Subsidizing Mortgage Debt Does More Harm Than Good
Housing policy in the United States strongly favors homeownership, and it does so by subsidizing mortgage debt. Programs like the mortgage interest rate deduction and guarantees on mortgages bought and securitized by Fannie Mae, Freddie Mac and Ginnie Mae cost the taxpayer about $200 billion in lost tax revenues each year. These policies are highly regressive, benefiting the rich with expensive houses much more than those with average homes, and amplifying inequality in society. The financial crisis illustrated the risks of policies subsidizing mortgage debt, with many households taking on mortgages they could only service as long as house prices continued to go up and they stayed employed.
Many of our housing policies are highly regressive, benefiting the rich with expensive houses and amplifying inequality.
Surely there are benefits to home ownership. Some proponents cite the “forced savings” aspect that comes with building wealth in a home. That is not only a paternalistic perspective, but also one that is belied by historical price appreciation rates on homes far lower than those on other risky assets, and by the 31.7 percent collapse between 2007 and 2012 in American repeat home sale prices during the Great Recession. Others cite social benefits such as more civic engagement found in areas with higher home ownership. But correlation is not causation. The problem with studying the relationship between home ownership and, say, school quality is that most areas with good schools not only have high homeownership rates but also residents with better education and higher income. This makes it impossible to infer whether it is ownership rather than high income or parental education that causes the better school quality.
Absent a dictator who randomly decides who becomes an owner and who becomes a renter, we lack a clean experiment that varies homeownership without varying household and building characteristics. The unfavorable cost-benefit tradeoff of stimulating homeownership via mortgage subsidies is born out in an international comparison. The U.S. does not score better in terms of homeownership rates, mortgage rates or housing market stability, despite having a bigger governmental footprint in housing than any other developed nation.
Given the evidence, U.S. society would benefit from a more balanced housing policy that puts equal weight on rental and home ownership assistance programs. On the ownership side, we need a policy that stimulates the accumulation of home equity, for example through down payment assistance, rather than mortgage debt. We should cut the benefits for the rich by lowering the limit below which Fannie and Freddie can purchase mortgages (or phase out these government-sponsored enterprises altogether as I have argued in "Guaranteed To Fail"), by capping the mortgage interest rate deductibility, and by focusing efforts on first-time buyers.
Our large population centers, like New York City, are centers of innovation and growth that face very high costs of living. New Yorkers spend on average 40 percent of their income on rent, 10 percentage points higher than the nationwide average and 67 percent more than in 1985-2000. We need a policy that keeps rental housing affordable by facilitating construction in our large population centers and by providing assistance to the neediest.
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