The New Yorker on Housing and Mortgage Subsidies

James_Surowiecki
James Surowiecki, The New Yorker

I can’t say there’s anything particularly new in James Surowieki’s New Yorker article on the various ways we subsidize home ownership vs. renting, but taken as a whole he provides a great starting primer and review of the arguments.

I mean, don’t get me wrong, home ownership is awesome for someeven for many – but I don’t think we talk enough about whether it’s such an unimpeachable good thing that it deserves quite so many subsidies.

We traditionally have subsidized home ownership in myriad ways.

  • A quasi-government guaranty (followed by a $800 Billion assumption of liabilities in 2008) of mortgage guarantors Fannie Mae and Freddie Mac.
  • Federal FHA/VA loan programs for first-time home buyers and veterans to encourage home-purchasing with as little as a 3% down payment.
  • Mortgage-interest tax deduction ($200 Billion in foregone tax revenue).

And yet, the benefits and effects of such subsidies are questionable

housing_as_investment

  • We do not have an appreciably higher percentage of home-owners in the US vs. other countries that lack such subsidies
  • 3% to 10% down-payment mortgages default more frequently (50% more frequently) than 20% down-payment mortgages, serving both home-buyer and bank poorly.
  • Americans tend to react to the mortgage interest subsidy by buying bigger homes, rather than saving the money.
  • The mortgage interest tax deduction is regressive, in the sense that it primarily benefits folks with incomes higher than $100,000, and a household with a larger home and mortgage benefits more than a household with a more modest home and mortgage.
  • Houses, which often constitute a high portion of household net worth, are a very illiquid investment.
  • Housing, as a sector, tends to add volatility to the economic cycle – making booms more manic and busts more depressive.

Surowiecki summarizes nicely: Given the extraordinary subsidies aimed at the sector – compared to other worthy areas of subsidy – is it all worth it?

 

Please see related posts:

What we do when we invest in a house

Housing – The Opportunities

Housing – The Risks

The New HUD Secretary encouraging home ownership, and me cringing

Book Review: Edward Conard’s Unintended Consequences

 

 

 

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