Wednesday, October 14, 2009
Harvard economist Edward Glaeser (who has written a lot of interesting papers on the economics of land use regulation) wrote an op-ed in the Boston Globe last week called "Rolling the Dice on Wasteful Home Subsidies." He argues that the current (and longstanding) federal policy of subsidizing home ownership, such as the home mortgage interest deduction, has encouraged buyers to make overleveraged bets, incentivzed overbuilding, and leaves Americans too vulnerable to swings in the housing market--swings also caused by the very policies that in turn inflate prices. The intro:
FEDERAL POLICIES bear some of the blame for the housing bust because they encourage leveraged bets on housing. Yet instead of reconsidering the public incentives that encourage real estate gambling, the federal government seems ready to double down, with another $35 billion in Treasury support for state agencies that subsidize borrowing, and the reauthorization of an $8,000 home buyer’s tax credit. The ship of state would do better to turn around and reduce borrowing subsidies, by lowering the million-dollar cap on the home mortgage interest deduction.
Presidents from FDR to George W. Bush subsidized real estate borrowing through government-sponsored agencies that insured mortgages, like
Fannie Mae and Freddie Mac, and through the home mortgage interest deduction. These policies encouraged homeownership, but they also encouraged people to buy bigger homes and to finance those homes with high loan-to-value mortgages.
Glaeser also notes that subsidizing spending on housing encourages people to build and buy larger homes, which causes more environmental damage and is also "anti-urban," encouraging an "exodus from the nation's cities." He suggests reducing the upper limit of the mortgage deduction from $1,000,000 to under $500,000, which would "reduce the incentive to overborrow and overbuild." Read the whole thing.
- Matt Festa