade. None of the four things you mention have any bearing on my small business.

My experience has been that government is hostile to small business. It is time consuming to comply with the regulations (federal, state, county and city) that apply to my small business, and my local goverment is decidedly hostile to small business, at least to my small business. (On two separate occasions we have had local government tax and license bureaucrats insist they that did not need no stinkin warrant to come in to our private offices.)

Your assertion that people wouldn't take risks without government encouragement is based on what evidence and what experience?

Nothing I have seen or experienced as a small business owner leads me to agree with your statement "the government is encouraging people 'to make a risky investment that they would otherwise rationally avoid.'" In fact, the government does many things to discourage risky investment and choose instead to get a job with a large company or the government.

I am a small business owner despite the government, not because of the government.

As to "tax incentives" for small business, please enlighten me so I can pass the information along to my CPA.

Let's assume there are no subsidies for home ownership. What would risky people spend their energy,time, and money on instead? Would they be better off? My gut tells me no -- perhaps even worse off because it would be wasted on non-productive assets.

It's good you trust the government and your gut so much that you are comfortable with the government and you devising so many ways to infringe on the liberty of others. Why is it the state's job to determine how I spend my energy, time and money? Why is it your job?

You appear to suffer a common mis-impression that only with the benevolent and knowing state looking out for us will we all be better off and make better choices.

C. S. Lewis said:
"Of all tyrannies, a tyranny exercised for the good of its victims may be the most oppressive. It may be better to live under robber barons than under omnipotent moral busybodies. The robber baron's cruelty may sometimes sleep, his cupidity may at some point be satiated; but those who torment us for our own good will torment us without end, for they do so with the approval of their own conscience."

Has anyone compiled a statistic on the percentage of homeowners whose retirement savings are less than the value of their home at purchase?

If you want to know a main component of why the poor keep falling farther behind, look at asset allocation. You have the coerced purchase of U.S. Treasuries equal to approximately 12% of their income for 20 something year olds with an investment horizon of 40 years (this is bat shit insane). Additionally many housholds are overweight real estate in one market on one street in one location. (this too is bat shit insane). Not to mention that they are likely levered up, 4 to 1 or maybe even higher. The only consolation comes from the fact that federal law requires a favorable put option be purchased by homeowners (called a non-recourse loan). Financially literate people that look at the investment allocation of a typical 30 year old that is not well to do are disgusted.

I don't think society should encourage (through financial incentives) taking risks, such as taking on a mortgage or starting a business.

Ir should, instead, let people make their own judgments about what risks to take and let people take them. And they will and always have.

If you subsidize the costs of taking risks, people will take risks that don't make economic sense. And that's what we have now, as our policies have come to their full fruition.

Not sure why you are so angry. Breath.

Robert, I don't see where the poster has expressed any anger.

Also don't see any angst in the post.

As I said, phil, second rate . . . and behaviour like yours is a large reason why this is so.

As for the idiotic idea that the CRA had nothing to do with the present problem, I don't quite know how to deal with such inanity.

No cites, no references, nothing. How about we look at what people actually say:

In a Bank for International Settlements ("BIS") working paper, economist Luci Ellis concluded that "there is no evidence that the Community Reinvestment Act was responsible for encouraging the subprime lending boom and subsequent housing bust."[39]

According to Janet L. Yellen, President of the Federal Reserve Bank of San Francisco, independent mortgage companies made "high-priced loans" at more than twice the rate of the banks and thrifts. She states that most CRA loans have been responsibly made, and are not the higher-priced loans that have contributed to the current crisis.[40]

From Congressional testimony we have:

Leland Brendsel, former Freddie CEO: “I cannot recall ever being forced to make — or to purchase a mortgage loan that I didn’t feel, as a matter of policy at Freddie Mac, was a good mortgage loan, a sound mortgage loan, and an attractive mortgage loan for the homebuyer or the owner of an apartment building.†

Franklin Raines, former Fannie CEO: “I do not believe that poor people are the cause of the current financial crisis. †¦ Most of the losses, as I read the record, have come on mortgages that were made to middle-class and upper-middle-class people, not to poor people.†

Continued . . .

Continued . . .

Or this:

From the beginning, subprime has been a symptom, not a cause. And the notion that the Community Reinvestment Act is somehow responsible for poor lending decisions is absurd.

Here's why.

