Most people take the benefits of home ownership for granted. But does that mean the government should take aggressive measures to support it? Eating spinach has benefits too, yet there aren't tax credits for buying spinach or giant government-sponsored entities that help to subsidize spinach prices. So something must be pretty special about home ownership to explain the government's actions that promote it. Are they justified?
There are actually two questions that need to be addressed here. First, is home ownership an absolute good? This is actually both normative and economic. If that question is answered in the affirmative, then the second question is whether the government's involvement is necessary to make home ownership sufficiently widespread. Let's consider each.
Is Home Ownership an Absolute Good?
For years, most Americans have believed that it's good when more people own their homes. But Wall Street Journal Economics Editor David Wessel makes a strong argument today that questions this common wisdom. It can be summed up by the following sentence:
The success of a mortgage-financing system should be gauged not only by how many people own their homes, but by whether it can absorb shocks without crumbling.
What underlies this notion is that everything is good in moderation, but problematic in excess. As the real estate bubble taught us all too well, home ownership is not an exception to this rule. When the government steps in to make something too widely available, economic distortions creep in.
So just why is owning a home good? Here are several common reasons advocates give:
1. Economic benefits are achieved compared to renting, like the interest tax deduction.
2. Mortgage borrowing occurs at a relatively low interest rate.
3. A house can be like an investment if it appreciates.
4. It creates positive externalities, like better community involvement.
5. Once your mortgage is paid off, housing costs are limited to maintenance.
Above, the first two reasons aren't entirely honest. They are only benefits of home ownership because the government has made them so. The benefits the first point describes are due to various tax incentives provided to homeowners. The second is largely due to the government-sponsored entities helping to create liquidity by taking on much of the market's mortgage risk.
An argument for why the third reason doesn't always hold up can be found here. As the U.S. the housing market returns back to normal, home price appreciation will likely fall back to low levels. If you're looking for an investment, you can generally get a much better long-term return on other opportunities than on a home.
The fourth reason is somewhat doubtful, and refuted in this post by Felix Salmon. Like homeowners, long-term renters would also take pride in their communities. Any evidence otherwise would likely suggest more a correlation than causation relationship.
The last reason, however, is a solid one. It is, indeed, nice when you no longer have to make a mortgage or rent payment once you own your home. Of course, as homes age, maintenance costs increase. While it isn't likely that this would overshadow the cost of continuing to rent, renters don't have to worry about maintenance. Consequently, this benefit probably isn't quite as strong as it seems.
So home ownership does have some benefit. But it's pretty hard to argue that the benefit is so great that the government needs to heavily intervene in the market to ensure a high rate of homeownership.
Must the Government Prop Up Home Ownership?
But let's say you don't care if there's only a weak economic benefit to owning a house -- you think it's important from a moral standpoint. You believe most people should be able to buy their home if they can afford it. Do we still need all of these government incentives to make this possible?
A recent op-ed in the Wall Street Journal by Steven A. Blumenthal argues we do. He says that Fannie and Freddie should be fully nationalized and their charter essentially unchanged going forward. He believes:
Americans like getting commitments for 30-year fixed-rate mortgages and will never tolerate a situation where mortgages are simply not available--or not available at reasonable interest rates.
Is it really plausible that such a future would result if we eliminated the GSEs? It would be if there could be no private-label securitization market, or if banks never held non-insured mortgages on their balance sheets. Of course, both of those features do exist in our financial markets. Without the GSEs, they would just play a bigger role.
The absence of Fannie and Freddie will cause private parties to step in to take on these roles. Interest rates may be a little higher, but that's because they should be. Now, a government guarantee won't stand behind mortgages. Instead, investors and banks will have to take on that risk. But why should taxpayers pay for mortgage losses like they do with the GSEs in place? Slightly higher mortgage rates should translate into slightly lower taxes.
Of course Americans would eventually accept a small increase in interest rates. They'll just have to adjust to an economy where the government does not subsidize home ownership. It's not like, suddenly, no one will buy homes anymore because the prevailing interest rate is 7% instead of 6%. Instead, they'll just want to pay more principal up-front, so their interest payments will be lower -- which is a great thing for stability!
You can debate whether there is some moral imperative that home ownership is important. But even if you believe it is preferable to renting, there's no evidence suggesting that the government must be heavily involved in the market. In fact, a little less government involvement would be a net positive for the economy. It will result in a more stable financial system with Americans having more equity in their homes and less consumer debt with fewer mortgages.
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