Oh, give me a home without a subsidized loan
This op-ed appeared in the Christian Science Monitor on October 2, 2009.
The American dream means different things to different people. For some, it looks like a house on a leafy cul-de-sac with weekends spent mowing the lawn and planting shrubs. For others it’s a rented apartment in the big city with a building engineer to handle such tasks.
The government should not subsidize one dream at the expense of another. Sadly, though, that’s just what has happened. And as history so clearly demonstrates, one-size-fits-all policies don’t work very well.
During much of the last century the heavy hand of government has been used to turn the US into a nation of homeowners. It all began in 1913 with the inclusion of a deduction for mortgage interest when the federal income tax was enacted.
Two decades later, with the economy in the throes of the Great Depression, federal intervention exploded. Herbert Hoover signed the Federal Home Loan Bank Act in 1932. Over the next two years his successor, Franklin Roosevelt, created the Federal Home Owners’ Loan Corporation and the Federal Housing Administration. Fannie Mae was established in 1938.
Centralization of housing policy in Washington gave rise to interest groups representing home building, mortgage lending, and the real estate industries that pressured politicians to shower a never-ending stream of subsidies on owner-occupied housing.
So successful was this effort that by the late 1990s it became difficult to subsidize homeownership anymore, short of loosening lending standards on federally backed loans. Under unrelenting pressure, those, too, eventually wilted, and a torrent of unqualified buyers flooded the market, fueling a bubble that sent home prices into the stratosphere.
When the bubble eventually burst in 2006, home prices plummeted and many faced financial ruin. The economy slipped into a severe recession and Americans lost some $14 trillion in household wealth. Big Housing, which had pocketed enormous gains during the boom, dumped tremendous losses on taxpayers.
In addition to having different dreams, Americans also have widely varying housing needs. Consider those whose jobs require frequent moves. Because agent fees and closing costs typically exceed any short-run appreciation in value, it makes no financial sense for such people to buy a home.
Yet government policy encourages them to do just that.
Indeed, the current recession has shown what an albatross a home can be. People who have lost jobs often need to move for new ones. But having bought houses they can’t sell, many face the unattractive choice of remaining unemployed or abandoning their homes. By creating this labor market rigidity, housing subsidies have deepened and prolonged the downturn.
What have policymakers learned from all this? Apparently not much.
There is growing pressure to extend and expand Washington’s latest housing boondoggle: The $8,000 first-time home buyer tax credit. This new giveaway, passed as part of the stimulus bill and due to expire Nov. 30, is designed to lure even more people who are either not financially qualified or for whom buying a home is an unwise investment into the housing market, paving the way for more foreclosures and bailouts down the road.
Even if it is not extended, the provision will likely cost taxpayers more than twice what they were told it would in February.
Politicians must stop meddling in Americans’ housing decisions.
The way out of the housing mess is not billions more in subsidies. It’s dismantling the existing ones so that individuals can decide for themselves how to best attain shelter.
Doing so would protect taxpayers from the poor decisions of others and give the economy a much needed boost by steering investment away from the construction of McMansions and into those things that raise workers’ wages like modern factories equipped with high-tech machines.
To be sure, those with a vested interest in the status quo will fight tooth and nail to keep their handouts. The experience of the past year, however, should teach us that subsidizing homeownership comes at a very high cost and places our economy at considerable risk.
Governing a nation of more than 300 million people poses immense challenges. Keeping the nation safe from attack, policing our streets, proving a basic safety net – these are important and difficult tasks. Our elected leaders should focus on truly public matters and let citizens make personal decisions like how to best put a roof over our heads.
Patrick Fleenor is chief economist of the Tax Foundation.