The Community Reinvestment Act applies to depository banks. But many of the institutions that spurred the massive growth of the subprime market weren't regulated banks. They were outfits such as Argent and American Home Mortgage, which were generally not regulated by the Federal Reserve or other entities that monitored compliance with CRA. These institutions worked hand in glove with Bear Stearns and Lehman Brothers, entities to which the CRA likewise didn't apply. There's much more. As Barry Ritholtz notes in this fine rant, the CRA didn't force mortgage companies to offer loans for no money down, or to throw underwriting standards out the window, or to encourage mortgage brokers to aggressively seek out new markets. Nor did the CRA force the credit-rating agencies to slap high-grade ratings on packages of subprime debt.

or this:

Our analysis of the loan data found that about 60 percent of higher-priced loan originations went to middle- or higher-income borrowers or neighborhoods. Such borrowers are not the populations targeted by the CRA. In addition, more than 20 percent of the higher-priced loans were extended to lower-income borrowers or borrowers in lower-income areas by independent nonbank institutions--that is, institutions not covered by the CRA.6

Putting together these facts provides a striking result: Only 6 percent of all the higher-priced loans were extended by CRA-covered lenders to lower-income borrowers or neighborhoods in their CRA assessment areas, the local geographies that are the primary focus for CRA evaluation purposes. This result undermines the assertion by critics of the potential for a substantial role for the CRA in the subprime crisis. In other words, the very small share of all higher-priced loan originations that can reasonably be attributed to the CRA makes it hard to imagine how this law could have contributed in any meaningful way to the current subprime crisis.

Of course, loan originations are only one path that banking institutions can follow to meet their CRA obligations. They can also purchase loans from lenders not covered by the CRA, and in this way encourage more of this type of lending. The data also suggest that these types of transactions have not been a significant factor in the current crisis. Specifically, less than 2 percent of the higher-priced and CRA-credit-eligible mortgage originations sold by independent mortgage companies were purchased by CRA-covered institutions.

Continued . . .

Sigh. Yeah, that's right. They're all biased and not to be trusted. Fannie and Freddie and Paul Krugman and the FDIC and Business Week and . . . well, why go on?

But if you think you've got better sources, why don't you actually, you know, cite them? As to why I posted here - I usually hang out at swankier places, more reputable places, like economistsview and calculatedrisk. It's just that Matt Y. had a reference to this post, so I followed it. Only to find the usual bashing by the usual suspects.

If the goal is to force the poor to save, as seemed to be some commenters point, why do it in such an illiquid investment as real estate? Wouldn't tax free interest or capital gains be equally inducive, but more liquid?

And isn't Social Security supposed to do this as well, to some extent? Force retirement savings on those who couldn't or wouldn't. But then, that is just a Government-run multi-generational Ponzi scheme, sensitive to generational population bulges. Of course, even low income home ownership allowed the low income "owner" to pick out their own home.

Inducing the poor into home ownership that they wouldn't otherwise embark upon is akin to telling them to park their life savings as collateral on a loan at the roulette or craps table, with the promise that when they win, they'll be able to afford the interest on the loan. It's a shockingly unethical and immoral thing to have done, particularly by the government and politicians that were supposedly trying to help them, but in reality were helping the mortgage brokers and other financial institutions in exchange for political contributions.

This whole discussion just kills me. The overall assumption is that "poor people" tried to "move on up to the east side" in some over the top way. The foreclosed subdivisions in Nevada, Arizona, Florida and California (note which states these are) were not by some "welfare mom and 4 kids". It was by people watching too much HGTV, DIYNetwork and TLC's " Flip this house" programs. People buying up "shacks" in bad neighbourhoods and putting "granite countertops" in vandalized homes in Watts. These "investments" were made by "middle class" people looking to "flip this house", or by builders, not reinvesting in the "city" but going to the outskirts of Phoenix, Las Vegas, Riverside and Orlando, putting up houses "in the low $600k". These are the mortgages that are wrapped up in the Credit Default Swaps.

The idea that "low income" should just perpetually rent, because "middle class home flippers" tried to buy and sell a home, with a mortgage, in less than 90-days is just simply insane! A "home" is a long term investment. Somehow, through these "TV Shows" we came to think of homes as some "extended credit card to wealth". Carlton Sheets made infomercials all night about how to buy and sell real estate with "no money down". Guess where the "money down" came from? Loans. Loans on a "home" is called a "mortgage".

Please, let's get off this "low income people" shouldn't "buy" a home (like YOU did) and should simply rent. How about looking at a home as it was supposed to be - A LONG TERM INVESTMENT TO LIVE IN!

BTW, I'll bet that even those of you who "own a home" or have a mortgage have not kept the same job your entire life. So there were some "poorer times". Consider those times as you sling that blame.

Home subsidies are far less than they appear. The interest deduction is available to anyone making an investment as a cost in doing so. Banning interest deductions are not good policy as lending then goes underground and one cannot tax a transaction that disappears. The property tax deduction is only a distinction over what level of government collects it. Eliminate property taxes if you want to eliminate the deduction. Untaxed housing services? That is what property taxes really tax. Capital gains exemption is a benefit, but only to the extent it exceeds inflation and improvements which it does not do for most of the country. Overall the subsidies are far smaller than opponents advertise. If anyone were to suggest doing the same with any other investment they would complain loudly about how the government was trying to put them out of business. So if you want to eliminate these 'subsidies' then let us remove all such 'subsidies' for all investments.

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