Chip Taylor

Subsidizing homeownership

Interesting discussion of the pros and cons in the New York Times:

"Theory suggests there are social benefits to homeownership, but we don't know whether they are large enough to justify the size of the subsidy," said Joseph Gyourko, professor of real estate and finance at the University of Pennsylvania's Wharton School. "My gut feeling is that we are oversubsidizing."

Arguments for the positive effects from a society of homeowners - what economists call positive externalities - stem mainly from the fact that homeowners have a bigger financial stake in their homes than renters do. This motivates them, so the theory goes, to take better care of their houses and communities. In short, it will make them better Americans.

If that's the case, the efficient subsidy would be one that makes the difference between home ownership and not for people on the margin. We seem to mainly subsidize the construction of larger homes by people who would be homeowners in any event.

Even that consideration aside, homeownership may produce negative externalities, as well.

Homeownership limits mobility. According to census data, 31 percent of renters moved in 2003, compared with about 7 percent of homeowners. While this stability can be good for a community, the reduced mobility can become a problem in the face of a local economic downturn.

And homeowners may influence social policy to benefit themselves, at the expense of others. In a study of voters in California in 2000, Mr. Glaeser found that homeowners were more likely to restrict new home-building, voting for tough zoning rules and land-use controls.

"Homeowners have spearheaded the movement to limit new housing supply that has artificially inflated housing throughout the U.S.," Mr. Glaeser wrote. "This is the downside to having individuals who have incentives to keep price up."

In any event, the status quo is firmly entrenched:

Regardless of the debate, little change is likely. President Bush's tax panel proposed only modest changes in housing subsidies: capping the amount of eligible interest and replacing the deduction with a tax credit worth 15 percent of a homeowner's mortgage interest. This plan, the panel said, would be more equitable. But, whatever its merit, the proposal has little chance of becoming law. Trimming the tax deduction would most likely reduce the value of houses of much of the middle and upper classes.