Last month, the Treasury Department announced new steps to boost the market for private mortgage bonds, not backed by the government or any federal entity, in order to increase homeownership and improve access to credit for working-class Americans who might be having trouble borrowing money to buy a house. The Administration's latest effort to boost the market for private mortgage lending begs an essential question: What are the societal benefits to homeownership, and would more investment in homeownership help the economy?
It's a long-discussed question, of course. The pro-home-building folks aver that homeownership fosters civic involvement and helps people become more tied to their community, which encourages other behavior beneficial for the economy. And for a good proportion of homeowners the majority of their net wealth is in their home, so it can be an important source of savings.
But another way to look at it is that correlation is not causation: The reason that homeowners are more civic-minded and involved in the community is because such people are much more likely to have the wherewithal to save enough to make a downpayment on a house. Ed Glaeser, the renowned housing economist from Harvard, puts little stock in the notion that homeownership has significant positive societal externalities.
What's more, there's some evidence that high homeownership rates have downsides as well. In the last four decades the predilection for moving has slowed significantly: only half as many people moved across state or county lines in any year this decade as was the case in the 1950s, for instance. This is problematic because it means that our economy is worse at matching up workers with where the available jobs are. The lingering unemployment in many rust-belt states would be less if some of their unemployed could be persuaded to move to another community where there are jobs. There has been a decades-long move of people from the midwest to the Sunbelt, of course, but the data suggest there's ample room for more. This hasn't happened in part because people are tied down by the homes that they own and are reluctant to sell while they are underwater. That people are unable to ignore sunk costs isn't economically rational, of course, but it nevertheless governs how many people consider whether to move.
In other words, an argument could be made that instead of taking measures to boost homeownership, a better approach to jumpstarting the economy might be to reduce incentives to homeownership and let the proportion of people who own homes fall. There's no reason to think that lower homeownership rates would reduce spending on housing: people have to live somewhere, and fewer home owners would simply mean more renters. If the average size of a family's home shrinks slightly because of it, it's hard to see what the harm would be in that — home sizes increased by one-third from the 1980s to the early 2000's, so it's not like we're returning to the world of tenements. The net result of pulling back on homeownership incentives would be that new families would wait another year or two before buying the home that becomes their family home, and fewer singles would buy — salutary developments, I would argue.
And I’m morally obligated here to point out that the costliest incentive for homeownership — the mortgage interest deduction — does absolutely nothing to increase homeownership rates, since only the wealthiest third of all households can avail themselves of its benefits. The amount of the tax subsidy from the deduction that goes to homeowners in Greenwich Connecticut is an order of magnitude greater than the benefits for people in Mossville, Illinois.
Above all else we need to help policymakers get away from this mindset that our ample housing subsidies benefit the economy by creating jobs building homes. Demand-side fiscal incentives — and that’s 90% of the current political arguments for housing subsidies — are a chimera. If we spent less on housing we'd spend more somewhere else in the economy. This notion that the economy consists of various silos — like housing and autos — and that a reduction in any of these is an unmitigated bad thing is a lousy way to approach how an economy works. The more we spend on building new houses the less money is available for investments in things that might actually boost the productive capacity of an economy. In other words, the demand-side incentives of housing may reduce the productive capacity of the economy (the supply side of the economy) and with it long-term economic growth.
There's no disputing that our capital markets aren't working efficiently at the moment. Some of this has to do with the collective shell shock many financial institutions still have over the financial market implosion in 2008. However, government activities like the passage of Dodd-Frank, the management of Fannie Mae and Freddie Mac, the attempt by the CFPB to wipe out title and payday loan companies (with not a few installment loan companies caught in the crossfire), and the punitive fines assessed on various banks for their alleged misdoings (or in the case of the Bank of America, for simply doing what it was asked to do by the government) have left banks extremely hesitant to make anything but the safest loans. It's hard to see what the government can do to convince lenders they won't be accused of exploiting borrowers with poor credit risks again if there's another recession in the near future.
Capital markets need better and smarter regulation, but the fact that homeownership rates are falling is not a reason to act.
[Cross-posted from Alt-M.org]